Uniform Securities Act Flashcards

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Series 66
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Broker Dealer

must register in any state under the Act which they solicit or construct business. unless exemption is available. A person who engages in affecting securities transactions for the account of other, and trading for his own account(known as proprietary trading)


Agency Capacity

When a firm effects trades for account for others. Middleman. which is an agency capacity middleman of the transaction. When a firm effects transactions in an agency capacity this is the same as a broker.


Not considered to be broker-dealers


Agents- registered representatives. Individuals who represent the broker-dealer when performing security transactions, basically sales representatives. A registered representative is an agent of a broker dealer


Principle Capacity

When a firm trades out of its own account. when acting in a principle capacity the firm is considered a dealer.


M & A advisers/Finders

State regulators have interpreted anyone that gives advice on mergers and acquisitions and finders that find companies to be acquired can be defined as being a business in engaging in securities, if one company buys the securities of the other in a deal and compensations is paid based on closing the deal.


Not considered to be a broker dealer


Depository Institutions

Banks, savings and loans and trust companies: These firms are separately regulated under federal and state banking laws


Not considered to be a broker dealer


Issuers ( except when an issuer effects transactions other then with respect to its own securities.


Not considered to be a broker dealer

broker-dealers (exclusively trade with professional investors with no place of business in the estate.

Issuers of securities involved in the transaction; other broker dealers, Institutional buyers.

Out of state broker dealers, who is NOT dealing with the public in your State and thus would not have to register in your State.


Not considered to be a broker dealer

Firms that contact Existing customers on Vacation in Another State are Excluded.

any firm in the state which is licensed in a State in which the broker maintains a place of business and who offers and sells a security to a person who is an existing customers of the broker-dealer and where the firms principle place of residence is NOT in the State. This firm is NOT a broker dealer and doesn't have to register.


Firms soliciting New customers in a state in which the customer were Vacationing or traveling, this exclusion does not apply! Its consider a broker-dealer.



Canadian B/D Exempt for existing Customers who are temporarily in the U.S.

As long as the B/D does not have a place of business in the U.S it is exempt for registration (as are its agents) when effecting trades for per-existing customers who are temporarily in the United States,


Persons with no Office in the State With a Maximum of 5 clients In the past 12 months

Called De minimus exemption

are exempt. don't have to register in the state where the clients reside. Therefore firms with no office in another state that effect isolated business in that state are not required to be registered in that state. Called De minimus exemption. Minimal business.


Agent is an individual not a person as defined by the act.

An "agent" is an individual not a person as defined by the act. who represents a broker-dealer or issuer in affecting securities transactions. Agents are also known as sales representatives, and must register in each state in which they wish to perform trades.


Registered Representatives are Agents for broker-dealers

As a practical matter registered representatives are agents for broker-dealers. The definition of an agent is an individual who effects trades There is no requirement that this person earns commission to be defined as an agent under the act.


Agents may be compensated on either a salary or a commission Basis.

earning a commission or salary has no relevance whether she or he is considered to be an agent. Clerical employees and managerial employees who do not affect trades are not considered agents. and don't have to register in the state.


Partners, Directors, or officers of a broker-dealer are only considered to be sales representatives if they represent the broker-dealer or an issuer in effecting securities transaction. Otherwise they are not defined as Agents.

for example a partner at a brokerage firm who handles customers account transactions must register as an agent in the state, But a partner at a brokerage firm who has no sales function and who does not effect trades is not required to register in the state as an agent.


Automatic registration of officers names are in the Broker-Dealer application as agents

Names of the offices of the company that will act as agents are included in the broker-dealer application filed to register in the State. Once the registration is effective these persons who were named as officers with a sales function or supervising a sales function were also registered as agents as long as they pass appropriate exam series 63, or 66. Non sales officers are not registered as agents, (a back office supervisor) are not required to do state testing.


Exclusions from the Definition of the agent

apply to individuals who represent issuers - they do not apply to individuals who represent broker-dealers. And they apply only transactions in exempt securities or in exempted transactions, There are 4 exclusions. There are individuals who represent ISSUERS in: Sales of specific exempt securities (but not all exempt securities). Exempt transactions. Sales covered securities. Sales of securities to employees of that issuers if no remuneration is paid.


Individuals who represent Issuers in trading specific Exempt securities(not all securities) are excluded form registration and not an agent

Generally, Exempt transactions are trades that do not involve the public.


Individuals who represent Broker-dealer in selling exempt securities Must register,

If an individual represents a broker-dealer he or she must be registered in the state unless another exemption is available, thus an individual who represents a broker-dealer selling municipals bonds(which are exempt) in the state still must be registered in the state.


Exempt Securities

U.S government, foreign governments, Municipal governments, Canadian governments, bank and saving institutions (such as Bank certificates of deposits, trust companies.


Specific securities also fall under Exempt

Promissory Notes that will mature in 9 months or less, that are rated in one of the 3 highest rating categories. issued in amounts of at least $50,000. Essentially this provision exempts individuals representing issuers selling corporate commercial papers form registering as an agent. Securities issued in connection with savings, Pension, profit sharing plans, and employee stock options plans


Exempt Transactions

Isolated transactions

.Isolated transactions with someone other than an issuer, ( non-issuer transaction essentially these are transactions in the secondary market). The term isolated is not defined but is intended to cover the occasional or casual sale of a security by an individual. It is not intended to cover repeated successive secondary market transactions by the same person(in which case this exemption can not be used.


Exempt transactions

This only applies to individuals who represent ISSUERS

transactions between issuers and underwriters(since the public is not involved).

Transactions with financial or institutional investors,( including banks, financial institutions, trusts, insurance companies, investment companies and pension plans) these are exempt because investors are sophisticated and are not deemed to require legislative protection.


Individuals Who represent Issuers in trades of covered securities Are excluded

Private placement offerings conducted under rule 506 regD ( the federal private placement exemption)

covered transaction, Qualified Purchasers- sales to qualified purchases , Natural persons humans or family owned companies who own investments of at least 5,000,000 dollars.


Individuals Who represent Issuers in trades of covered securities Are excluded

Preexisting trusts for the person listed above as qualified purchasers( the trust cannot be formed expressly for the purpose of buying these securities)

any other person acting for its own account or other qualified purchasers who owns and invests on a discretionary basis at least 25,000,000.


Employees of an ISSUER who affect trades ONLY for the issuers Employees, partners, officers and directors of the issuer are excluded from the definition of an agent, as long as no commissions or other compensations is given to the sales representative for soliciting these persons.



INvestmetn adviser (state registration)

The Uniform Securities Act allows for two exemptions from state registration for investment advisors. The first is that the advisor must not have a place of business operating within that state AND that the investment advisor's clients are all institutional investors, i.e., other investment companies, other broker-dealers, banks, savings & loan associations, trust companies, insurance companies, government entities or employee benefit plans that total a minimum of $1 million in assets. The second exemption from registration states that no person must have a place of business in that state AND no direct communication to more than five clients in the state within 12 consecutive months (this is known as the de minimus exemption).


Investment Adviser

Must register with the state under the Act. An investment adviser is defined as a person who for compensation.

Engages in business of advising others directly or indirectly ( such as through a newsletter) as to the value of securities or the advisability of investing in, buying, or selling securities.

Or Issues or promulgates analysis or reports concerning securities on a regular basis as part of a business. Provides investment advisory services to others in financial planning practice.


Persons that are NOT defined as Investment advisers.

Employees of investment advisers(thus the employing firm must register as an investment adviser) its individual employees do not register as investment advisers rather they register as investment adviser representatives.

Also depositary Institutions: Banks, saving and loans, trusts.

Professionals, lawyers, accountants, engineers, teachers, whose performance of these services is solely incidental to their professional profession.

Broker Dealers whose performance of these services is incidental to the conduct of the business and who receive no special compensation for these services.

Publishers, employees or columnists of bona-fide newspaper, news magazines, business of financial periodicals and owners and employees of cable, radio, or television networks, where the content does NOT consist of rendering advise based upon the specific investment situation of each client.

Federal covered Advisers: any other person designated by the state administrator.


Federal covered Adviser

National Securities Markets Improvement Act of 1996( federal legislation) was enacted to eliminate duplicate regulation of investment advisers at both the Federal and State level.

If an adviser is defined as Federal covered adviser - then the adviser must register with the SEC; but is not required to register in the state.

If an investor is NOT a federal covered adviser then it must register in the state, but is not required to register with the SEC.

Federal covered Advisers are defined as:

Investment advisers that manage $100 million or more in assets have to register as Federal covered investment advisers must register with SEC and cannot be required to register with the state however each state can require a notice filing. New interpretations made is they manage between $100 million and 110 million then have a choice to register with the SEC or State but if the adviser had 100 million of assets under his management its required to register with the SEC. An adviser that is SEC registered does not have to De-register its assets under management unless its assets fall below 90 million. therefore there is a buffet of 90 million and 110 million that the advisory will be federally covered and will register with the SEC. Also Mid Size investor registration with the SEC with 25 million dollars of assets under management that are NOT required to register in the State where it has its principle office, must register with the SEC, this is enforced because some state don't require registration with investment advisers such as Wyoming. And in the case an investment adviser has 25 million of assets managed that is required to register in 15 or more states may choose to register with the SEC

Or, Investment advisers to registered investment companies.

Or a federal covered adviser is any person that is excluded for the definition of investment Adviser act of 1940.

if the adviser is excluded from the federal definition then it does not have to register in the state.

Federal registration of advisers to investment companies started under Investment Advisers Act of 1940s. main intent was to register advisers to mutual funds and to place limits of their compensation so that the fund shareholders are not charged excessive advisory fees.


Excluded from the definition of an investment Adviser under the ACT 1940

banks or bank holding companies

lawyers, accountants, engineers or teachers whose performance of such services is solely incidental of their profession.

broker dealers and representative whose advisory services are solely incidental to the securities business and who receive no special compensation for making recommendations.

publishers of bona-fide newspapers and magazines or financial publications of a general and regular circulation.

any person who advises solely about U.S Government guaranteed obligations.


Investment adviser representative

A partner, officer, director, or other individual employed by an investment adviser, who:

Makes recommendations or renders advice regarding securities.

Manages accounts or portfolios of clients,

Determines which recommendations or advice regarding securities should be given.

Solicits, offers, or negotiates for sale of investment advisory services; or

Supervises employees who perform any of the functions listed above.

Excluded form the definition of investment adviser representative are individuals who solely perform clerical or ministerial duties.


(NSMIA) national securities Markets Improvement Act 1996

defined federal covered advisers as ones that must register with the SEC( or who are excluded from SEC registration under the Investment Advisers Act 1940 and who therefore are neither required to register with the SEC not with the state.

Thus the ACT defines as an investment adviser representative, any partner, officer, director, or individual that performs any of the activities outlines above, has a place of business in the state and is employed by a Federal covered adviser.


Individuals that are associated with Federal covered advisers must register in the State as investment adviser representatives.



Registration requirements for Broker-Dealers and Agents

The Act states that it is unlawful for any persons to transact business in the state as a broker-dealer or agent unless that person is registered in the state. Under the Act, broker0-dealers are prohibited form employing an agent unless the agent is registered, if an agent is no longer employed by that firm, is registration ceases to be effective in the State. An agent is always an individual.


Agents cannot be affiliated with more than One B/D at one time in most states.

unless the B/D from whom the representative acts are affiliated (also known as being under common control) However some states do permit so - called dual registration.


If a State Administrator allows Dual Registration - This Must be disclosed To Broker Dealers.

A separate registration application is filed by agent through each broker-dealer. part of the application is a disclosure to the B/D of any other current registrations held by the agent.


Prompt Notification To State If agent Ceases Employment

When a agent begins or terminates employment with a B/D or issuer, the agent as well as the employer must promptly notify the States Administrator.


An agent may only be registered through a broker dealer.

If a broker- dealer loses its registration, its agents are no longer registered with that firm. The agents may however associate with another B/D who picks up their registration. If an agent loses his or her registration this has no effect on the B/D.


Agents cannot register on their Own

Agents are prohibited form registering individually with the State Administrator. their registration is performed through the B/D.


Firms Excluded form the Definition of a B/D.

these firms are not required to register in the State.


Agents associated with Excluded or exempt Brokers- Dealers Are Exempt (exempt and excluded means doesn't have to register with the state.)

For Example: A B/D in Oregon and the firms resident agent are both registered in Oregon. The B/D has no office in Nevaad, If the agent solicits institutional clients in Nevada, both the BD and the agent are exempt from registration in Nevada.

On the other hand, if the agent solicits retail clients in Nevada, then both the BD and agent must register in Nevada.


The act excludes Individuals from the definition of an Agent, in some cases. These are..

In trades of exempt securities, in exempt transactions, in covered transactions (the sale of private placement securities or sale of securities to qualified purchases - investors with at least $5,000,000 invested, or investment managers with at least $25,000,000 under management.

Selling securities to the issuers employees ( as long as no commissions are paid ).


Investment Advisers must register.

Its unlawful to act as a investment adviser unless registered in the State. Or unless that individual is exempt from licensing. The Act states that's its unlawful for any investment adviser that is required to be registered to employ an investment adviser representative unless that representative is registered.

If an investment adviser ceases to work with a registered investment adviser that individuals registration is no longer effective. When the representative begins or terminates employment with an investment adviser, the investment adviser must promptly notify the administrator.

Also investmetn advisers are prohibited from employing, directly or indirectly , any person, who has been suspended or barred by the administrator form association with a broker-Dealer or investment adiver.


Persons excluded from investment Adviser Definition

certain persons are EXCLUDED from the definition of an investment Adviser and therefore are not required to register in the State. Already stated above but briefly they are

Employees of Investment Advisers(investment adviser representatives they register as IAR). Thus the employing firm must register as an investment adviser.

Depositary institutions. Banks saving loans and trusts.

Professionals, eg teachers accountants.

Broker-dealers who receive no special compensation

Publishers, employees of columnists of bona-fda newspapers, news magazines, business and finance periodicals, and owners of employees of cable, radio, or television networks, where the content does NOT consist of rendering advise based upon a specific investment situation of each client.

Federal Covered Advisers, if already registered with the SEC then they are EXCLUDED from the definition of an investment adviser so they don't have to register with the state.


Broker dealers are not excluded from registering with the SEC if they are registered with the state they must register with the state, unless an exclusion is met.



Federal covered advisers must File notice to the State. Because they register with the SEC and are except from registering in the state, they still have to notify the state each state a file notice in the state along with a consent to service of process. In which they conduct business and pay a state filing fee.



Advisers with no office in the State Who deal only with institutional investors, or with no more than 5 clients in the state in the past year called the de mininus exemption, or Canadian adviser with an existing customers that are canadian citizens who is traveling in the U.S or only deal with professionals or have 5 or fewer clients in the state. Are exempt from registration in that State.



Therefore, Advisers with no office in the State who only deal with institutional investers are exempt for clients whose only clients in the state considt soley of these are

Other other investment advisers, federal covered Advisers, Broker-dealers, Banks, trust, companies and savings and loans institutions, insurance companies, investment companies as defined under the investment company Act of 1940, Employee benefit Plans with assets of at least $1,000,000, government Agencies, anyone so designated by the administration.

In these cases, the general public is not receiving the investment advice, so the protection afforded by registration is not needed. Also notice that if any of these advisers had a place of business in the State then they would be required to register in the State.

As stated since in the text they use Excluded for broker-dealers and Exempted for Investment Advisers.

The wording exclusion for broker-dealers dates back to the uniform Securities Act of 1956, When the investment adviser registration rules were rewritten in this Act to conform to NSMIA in 1996 the rule for IAs was revised correctly call this exemption since the firm is really an investment adviser but because it deals with professional clients and has no place of business in the state the firm is exempt for registration.


Excluded from the definition means excludes person from the definition of an Investment Adviser. for eg a broker-dealer.

those persons who are defined as investment advisers but who are EXEMPT means EXEMPT from the registration requirement.

EXCLUDED is from being a Investment Adviser.

EXEMPT is an Investment adviser that is exempt form registration.



IA representative must be registered in the State

IA represntatives of Federal Covered Advisers Must be Registered In the State. SEC doesnt require representatives of federal covered Advisers to register with the state thats why NASAA make it a rule they have to register unless an exemption is available.

therfore all representatives have to register in the state unles an exeption is available.



for IARs that are employed by federal covered Advisers, the NASAA rule is that,

If the IAR is in physically present in the state, then he or she must register in the state,

If the IAR is not physically present in the state, and the Federal covered Adviser files notice in the state(because is doing business there) then the IAR must register in the state.

Each state also gets to collect an annual registration fee for the registration of each IAR.



Solicitors for Advisers Must be registered In the State.

Solicitors for investment advisers that refer clients are required to be registered in the State even if they are not employees of that adviser. ( they can be independent third parties)


IARs of Exempt investment advisers are also Exempt from state registration.



An Investment Adviser is state registered, when the representive begins or terminated or ceases employment with an investment adviser, the investment adviser must promptly notify the Administrator.

This changes for the Agent of a broker-delaer the notification for the agent of a broker-dealer that changes employment, in this instance BOTH the agent and the broker dealer must notify the Administrator.

This changes for IARs of federal covered Advisers, when a representative begins or terminates employment with a federal covered Adviser, the representative must promptly notify the Administrator. ( becasue federal covered is SEC registered not state, the Administrator cannot require the advisory firm to give notice, but since the representtive is required to register in the Stateon ly the representative is required to give prompt notice.



Registration of broker-dealers, Agents, investment Adviser, investment adviser representatives, is accomplished by filing a registration application with the State administrator along with a form giving consent to service of process.



IAs cannot employ persons who have been suspended or Barred.



Consent to service process,

only needs to be filed for initial application, not for renewal applications.

appoints the state administrator to be the "attorney" for the registrant. Once the consent is completed, the state administrator can receive orders for any lawful process or proceedings against a person arising in a non-criminal suit. In other words, if a person is sued the state administrator will receive the summons. The Administrator would then notify that perosn.


Registration Application includes:

Form of business organization ( e.g. corporation, partnership, sole proprietorship):

Place of business and proposed method of doing business

Qualifications and business history of applicant (including that of any partners, officers, or directors of broker-dealers and investment advisers).

Finger prints of partners, directors, or officers fingerprints are already on file at CRD (CENTRAL REGISTRATION DEPOSITORY- run by FINRA). of broker-dealers or investment advisers and their representatives. ( though this is usually not required if a representatives.

listing of any injunctions, administrative orders, or convictions for misdemeanors or felonies in the securities business.

Applicants financial condition ans history,

For investment advisers only, any information required to be furnished to any client or prospective client.

The administrator can, by rule, require an applicant for initial registration to publish an announcement in one or more newspapers in the state.


Federal Covered Advisers File Notice of Sale

the adviser is required to file a notice in the state by filing with the state. federal registration requires the same documents for registration of the adviser. The document is the Form ADV(ADViser Registration) flled with the SEC under the Investment Advisers Act of 1940, In addition a consent to service of process must be filed.


Each state also gets to collect an annual registration fee for the registration of each IAR.

Initial licensing fee, Each state requires an initial licensing fee for the registration of each: Broker dealer, Agent, Investment Adviser, investment adviser representative.

Each state requires an initial notice fee for each federal covered adviser that transacts business in the state.



Completion of filing

any filing in a state is not considered to be complete until both the proper documents and the filing fee have been received by that State ( saying that they are in the mail is not enough).


Annual renewal Fee

the amount of the initial fee varies form state to state.

In addition, each licensed person must pay an annual renewal registration or notice fee to the state. Note that if a person initially registers mid-year, there is no pro-rating of the annual filing fee - the full year fee must be still paid.


Registration Effective in 30 days

Registration, if there is no problems, becomes effective 30 days from filing date. The administrator may, however, specify an earlier effective date or a later effective date.


No Additional fee for Successor firm

That's if i registered broker-dealer or investment adviser wishes to file with the administrator for a successor firm( for example, to change the business name or change the composition of partners in the firm). then the successor firm can complete the unexpired portion of the year without paying an additional filing fee.


Registration / notice Expires On Dec 31st

Every registration or notice filing expires on December 31st of that year unless renewed


Renewals May vary from state to state

However renewal periods may vary from state to state ( for example some states have bi-annual license renewals


CRD Registration satisfies State Requirements.

If an individual (only agents of broker-dealers or investment advisers representatives are agentszis registered with the SEC through CRD central registory depository, the information required in the State application is satified. The only requirement is that the sate Administrator be notified of the CRD registration. and the appropriate filing fees be paid.

the CRD system is used for brker-dealers and their agents that are rigistered at the federal leve. For firms that are smaller investment advisers only (under$100,000,000 of assets under management). there is no federal registration requirement for either the firm or the agents. The only registratin is the state level. An electronic system simliar to CRD has been established for this purpose "IARD - Investment Adviser Registration Depository.


U-4 Industry Apllication Creates CRD or IARD File

to rigister through either CRD or IARD, that individual completes and signs a U-4 Form ( the Unifrom Securities Industry Application). The information is used to create that persons CRD or IARD file.


U-5 Termination Form

If an individual i fired, the former employing firm files a U-5 termination form with CRD or IARD. This must be filed within 30 days of termination by the former employer.


Electronic Signature and payment

States are moving towards full electronic filing of documents, Thus any signature requirement for the electronic filing systems is simply met b that individual or an officer of the firm typing in the name the required field.

many states now require electronic filing and will only allow paper forms to be filed for reasons of hardship.


Registration Standards for broker -dealers,

to register as a broker-dealer the state administator can require- minimum dollar amounts of Net capital, Net capital is the same as liquid net worth requiremtn.)

Surety Bond coverage( the amount is set by each administrator; the old law called for a 10,000 minimum requirement) the law requires the Administrator to accepts a deposit of cash or securiites in lieu of the bond; and

The passing Of a qualified Examination.

The net capital is the same as a liquid net worth requirement for the firm) and surety bond standards are imposed because broker-dealers are permitted to take custody of customer funds and securities, or may has discretionary authority over client funds.


Surety Bond helps Insure That registrant will not violate State law.

A surety bond is a deposit of cash, securities( the state administrator gets to decide which securities are acceptable), or an insurance "bond". The State gets to seize the assets on deposit or gets the insurance proceeds if the registrant violates State law. The best idea is that if the registrant has "skin in the game, " the firm and its owners are less likely to violate state law.


Registration Standards for Investment Advisers

TO register as a investment adviser, the State Administrator cn require;

Minimum Dollar Amount of Net Worth ( Minimum Financial Requirements).

Surety bond coverage ( the amount is set by each administrator, same as broker-dealer the old law states for a $10,000 minimum requirement). The law requires the administrator to accept a deposit of cash or securities in lieu of the bond ; and

The Passing of a qualified Examiniation.


Surety Bond only required for Advisers that take custody

There is a minimum Net Worth and Surety bond requirement for investment advisers, because, under state law, investment advisers are permitted to take custody of customer funds and securities. Please note however if investment adviser does not take custody of the clients funds, there is no surety bond requirement.


Note under NASAA Rule

under NASAA Rule 202-d-1, investment advisers that take custody of customer funds must have a minimum net worth of $35,000; investment advisers that do not take custody of funds, but that have discretionary power, must maintain a minimum net worth of $10,000. Under Rule 202-e-1, investment advisers that have either custody or discretionary authority over customer accounts must maintain minimum surety bond coverage of $35,000, if their reported net worth is less than this amount.


Higher financial and bonding Requirements for investment advisers that take custody Or that Exercise authority.

The point that must be know is that the Administrators can require different minimum amounts financial requirements and bonding requirements for investments advisers that take custody of customer funds than for the ones that don't. and can require different financial requirements and bonding requirements for investment advisers that have discretionary authority than for ones that don't.


Net worth requirement only applies in State, Where Adviser Has principle business.

Only the net worth requirement of the advisers state where it has a principle office applies.

If the adviser has "out of state' branches, there is no additional Net Worth requirement based on those locations. Only the net worth requirement of the adviser's State where it has its principle office.


Items included in minimum net worth Or Net capital Or net Capital computation.

The minimum net worth or net capital requirement for investment advisers is: All Assets - All Liabilites - Intangibles (e.g Goodwill, trademarks, copyrights, etc).

In addition, if the adviser is an individual, the value of all personnel property(home, furnishings, automobile) is deducted; but if the adviser is a partnership or corporation the items used in the business are included and are not deducted (this is a test point).


Filing of financial reports

and balance sheet of applicant.

The act requires that every registered broker-dealer and investment adviser file any financial reports required by the administrator. As a condition of registration, the state Administrator typically requires a statement of financial conditional (balance sheet)for the applicant, along with oath or affirmation that it is true and accurate.


If BD or IA fails to meet financial standards

Notify Administrator Next business day.

File report On following next business day. (the day after notifying).

if BD or IA knows or has reason to know that it is not meeting the Net capital or Net worth requirements, the firm is obligated to promptly notify the administrator by the next business day. No later than the day after notice is given, a report must be filed with the administrator detailing the advisers. financial condition.


Note : that the fact the net worth deficiency notice is given the day after discovery, and that report is filed day after, should be known for the exam.



Registration standard for Agents.

To register as an agent, the State administrator can require:

Surety bond coverage( if the agent will have custody of, or discretionary power over, client funds); and

The passing of a Qualifying Examination.

If no examination is required, the administrator can ask for certification that the individual has renewed the State Blue Sky laws and understands his responsibilies.


Registration Standards for Investment Adviser Representatives (IARs)

To register as an investment adviser representative, the State Administrator can require;

The passing Of a Qualification Examination.

(Note that there is no surety bond requirement to register as a IAR. But this is a requirement for broker-dealer, agents and investment Adviser registration).

If no examination is required, the administrator can ask for certification that the individual has reviewed the States Blue Sky laws and understands his responsibilities.


Filing Of fingerprints Required by many States.

Finally note, that the filing of fingerprints not a requirement for State registration of agents or representatives under the uniform Securities Act, but many states require fingerprint filings anyway. The States generally apply the fingerprinting requirement as the following- if the fingerprints have been filed with CRD run by the FINRA. for federal registration, then they are not required to be filed in the State. if they have not been filed with CRD( for example a representative of a State-registered investment adviser), then the state requires a fingerprint filing.


Requirement for maintaining Registration

To maintain registration the administrator can require

Books and Financial Records - Registered broker-dealers and investment Advisers must keep account, correspondence, memoranda, books and other records as prescribed by the Administrator by the rule or order.

However, if the broker-dealer is subject to Federal record keeping requirements under the securities Exchange Act Act of 1934; or an investment Adviser is subject to record keeping requirements under the Investment Adviser Act of 1940; then records are to be kept in accordance with these rules ( NSMIA avoiding duplicate regulation at the Federal and State level again).


Broker -Dealer Records - Act of 1934 sets Rule

Regarding specific records that must be know for the exam, The SEC ( and hence State) retention periods for broker-dealer records are:

Customer Correspondence and Emails: 3 years

Customer Trade Confirmations: 3 years

Customer Account Statements: 6 years


Regarding Federal Covered Advisers Keep all records for 5 years.

The Investmetn Adviser Act of 1940 requires that all records be kept for 5 years


State registered Advisers - NASAA

Regarding State-registered advisers, NASAA has written an extensive rule, since it has jurisdiction, and it must be know for the exam.

IA Records to be Kept under NASAA Rule

NASAA requires that State-registered Advisrs mainitna the following records:

Journals of original entry (e.g., cash receipts and disbursements.

General Ledger and trial balances

Order Ticket copies

Copies of cancelled checks, bank statements, and bank reconciliations.

Originals of all written communications sent to or received from clients. (including complaints).

List of discretionary accounts

Copy of each power of attorney granted to adviser.

Copy of each advisory agreement entered into client.

Copy of notice, circular, advertisement, article investment letter, etc., sent to 2 or more customers;

Record of each securities transaction except for transactions in U.S Government securities.

Note that the NASAA rule then goes on to list even more records, but you get the idea - keep everything!


Advertising defined As a communication To more than one person.

Regarding Advertising ( defined as communication to more then 1 person, which you should know for the exam it can include recommendations of the purchase or sale or sale of a specific security: and if the communication does not state the reason for the recommendation, a memo must be retained indication the reasons for the recommendation.


Customer accounts Posted by 10 business Days after End of calender Quarter.

Regarding records of securities transactions, the rule requires that customer accounts be posted no later than 10 business days after the end of the calender quarter in which the trade occurs. (in contrast, broker-dealers must post customer account transactions on settlement, under SEC rules).


Retain both business and personal Emails.

Data Inegrity

Regarding email retention, the regulators take the stance that both business and personal e-mails sent and received by agents must be retained by the broker-dealer or investment adviser. They do this because agents often send e-mails to clients, or receive e-mails from clients, while at home.


Record keeping Rules for Adviser Based on location of Principles Office.

Adviser that takes custody must keep customer records in principle office

Finally, note that advisers that have locations in multiple States only have to comply with the record keeping rules of the State in which the Advisers principle office is located. (this applies to advisers only; not to broker-dealer).

The uniform securities act also states that if an adviser takes custody of a clients funds, it must retain, in its principles office, for a period of 5 year, a copy of:

Client Purchase and Sales History ; and Current Client securities Positions.


5 year retention with first 2 years records kept in principle office.

Under NASAA rules, all records must be kept for 5 years in an easily accessible place with the first 2 years' records kept in the principle office of the adviser( this applies only to state-registered advisers, however investment Advisers Act of 1940 happens to have the same rule for Federal covered Adviser.


Permanent Records kept for life of firm.

Permanent records must be kept for 3 years after the firm is closed.

An exemption to the 5 year record retention is applied to so called permanent records. These are the investment advisers articles of incorporation, minutes to Board of Directors meetings, stock certificate books, partnership articles and any amendments. This must be retained for the life of the enterprise and, additionally, must be retained for 3 more years after the enterprise is terminated ( this must be know for the exam).


Reports to customers

: Investment Advisory Brochure

sent 48 ours prior to investment advisory contract to the customer.

The investment Brochure is a requirement of the Investment Adviser Act of 1940 under so called Brochure rule. Is an adviser is satisfying federal delivery requirements then the state law is satisfied as well (NSMIA).

this requirement only applies to investment advisers; not to broker -dealer. The administrator can require investment advisers to furnish certain information to customers. This takes the form of an "Investment Advisory Brochure" given to prospective customers at least 48 hours prior to entering into any investment advisory contract.


Financial Reports

Broker-dealers and investment Advisers have to file financial reports with the Administrator as required. If the broker-dealer is registered with the Securities Exchange Act of 1934 or f the investment adviser is registered under the investment Adviser Act of 194 ,this requirement may be met filing the federal required reports with the state.



Inaccurate Information

If any filing with the Administrator is found to have material errors or omissions, the registrant must file a correcting amendment promptly. It the amendment corrects an initial registration application, the registration does not become effective until 30 days have elapsed from the filing date of the amendment.




All records of registrants are subject to periodic examinations by representatives of the administrator. To avoid duplication of examinations these reviews can be performed by representatives of FINRA or the SEC. The Administrator can inspect records, both in the State and outside the State and can conduct inspection on a surprise basis.



Advertising and Sales Literature.

These materials may be required to be filed with the state unless the security or transaction is exempt, or unless the security involved is a federal covered security. Included in the requirement are the prospectus pamphlets, circulars, form letters, advertising (including internet advertising) and sales literature.



Federal Law supersedes State law in most cases.

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


Broker-dealer, agent and investment advisers can Withdrawal from registration and withdrawal becomes effective in 30 days after the filing date.



If legal proceedings Are Commenced Within 1 Year, Registration Cannot Be Withdrawn. Proceeding may not begin up to 1 year after termination, therefore ones registration is not considered truly terminated until 1 year elapses with without legal action. During that year prior the person is still considered to be registered and is under the jurisdiction of the state Administer.



Agents can only Maintain registration only if Affiliated with a registered Broker-Dealer, unless they become associated under another broker-dealer, they then re-register under the new broker-dealer. Agent cannot register on his own. must be associated with a broker-dealer to be registered. The same treatment is true for investment Adviser and their representatives.



If an existing customer moves to a new state, BD and agent must Register in the New state in 60days days.



Definition of security unless a exemption is available or unless the security is a federal covered security the act requires that securities be registered in the State.



Definition of security: The basic definition of a security is any investment in a common enterprise for profit, with management performed by another party. Falling under this basis definition are:

Corporate issues: Transferable shares, common and preferred stock, notes, bonds, debentures, treasury stock, Collateral trust certificates, equipment trust certificates, real estate investment trust certificates, certificates of deposit for a security(such as American depositary receipts). Collateralized Mortgage obligation, rights and warrants, voting trust Certificates.

Government Issues: US gov obligations, Government Agency obligations(GNMA, FNMA, obligations of State and political subdivisions(municipal obligation), Foreign Government obligations.

Investment Company issues: open end fund shares(mutual fund shares redeemable with the sponsor), Closed end fund shares(publicly traded funds, negotiable securities and cannot be redeemed), Investment contracts(front end loads, spread load contractual plans), Unit investment trusts, variable Annuity contracts).

Option Clearing Corporation Issues: Option contracts on stock, debt instruments, Indexes and foreign currencies( Put and Call Options).

Tax Sheltered Investment Issues: Pre Organization certificates (subscription agreement for LP, the purchaser fills out basic info and sends a cheque to the GP, if the GP accepts the subscription the individual becomes a limited partner), Certificates of Interest in a profit Shares arrangement(LP subsciptions(, Fractional Interests in oil, or mining ventures, Real Estate Condominiums, Farming, planting, and breeding progrmas.


Third Party Manger needed for these to be considered Securities

Note: These programs are considered securities wen a third party manages the Enterprise. If the investor is the manager, these are considered to be a personal business and are NOT securities.


Other Securities

Whiskey warehouse receipts(Warehouse receipts), Merchandising marketing Schemes, commodity option Contracts.

Notes: these have been defined as securities because of past abuse in selling such interests. so state regulators brought them under control to protect investors.


Issues not defined as Securities:

Insurance endowment Policies or contracts, Fixed annuity Contracts, ownership Interest in credit unions(non for profit organizations), Commodities Futures contracts, Interests in both contributory and non-contributory retirement plans(pension plans, IRAs and KEOGH (HR10) plans, however specific investments held within these vehicles are defined as securities.

isf a person is giving advice about fixed annuity contracts(which are defined as a security) then this person is not defined as an investment adviser that must register in the state. However, if a person is giving advice about variable annuity contracts (which are defines as a security then this person must register in the state(unless they are either excluded form the definition of investment adviser or are exempt form registration.


Definition of a Federal covered Security:

The Uniform Security Act defines a Federal covered security as one that is covered under section 18b of the securities act of 1933 (federal legislation). Section 18b of the Securities Act of 1933 was incorporated as part of the National Securities Market Improvement Act of 1996 NSMIA. The intent here is that if a security is defined as Federal covered security, then registration in the State not required (only registration with the Sec is required.

hus, duplicte registration of securites at both the Federal level and State level is avoided.


Federal Covered Securities are defined as:

Listed on the NYSE, American stock Exchange(NYSE MKT), or NASDAQ, or is a senior security (preferred stock or bonds), of such an issuer: listed on a national securities exchange that has substantially similar listing standards to those exchanges listed above;

Investment Co,Issues (issued by registered investment company)

Sold to Qualified (wealthy purchases)(basically a person who owns investment so if 5,000,000 dollars or more investment managers with at least 25,000,000 dollars of investment assets under management): or

Sold in Exempt Transactions under the 1933 Act: Sold in specified by the Securities Act of 1933 such as REG D private placement.

Thus listed securities and investmetn company securites are only required to register with the SEC; they are not required to register sperted in each State. In addition, securities sold to truly wealthy investors in certian exempt tranactions are not required to be registered with the SEC; nor can they be required to be registered in the State.

OTCBB and pink issues Must be state-registered


Defintion of SALE or OFFER to sell, or OFFER to purchase

defining a SALE or an OFFER TO SELL is important for the test.

SALE; A contract to sell or dispose of a security, or an interest in a security for value.

OFFER TO SELL: as any attempt or offer to dispose of a security, or a solicitation of an offer to buy a security or an interest in a security for value.

OFFER TO PURCHASE: As an attempt or offer to obtain a security or a solicitation of an offer to sell a security or an interest in a security for value.


Gift of Assessable Stock is considered to be a sale.

A gift of assessable security, where the issuer can assess the owner for additional funds is considered a sale since the donor is relieved of any future required payments. (LP interests are generally assessable by the GP).


Securities given as a bonus are part of a Sale

A security that was given as a bonus because of the purchase of securities or other items is considered to be part of that purchase, and hence to have been offered and sold for value.


Offer or Sale of warrants and rights and convertible securities is considered to be an offer or sale of the underlying stock.

hence the underlying security would have to be registered under the Act to offer the warrants or rights unless an exemption exists.


Specifically EXCLUDED from the defintion of a SALE or OFFER to sell are

Dividends PAid to shareholders whether its a form of cash, stock or property

Security interest created as a result of a loan, when a loan is made the lender may take security interest in the property of the borrower, as collateral for the loan). Another wording for this is Bona-fide pledge for a laon.

A corporate reorganization caused by a voteof shareholders resulting in a merger; consolidation reclassification of securities, or sale of coporate assets in consideration for the issuance of security of anoth corporation.

This exclusoin does not apply to a cash tender offer for a corporations securities.

A judicially approved corporate reorganization, where a new security (for example, a corporation that is in bankruptcy may offer its bondholders an exchange whereby the corp will give the bondholder an equity security usually of greater value in exchange for the bonds. corp cna reduce its leverage, and has a better chance of emerging for bankruptcy. Please note that the eclusoin only applies to judicially approved reorganization eg bankrupticies. It DOES NOT apply to voluntary reorganizations such as those carried out by a corporation through a tender offer or exchange offer.


Other definitions


Guaranteed as to payment of interest, dividends or principle by someone other then the issuer.

Administrator; the uniform securities act provides that each state has an administrator who administrates the ACT. The administrator can be the state securities commissioner, commissioner or secretary.

STATE: Any State, territory, or possession of the United States, District of Columbia, and Puerto Rico.


Registration of securities

The Act states that it is unlawful for any person to offer or sell any security in a State unless the:

Security is registered in the State under the ACT.

Security is a Federal covered security.

Security or transaction is EXEMPT under the Act (these are exemptions rovided by the Uniform Securities Act -NOT the seurities Act of 193. The Securities act of 1933 is federal legistion. The uniform Securities Act is State legistlation.


Registration of Securities

Effective for 1 year, with quarterly updates.

Each registration is effective for 1 year. During this period, the Administrator can require quarterly reports form the registrant on the progress of the offering.


Filing a registration requires a payment of a fee to the State, if the fee is not paid in full registration will be denied or stopped.

in addition the State can require filing of advertising, sales literature, prospectuses, circulars or form letters used in connection with the offering.



Persons who may File Registration application

may only be made by the issuer, any other perosn whose behalf the offering is ot be made(for example an officer of a company seeling shares in a registered secondary distribution or a registered broker-dealer.


Amended Registration

if the registration application is incomplete or inaccurate an amendment must be filed prior ot the registration becoming effective.


Types of security registration

3 methods

Registration by filing

Registration by Coordination

Registration by Qualification


Registration by Filing

A statement demonstratineligibility for registration by filing

NAme, address, and form of organization of the issuer.

A decription of the security being registered. If part of the offering is non-issuer distribution eg officer is including restricted shares that he or she owns in the registration then that person name and address andamount of securities being offeered and reason for offering must be included.

A copy of the latest prospectus filed with the registration under the securites act of 1933.

Registration is Effective on the 5th business day after filing. or any shorter period designated by the Administrator many states have 2 business days.

When the registration with the SEC becomes effective the State registration is effective. any purchaser of the issue must get a copy of the prospectus at or prior to confirmation of sale.

if a stop order against the issuer being registered by coordination the burden of prof is on theapplicant.

established "Seasoned" companies which there is already substantial trading activity and marketplace information is given a less rigorous registration procedure than the other two. Lets established companies use prospectus filed with the SEC under the securities Act of 1933 as the filing document with the State. Thus no special State paperwork is required filing with the State.

Used by offices In non-issuer transactions - easiest and less costly registration.this is the method commonly used by NON-ISSUERS to offer shares in the State.

A compnay hold unregistered shares outstanding If the company registers the shares outstanding and is current in its SEC filings, the officer can selll the shares under SEC rule 144. USe registration filing procedure.

To qualify for regsitration by filing; Have been in business continuiously for the past 3 years.

have previously registered its equity securites with the SEC, which class of securities must be held by at least 500 shareholders.

Have filed required reports with the SEC during 36 months and must have been timely in filing all reports during the preceding 12 months.

Have either a Net Worth of 4,000,000 or Net worth of 2,000,000 and net pre tax income form operations for at leaast 2 of the last 3 yeasrs.

Have at least 400,000 shares outstanding, excluding shares held by officers, directors, underwriters, and insiders. defined as holders of 10% of more of the issues stock. Not have any warrants or options held by underwriters in excess of 10% of the outstanding issue.

have at least 4 registered market makers. making market in the issuers equity securities for 30 days out of the preceding 3 months.

Have this offering performed by an underwriter who is FINRA member, and the underwriter cannot take in excess of 10% of the offering price for performing the underwriting: and the minimum offering price per share is $5. Have not defaulted in any paymetn of principle, interest dividends or lease payments for the fiscal year preceding the registration filing.

If the issuer is an open end investment company (mutual fund) or unit trust to Register by filing the applicant must: Have previously registered securities in the State for at least the preceding 24 months. Be in compliance with all material terms of such registrations; Have no material cha


Registration by Coordination

Administrator requires the State registration to be on file for 10 business days before State registration is effective.

Also the amount of max and min proposed offering prices and underwritting discounts must be on file 2 days prior to the effective date.

if a stop order against the issuer being registered by coordination the burden of prof is on the administrator

More rigorous then registration by filing, and can be used by any company filing a registration statement with the SEC, whereas registration by filing is only available to seasoned companies.

To register the issuer must file in addition to the consent to serice of process, the following with the State.

3 copies of the proposed Prospectus filed with the SEC under the Securites act of 1933,

A copt of the issuers Articles of incorportation and by-laws.

A copy of any Agreement Among underwriters.

A copy of any indenture governing the issuance of the security

A speciman of the security to be issued.

Any purchaser of the security in that state must get a copy of the prospectus at or prior to confirmation of sale.


Registration by qualification.

registration is effective 30 days after filing by qualification. but if there is omission or misstatements in the registration documents the issue may never go effective. Any purchases must receive prospective at or before the time an offer is and in writing or a written confirmation of sale.c

Most difficult method of registration.

5 years history of principle occuption and ddress name,

he administrator can require that if the promoter is compenstaed with stock that the stock be held in escrow for 3 years this stops immediate cashing out.

al contracts made in the last 2 years/


General Information Regardinfg Security Registrations:

Aministrator requires a filing fee.

A condition of registration by qualification or coordinating and unusual consideration paid to promoter may be required to be deposited in escrow for up to 3 years. The administrator can also impound the proceeds from a sale of securities until the issuer receives a specified amount.

Each registrant statement is effective for 1 year form effective date. A registration statement may not be withdrawn for 1 year form its effective date if any securities of the same class are outstanding.

The administrator may require the issuer to file quarterly reports to disclose the progress of the offering.



Federal Covered Securities

Administrator cannot require registration of federal covered securities in that state. But the Administrator can require a notice filing for the initial offering of securities in a State by an issuer. and the document filed with the federal agency SEC along with a consent to service. And the payment o the filing fee in the state.

If the issuer refuses to pay the notice fees then the State is authorized to require registration of the securities

Concurrent filing of amendments after the initial offering of securities in a State and amendments that are filed with the SEC must be fied with the State. the filing of sale reports and fees payable based on sales of the security in the state.

administator may issue a stop order suspending the offer of a covered security with the exemption of exchange listing securities if it finds that the order is in the publics interest. and the inssuer has failed to coply with any condiotns outline.

FCS are defined as listed securities NYSE ,NYSE MKT NASDAQ or senior security, preferred stocks and bonds. pf such an issuer.

Investment Co issuers by a registered company.

Sold to qualified (wealthy) investors. person owns 5 million of investments, investment manager with 25 million of assets under management.

Sold in Exempt transaction under 1933 Act. Such as Reg D. private placement.


Exempt securities under State LAws

Us Gov and agency securities

Municipal Securities

Canadian Gov Securities

Other Foreign Gov Securities



Issues of companies already regulated under other Or State laws.

DEPOSITORY INSTITUATIONS ISSUES( banks and saving and loan issues) but nit bank holding companies)

Federal credit union Issues

Industrial Loan Association Issues.

insurance Company issues(except variable annuities)

Securities issued by railroad and common carriers regulated by the interstate commerce commision

Securities issued by public utilities regulated by the Public utility Act of 1935.

Blue chip securities Listed NYSE, NYSE MKT NASDAQ senior securities preffered stocks and bonds as well as rights of warrants and rights. promisary note that mature in 9 months or less, rated 3 highest rating categories, issued in amount of at least $50,000.

Non profit persons.

However, please note that any joint ventures of this issuer or partnerships formed with the issuer as the GP do not fall under the exemption, since technically the joint venture or partnership is the issuer not the corporation.


Exempt transction are ones that dont involve the public.

Individauls that represent Issuers in exempt transaction are excluded


Individuals who sell securiites in exempt tranascations still must register in the state unless the broker- dealer itself is exempt.



Private placement Has a different rule with exemtion compared to Federal law.

The uniform securities act for a private placement as an offer to not more than 10 persons during any 12 month period to qualify for exemption. The seller must believe that lal of the purchasers are buying for investment. No commissions may be paid for soliciting prospective buyers other than financial or institutional buyers. This discourages the offer to individuals since no commissions are paid for soliciting them. commissions may be paid to financial and institutional investors solicited.

The federal law is different dont get them confused!! REG D private placement exemption that allows a slae to a maxium of 35 non accredited investors and to an unlimited amount aof accredited investors (wealthy or institutional).

Offers of sales of Pr-Organization Subscriptions mimics the PP rule. and no commission paid for soliciting potential subscribers.



rights offering is exempt if no commission are paid when an existing shareholder subscribes to a new issue of stock by exercising his subscription rights. this also applies to mergers, exchange offers, and corporate reorganizations.



Administrative orders cannot be applied retroactively. A person cannot be found in violation of such an order if he sustains the burden of proof that he did not know, and in the exercise of reasonable care, could not have known about the order.



Administrators can require filings of advertising used in connection with a new securities offering in the state, however filing of advertising cannot be required for offering of Exempt securities, federal covered transaction, securities in exempt transactions.

However please remember that the anti-fraud provisions of the uniform securities Act apply to everything. that is to both non exempt and exempt securities, and transactions.



NASAA requires advisory contracts with customers be written be in writing. have a fixed life. eg, 1 or 2 years. detail the advisory fee to be paid. - note that the prepayment of fees is permitted. such as paying for 6 months of advice up front). detail the refund of any prepaid advisory fee to be made if the contract is terminated early. Provide that no assignment can be made unless the customer approves. Investment advisers are prohibited from entering into, or extending, an advisory contract unless it provides in writing that no compensation based on gain or loss, notify the customer of changes in partnership composition. note: if the advisory contract is assigned from one IRA to another IRA in the same firm this is not an assignment of the contract because it didn't move to another firm.

Regarding compensation, the adviser can charge a percentage of assets under management as a fee, using schedule that gives declining percentage fee as assets from client increase. The adviser can also use a negotiated fee basis, as long as it is consistently applied to customers.

An exemption to the rule prohibiting compensation based on gains is given to advisers that have very welthy customers(defined as a customer with either $1,000,000 assets under management with the adviser or a 2,000,000 net worth). In this case the advestment adviser Act of 1940 allows a performance fee, and federal law has suremacy over state law.

NASAA requires that if an adviser charges a performance fee, it must be disclosed.



Investment Adviser fee

Wrap fees and commisions:

Soft dollar arrangemnts

12b-1 fees

No hedge Clauses

Advisers can take compensation in other ways as well. They can earn wrap fees that wrap all services. including the cost of all trades, into a single annual fee - either as a flat dollar amount or as a percentage of assets under management. If an adviser has an affiliated broker-dealer, it may send its trades to this firm, and commisions may be earned by the affiliated broker-dealer (but this must be disclosed to the IAs clients). Advisers can also earn so-called "soft dollars."

A soft dollar arrangement is where an adviser sends its portfolio trades to a brokerage firm that does not discount commissions, which, on its face, would raise costs to its clients and would violate the IAs fiduciary requirement to act in the clients best interests. However, as a quid-pro-quo - the broker gives back to the adviser research reports, asset allocation software, stock selection software, etc, In theory these item should allow the adviser to do a better job for his or her customer. The SEC and NASAA permit soft dollar arrangements with the provision that the GIVE BACKS benefit the clients not the adviser.

12-b another fee a adviser can collect is a portion of a 12-b fee. SEC rule 12-b1 permits investment companies to charge their shareholders an annual fee (capped at .75% annually). where the proceeds are used to pay for the cost of getting new investment into the fund. An investment adviser that agrees to place money in a mutual fund can share in these annual fees.

Advisory contracts cannot not contain "hedge clauses" that seek to eliminate the advisers the advisers liability for negative investmetn results, except due to events beyond that advisors control such as war, terriosts act, etc. IN addition such exculpatory clauses cannot be used to get around the adviser contract rules. For example the adviser cannot use such a clasue to take a portion of gain and losses in an account, and the customer agrees to hold the adviser harmless for doing so.


Investment adviser - Deliver Brochure delivery rule.

requires new customer with advisers Form ADV part 2A"brochure" and Form ADV part 2B "brochure Supplement".

2 -day free (48 hours) look before signing advisory contract customer can sign contract and be given the Brochure and Supplement and then has 5 business days to terminate without penalty. This is a NASAA rule - the SEC rule under Investment Adviser Act 1940 is NOR the same it simply requires delivery of the brochure and Supplement , at or prior to entering into any Advisory Contract.

Annual Brochure update, If changes are material send to customers within 120 days of the advisers fiscal year end. (this is the same as the SEC rule).

Note that: instead of sending customers a boring document that is filed with the sate as the Brochure, the adviser can create its own brochure, as long as all of the same information is presented. NASAA also states that electronic delivery of brochure and supplement to customers is permitted.

New client entering into an Advisory contract NASAA requires that the customer be provided with the Advisers Brochure and brochure supplement. This is copy of Form ADV part 2A (the Brochure) which gives information about the advisers business; and Form ADV Part 2B (the brochure supplement) which gives information about the advisers key personnel. These are the SEC investment advisers registration forms which are also used by each State for State-registration advisers. Under NASAA rules these forms must be delivered to customers.


Investment Adviser - Custody Rules

It is prohibited for an investment adviser to take custody of, customer funds and security.

If the Administrator prohibits this by rule; or

if there is no rule, the adviser fails to notify the Administrator that he has, or may take custody.

if an investment adviser wishes to take custody of clients funds or securities, NASAA requires that:

It must notify the Administrator in writing on Form ADV (this is the form that advisers use to register with the SEC; and also used by each State for Adviser registration). that it has, or may have custody.

Custody must be kept by a qualified custodian in a separate account under each client name; or in accounts that only contain clients fund and securities, held in investment adviser name as trustee for the clients.

Prompt notice to customer of custodian Identity; prompt notice must be given to the clients in writing of the qualified custodian's name, address, and the manner in which the funds or securities are maintained; Account statements must be sent at least quarterly to clients; and The qualified custodian must be audited on a surprised basis as least annually to verify all client funds and securities.

The investment Adviser must file a copy of the audit results with the State Administrator within 30 days of completion of the audit.


Qualified custodian definition under NASAA custody rules;

FDIC insured deposit taking institutions;

Registered broker-dealers holding customer assets;

Registered futures commission merchants holding customer assets; and

Foreign financial institutions holding financial assets for customers.

Note that the definition of taking "custody" includes not only accepting customer funds or securities, but also includes:

the acceptance of prepaid advisory fees of $500 or more, 6 months or more in advance of rendering services (NOTE 1)

an account that gives full power of attorney to the adviser, which would allow the adviser to withdraw funds (NOTE 2)

(NOTE1) The investment advisers Act of 1940 (federal law) sets the dollar limit for being defined as "taking custody" at a higher level -$1,200 - Federal covered Advisers. State law sets it at the lower $500 level for State- registered advisers.

(NOTE 2) If the adviser is given a limited power of attorney, which limits the adviser to trading the account so that funds cannot be withdrawn, then this is not considered to taking custody.

if a client inadvertently gives securities or funds to an investment adviser, as long as they are returned within 3 business days, then the adviser has NOTE taken custody.

If an adviser inadvertently receives a check from a customer made out to a third party (for example) the customer mistakenly puts a check made out to another payee in the adviser's envelope), as long as the adviser mails the check to the third party within 3 business days of receipt, then the adviser has NOT taken custody.

NASAA requires that each investment advisory firm file an update of their Form ADV (registration) in the State within 90 days of the fiscal year end.

If there is a significant material event, an "other than annual" amendment must be filed in the State within 30 days.



Conduct of customer account rules.

4 critical pieces of information to open customer account.

Customer name:


Date of Birth and;

Social security number

failure to get each of the 4 pieces of information is a violation. This info must be used to independently verify customer's identity promptly after account opening.

No customer signature is required on new account form when opening a cash account for a client.

no unauthorized trading of customer account, only that customer is authorized to place trades ( or any one of the customers in a joint account can place trades). trades from customers can be accepted verbally or in writing. Unauthorized trading of a customer is an unethical and prohibited practice.


Customer Margin account

customer signature promptly after account opening.

customer signature is required when a margin account is opened. The customer must sign the margin agreement promptly after the first trade under NASAA rules. By signing the margin agreement, the customer pledges the securities in the account as collateral.


Customer account cash or margin: the agent must sign the new account form attestation that the info is true as given by the customer;

Manager must sign the customer new account form accepting the account for the firm.



Joint customer accounts; A trade can be placed by any one of the account owners; and any one of the account owners can demand that a check be drawn. However, any check drawn on a joint account must be made out to the full account name - not to the name of a single tenant.



Customer account:

Third party is prohibited form placing a trade in a customer account unless the customer gave the third party a power of attorney in writing. Note that if an individual is a customers attorney (like a family lawyer) that person does not have power of attorney to trade the customes account ( unless the customer gives written authorization).



Customer accounts; discretionary account:

An agent or a investment adviser representative cannot exercise discretion in a customers account without written customer authorization.



Customer accounts : NASAA rule for investment Advisers:

written authorization must be obtained from the customer no later than 10 days after being given verbal authority by the customer. This rule does not apply to broker-dealers - in th ecase the SEC rule prevails.



Customer accounts; SEC rule for Broker-dealers:

written customer authority is required prior to any discretionary orders ( remember, Federal Law will prevail over State law, if there is no Federal Law the State law applies).

Trade is not discretionary if agent only selects Price and /or time of execution.

The trade is only considered discretionary if the representative selects the size of the trade or the security to be purchased, it is not considered discretionary if the representative only selects the price and time of of execution.


customer Account; Broker Dealer " Suitability Standards:

before recommending a security to a customer, the agent of a broker-dealer must first determine that the investment is suitable for the customer, based on the customers investment objectives, needs , risk tolerance and investment time horizon. A broker- dealer that owns a security may sell it to one of its customers, as long as the security is suitable (this would be the case if the broker-dealer were a market maker in the security).

Actions that violate the "suitability rule " include;

Failure to inquire as to a customers financial situation, needs, and investment objective.

Recommending securities without regard tot eh customers financial situation or objective.

Recommending a security without having a reasonable basis of the recommendation.

Churning customer accounts (performing trades of excessive frequency).

performing excessively large trades in customer accounts,

Failure to sufficiently describe important facts and risks concerning a transaction.

making blanket recommendations of the same security to all customers.



Customer Accounts Suitability Rule for investment Adviser: NOT the same as broker-dealer.

The suitability standard used for broker-dealers does NOT apply to investment advisers. Rather investment Advisers are fiduciaries, and cannot take the opposite side to a trade. The basic idea is that investment is good for the customer, why would an investment adviser that owns it want to sell.

If an investment adviser recommends a security to a customer, the investment adviser can ( and should) buy that same security for its personal account It cannot sell that security to the customer. Thus, investment advisers should be investing along side their customers.



Customer Account- Payment/margin/commingling Rules.

Regulation T Applies to both cash and margin accounts.

Reg T of the Federal Reserve Board set margin requirements for non-exempt securities. Reg T covers both cash and accounts and margin accounts.

Long Sale; In a cash account, the customer pays in full, The customer can sell securities that he or she owns (a long sale because the customer owns( is long ) that stock.

Short sale: In a margin account the customer puts up the Reg T requirement (50% for stocks) and is loaned the other 50% by the broker dealers. In a margin account, securities can be sold long or short - which is the sale of borrows shares.

Prompt payment for purchases - when a customer buys securities, payment must be obtained promptly but no later then 5 business days past trade date. If payment is not received, the unpaid securities position must be sold out and the account is frozen for 90 days.

Frozen account - A frozen account does not mean that a customer cant trade account. Many firms call it putting a CUF on the account (cash up front) because in a frozen account, the customer no longer is expected to pay promptly - rather - the customer must have the cash on deposit at the broker to buy securities before trade is entered. If the customer behaves for 90 days, the freeze comes off the account and the customer is back to paying promptly for securities purchases.

In a cash margin account, a customer cannot make a purchase without intending to pay by settlement. In a cash account, a customer cannot sell long unless he or she intends to deliver the security on settlement. In a margin account, a customer cannot sell short unless the securities to be borrowed are located ( and this must be documented) and can be delivered on settlement.

Cannot extend Loan amount greater than Limit set by Reg T:

Lending money to a customer in contravention of Reg T requirements in prohibited. For example if Reg T requirement is 75% ( this is the margin to buy LEAP (long term) options, then the loan value of the security is 25% thus, the maximum loan that can be extended to a customer on this security is 25% of the current market value. Any loan percentage that is greater than this violates Reg T.

Street name securities; As a part of the margin agreement, a broker-dealer is permitted to place customer into "street name" that is, the securities are kept in the name of



Orders /Confirmations - Order ticket -BROKER-DEALER

Broker dealer Order ticket information: An order for a customer cannot be entered by a broker-dealer without an order ticket having the following information:

Customer name or account number

Agent (registered representative) name or number

Buy or Sell

If sale - long or short

Whether order was solicited or unsolicited

Number of shares or bonds to be traded.

Description of security to be trades; and

Execution price ( if the order is a market order, there is no price - only the designated MKT).

Note that there is no requirement for the customer address, date of birth or social on the order ticket.

Each order ticket must be marked as either a solicited transaction or an unsolicited transaction. This is required because "suitability" complaints have no standing when a trade is unsolicited.

Order ticket Time Stamps. SEC rules require that order tickets be time-stamped with the following;

Time of order receipt

Time of execution

Time of order cancellation, if canceled.

By requiring these time stamps, front running violations can be easily detected by regulators. In addition, if there is an error in execution, having the time stamp record allows the from to more easily trace the cause of the error.



Order tickets - Investment Adviser - different to SEC ruling for broker-dealers. NASAA rule for investmetn Adviser Order tickets.

NASAA has a rule for order ticket infromation that must be retained by investment advisers, and of course, it is different than the SEC rules for broker-dealers. Because an IA sends an order to a vroker-dealer for execution. The IA must keep record of the order as sent - there is no requirement for the IA to keep the record of the actaul execution - this would be kept by the broker- dealer that filled the order.

The NASAA rules states that Investment Adviser order tickets must contain;

Name of the person at the IA who recommended the transaction.

Name of the person who placed the order;

Date of order entry

Name of account for which the order was entered

name of the broker -dealer or bank to which the order was sent for execution

whether the order was discretionary.


The "Do it" Rule

Also note: that NASAA states that deliberately failing to follow a customers instructions is a prohibited practice so the " Do IT" rule prevails.

An order placed by a customer must be filled according to the customers instructions. If a broker-dealer or investment adviser receives an order form a customer that it believes to be unsuitable, the customer must be told this, and if the customer directs that the trade be done - DO IT.

In this theme, if a customer directs that a trade be done in a specific market, then follow the customers instructions. If a customer directs that a specific percentage of his or her portfolio be invested in a specific stock - DO IT. Also note that if a customer directs, you still cannot do anything that is prohibited. For eg. if a customer directs that a trade of a listed security be executed privately and not in the public market, this is not permitted.


Limit order Rule - The SEC has another rule called the limit order display rule. This rule requires that market makers in securities that receive customer limit orders that are better prices then their "displayed quote" must show the better priced quote in the market. The market maker cannot bury the customer order. For eg, assume that a market maker has a displayed quote in the market for ABC stock of BID 15.00 (400 shares). ASK 15.50(300 shares). The market maker currently is willing to BUY 400 shares of stock at 15.00 (the bid) and is willing to sell 300 shares of the stock at 15.50(the Ask)

If the market maker receives a customer limit order: to Buy 200 shares of ABC at 15.20, it must update its BID (BUY) to reflect the order since it is better priced. The update quote from the market maker that will show in the market is. BID 15.20 (200 shares) ASK 15.50.

If a market market now receives a customer limit order to SELL 600 shares of ABC at 15.40 it must update its ask (SELL) to reflect the order since it os a better priced. The updated The updated price is BID 15.20 (200shares) Ask 15.4 (600 shares).

Also Note that as exchanges have improved the computer technology by adopting electronic order books that can hold each customer order individually, this rule really now only applies to OTCBB quotes. where the market maker still only show one quote.



Confirmation Information: After a trade is executed the customer must be sent sent a confirmation detailing the specifics of the executed trade.

The exchange where the trade was effected used to be required to be disclosed on the confirm. but this is no longer the case because all markets are linked and trades must be done at the best price in a given market or routed tot he better-priced market for execution.

The information that must be disclosed on the confirmation includes:

Broker-name, address and telephone number

Customer name and addres

number of shares bought or sold.

Security desscription

Executio price

Commission charge for an agency trade

Whether a payment for order flow was received.

No requirement to disclose whether the trade was solicited or not on the confirm - this is only required on the order ticket copy

Regarding payment for order flow, the SEC permits market makers and exchanges to pay order entry firms for routing their orders to them. In essence, the market maker is giving up part of his spread (difference between the bid and the ask) to the order entry form.

The SEC permits this because it believes that this allows order firms to reduce their commission costs to customer. ( now you know how discount brokers can charge $8 per trade and make money - they get payments for order flow as well). However if a payment for order flow was accepted this must be disclosed on the customer confirmation.




borrowing from the customer - a broker-dealer is prohibited form borrowing money or securities form customer accounts. Note, however that a broker dealer is permitted to borrow a customers securities if the customer gives written permission by signing a loan consent agreement.

An agent of a broker- dealer or an investment adviser representative cannot borrow money from a customer personal. An exception is granted if the customer is lending institution that is lending to the agent or investment adviser representative on the same terms (not better terms) as it would to say another customer.

For eg if an IAR has a customer that is a saving and loan, the iAR can get a mortgage on a home purchase form that saving and loan as long as it is on the same terms as the S&L offers its other customers.

If an agent of a broker-dealer has a customer that is a relative, NASAA have a very different rule than FINRA. FINRA allows registered representatives to borrow form relatives that are customers; NASAA does not!! (Since this is NASAAs test you must know there rule.




Lending money or securities personally to a customer is a prohibited. This rule applies to both agents and IAR. In addition IAs (IA firms) cannot lend money to customers.

Broker dealers or bank can lend money to a customer using securities as collateral under the provision of Reg T of the Fed reserve Board.




Sharing in the gains and losses in a customers account is prohibited. However an agent of a BD is permitted to share in the gain and loss of a customer account as long as:

A joint account is opened with the customer

Sharing is proportionate to capital contribution and

Manager approval is obtained.

An agent will often offer to open a joint account with a customer in such a manner, because then the customer knows the agent is not like;y to make a bad recommendations, since the agent will lose as well. Such an account "Aligns the agents and customers interests.

The sharing rule is different for a IA accounts. IA and IAR are outright prohibited form sharing in customer accounts. they cannot open joint accounts.

Because IAs and IARs are held to a fiduciary standard, while BD and agents are not. if they make personal investments, IAs and IARs invest alongside the customer that is make the same personal investments as they are recommending to customers. Thus, they will experience the same gain and loss personally as their customers anyways.




Finally guaranteeing a customer account against loss by either a BD, agent, IA or IAR is prohibited. This applies to both exempt and non-exempt securities.




BD commission charges Must be fair and reasonable-A customer cannot agree to pay a higher commission unless it is justified by extra value being offered by the agent or BD.

For eg, a BD that gives lots of hand holding, gives proprietary research, has great stock picks ; etc can charge a higher commission than a bare-bones discount broker that just does trade executions.

An agent cannot charge higher commission rate based on the subsequent performance of recommendations.

Commission disclosed only on confirmation - any commission charged is not required to be disclosed at the time of the trade is placed. The only requirement is that it be disclosed in writing on the trade confirmation.

Disclosure of usual costs/fees- Because the customer normally does not know the commission charge until he or she gets the confirmation to avoid unpleasant surprises, NASAA required that any unusual fees or costs for trade be disclosed verbally at the time of the trade been placed.

For eg, if the customer wants to buy odd lots (less than 100 shares) the commission charge is usually much higher than normal, and this must be disclosed to the customer in advance.

BD can charge for clerical services such as safe keeping of securites and appraisals of securities, but not for reccommendations of securities. If they do they become Statutory IAs and that must register as such and that are subject to all the IA rules.

IA cannot charge Excessive fees: NASAA says its prohibited practice. Fees for services rendered must be comparable to other IA who operate in similar situations.

Failing to disclose the availability of discounts to all customers.Fee discounts cannot not be made available on a selective basis to customers. If a discount is offered to given customers, any other customers that meet the qualifications for that discounts must be given the discounted rate. The availability of discounts must be disclosed in the Advisers brochure ( FORM ADV 2A).




The list is extensive, the basic idea is that one must be ethical and not lie to, or mislead customers.

Misleading or Untrue statements

telling a customer that a mutual fund has no load funds when it charges 12b1 fees in excess of .25%annually. They are charged against net assets that a mutual fund can charge for the cost of soliciting new investment to the fund. FinrA states that a mutual fund cannot be called no load fund because if its 12b1 fees exceed this limit it also sets a maximum .75% annual 12b1 fee for any fund.

Omissions of Material Facts

(giving a customer a research recommendation prepared by someone other than that firm, without disclosing that fact( this is called "third party research). Failure to tell a mutual fund customers about breakpoints, its a sales charge reduction based on the dollar amount invested in a mutual fund. must be made aware of the dollar amount threshold. and also must be made aware of a letter of intent. LOI feature if offered by the fund gives the customer up to 13 months to complete the breakpoints if the letter is signed.


prohibited is

Soliciting orders for unregistered non-exempt securities. Soliciting customers to buy unregistered common stock is prohibited. soliciting customers to by unregistered municipal bonds is permitted(since these are exempt securities).

A BD or agent recommending the purchase of the firms publicly traded parent company. For ex at Merrill Lynch cannot recommend the purchase of Bank of America stock( which owns Merrill Lynch) unless this is disclosed verbally at the time of recommendations and in writing on the confirmations.




A customer complaint is defined as one received in writing ( e-mail counts here). A customer calling up and yelling is not a complaint. If a written complaint is received by an agent or an IAR, it must be given to a manager for resolution

If a customer sends a written complaint an then changes his mind about the complaint and asks for it back, the original written complaint must be retained as a record and a copy returned to the client.

Any mail that the firm sends to a customer, such as confirmations and account statements, must be sent to the customer at the mailing address provided by the customer (email is OK). Customer mail cannot be suppressed; and cannot be directed to be sent to a branch office or a P.O box designated by an agent.

The idea is that the customer must know what is going on in his or her account. There have been many frauds especially with elderly customers, where an agent who had discretion over the account, churned it to generate commissions and directed that the customer mail to be sent to a different address so the customer did not know what was going on until it was too late.

Death of Customer- If a BD or Adviser is notified that a customer has died, the firm must;

Cancel all open orders:

note the date of death on the account

Freeze account from removal of assets ; and

wait for the proper paperwork (copy of death certificate, last will and testament, and probate court filings, if required). needed to transfer the account or assets to the executor or beneficiary.

Any power of attorney ceases upon the customers death- If the account had a power of attorney, that died with the customer and is now invalid. Also note that a so called durable power of attorney also dies with the customer. - the only distinction is that if a customer is incapacitated, the durable power of attorney remains in effect. If the account has a "non-durable" power of attorney, the authorization expires upon the customers incapacitation (most powers of attorney are durable).




Inside info is defined as info about an issuer that has not been made public. Material inside info is info that is not public that would have an effect on the value of the issuers securities in the marketplace. The act prohibits persons from:

Prohibits persons from -

Cannot trade based on:

Effecting securities transactions based on the material inside info.

Making recommendations to either buy or sell based on material inside info.

Tipper - Tippee

The acts prohibits persons from transmitting material inside info to someone else, who might trade based on that info ( the so called tipper- tippee) doctrine. That holds not only the person who traded as liable, but also holds the person who gave up the tip. that resulted in the trade.

Note that a tipper is not held liable if the information that resulted in a trade is accidentally or unintentionally transmitted tot he tippee. Also note that there is no violation for either tipper or tippee if n trade results form the transmittal of the inside info.

BD must have procedures to prevent misuse of material non-public Info- Federal insider trading law required BD to establish, maintain and enforce written policies and procedures designed to prevent the misuse of material nonpublic info by any associated person.

In particular, this legislation was aimed at investment bankers engaged in takeovers.Large BD have divisions for investment banking; mergers and acquisitions; trading and retail. Inside info is routinely received through investment banking and merger activities. It is not a violation to receive inside info. It is a violation to use the info to trade for profit.

The issue for BD is that, because of the tipper and tippee doctrine, the BD can be viewed as the tipper if one of the firms employees trades based on inside info received from the BD. Furthermore the potential liability for the tipper is huge (25 million fine per trade). However, this penalty is only imposed if the tipper recklessly disregards the insider trading laws.

Thus the BD must put policies and procedures in place that:

train employees about insider trading rules

demonstrate that the employee received such training and understands the insider trading laws

impede the flow of inside information between different departments of the BD.

Chinese Walls: To insure that such inside info is not communicated




Selling a non-exempt new issue security to a customer without providing a final prospectus to the customer at or prior confirmation of sale, is a prohibited practice.

For eg a new issue of common stock cannot be sold to a customer without delivering a prospectus. A new issue of municipals bonds can be delivered to a customer without prospectus delivery because the securities are exempt.

Marking up or highlighting a prospectus delivered in connection with the sale of a new issue is prohibited. Doing so alters the legal content of the prospectus an is therefore prohibited.

Third party research disclosure - If a BD or IA prepares a research report it can be distributed to customers with no special disclosures other then the standard conflict of interest that any research report must contain. If a BD or IA buys r uses "third party research (this is prepared by another firm) and distributes it to customers, the fact that is was prepared by an outside firm must be disclosed.

IPO allocations to BD and their employees, are prohibited: It is very common in a common stock IPO that the underwriter prices the issue a bit low to make sure that the issue is sold out to investor. Thsi creates a conflict, because industry insiders know this and want to buy the issue form the underwriters (since it is likely tot trade higher once it opens for trading in the market). It is unethical for employees of BD to buy IPOs form underwriters.

Free riding and withholding - this is prohibited practice called free riding and withholding which is withholding an iPO from sale to the public by a BD or Associated person, with the intention of keeping it personally so that a free riding can be taken on the issues price rise when when it opens for trading.

IPO allocations can be made to employees and officers of the issuer, the issuers suppliers, and the general public. They cannot be made to BD, BD offices and BD employees.

IPO Allocations to investment advisers are permitted. - IPO allocations can be made to investment advisers, but the adviser must buy the allocation for all the clients - it cannot keep the allocation for the IAs account or an IARs personal account.

Underwriting manager cannot issue research report on the issue for prescribed time - A member firm that acted as a manger or co-manager in an underwriting of that issuers securities cannot issue the research re






NASAA IS restrictive to the fact spam email recommendations of securities do not involve interaction with customers so that the suitability of such a recommendation can be determined for that customer, this is unethical business practice and is an inappropriate activity for a BD, BD agent, IA , IAR

Also cannot solicit business or make recommendations in internet chat rooms. for agents of BD and IA they are limited to general statements about investing. since the suitability of each recipient cannot be determined. and the giving of opinion in a chat room as a means of soliciting business is prohibited as well ( because the agent must be registered in each state where a prospect receives solicitation.




if not properly licensed in the state cannot solicit securities business in the state. including making recommendations, soliciting trades, performing suitability determination and writing order tickets.

Prior to been licensed in the state, an individual can only perform clerical or ministerial functions. this is taking new accounts info, entering customers orders that have been already taken by a licensed individual. reporting completed trades and responding to customer account inquires.

If an agent takes outside work notify firm - if an angent of a BD wants to take any outside work, they must give notice to the firm and following instructions of the firm.

Private Securities transactions- Trading privately with a customer is prhibited. These trades have not been recorded on the books of the BD. If an agent effects such a private transaction, then that agent becomes a statutory BD who should have been registered in the State.

Selling away - because this means the agent is selling away from his or her BD. Also note that if an agent received written permission of his or her BD to effect this transaction and if the BD recorded the transaction on its books and supervised it, then this would have been permitted.

NO sharing commissions with Unlicensed person - sharing in commissions with unlicensed individuals for securities based business is prohibited. Note that sharing commissions with other individuals holding securities licenses is perfectly legal. as long as both individuals are registered through the same BD;or BD that are under the common control. Note; that sharing in commissions between two registered individuals who are at different BD is prohibited.

IA can pay referral fees- do not confuse the prohibition on sharing commissions with the paymetn of reffereal fees. Agents of BD are subject tot he prohibition on sharing commission with unlicensed persons or with agents registered through other BD. ON the other side iA do not earn commissions and are not subject to this rule, They are permitted to pay referral fees to solicitors, however the state requires that the solicitor by registered in the State as an adviser representative to accept fee.

IA can send its portfolio trades to an affiliated BD and that affiliated BD can earn commisions on those trade, as long as this is diclosed to customers and they give written consent (this is typically part of the advisory aggreement).




This act is adopted in most states is a modernization of the prudent investor rule, restricting the investment authority of fiduciaries. Instead of setting forth a list of approved securities for investment the prudent investor Act allows fiduciaries to use modern portfolio theory for IA decision making.

Thus, instead of just investing in securities that have minimal risk, the fiduciary can apply risk-return analysis to choose the best investments for the level of risk assumed. Investment performance is not measured on each individual investment. But rather by looking at the overall portfolio return. To be considered when setting overall investment strategy are:

General economic conditions

Effect of inflation or deflation

Tax consequences

The role that each investment plays part of the overall portfolio

Expected total return

Other resources of beneficiaries

Need for liquidity, income and preservation or appreciation of capital.

An assets special value to one or more of the beneficiaries


the trustee must diversify the trust assets, unless there are special circumstances that obviate this requirement. All assets must be managed solely for the benefit of the beneficiaries. and if the trust has 2 or more beneficiaries, the trust must be managed impartially taking into account the differing interests of the beneficiaries.

Also, the trustee must seek to minimize costs associated with managing trust assets.

Finally, fiduciaries, who usually cannot give a third party trading authorization, are permitted to delegate investment decisions to qualified agents - so the trustee can sign a contract with an investment adviser. This Act has been adopted in most States.




An investment adviser allocating securities positions to customer accounts in a biased manner is prohibited practice. Often, investment advisers place block trades (defined as a trade of 10,000 shares or more) which are not filled all at once. The trade execution might occur in pieces at differing prices. The adviser cannot allocate the shares purchased at the lower prices to his "best" customers. Rather, shares must be allocated across all customers participating in the block trade on a pro-rata basis at the average execution price.

Not disclosing potential conflicts of interest to customers is a prohibited practice. Such conflicts of interest, that must be disclosed, and to which customers must agree to in writing, include:

the investment adviser receiving an advisory fee from the customer, and in addition, receiving a commission on each trade executed for the customer:

the IA receiving an advisory fee from the customer; and in addition the adviser receives a referral fee for each trade performed for that customer given to an executing broker.

The IA receives so-called "soft dollar" compensation from a BD to whom the adviser directs its portfolio trades. This is a very typical business - in return for directing trades to specified BD, that BD gives the adviser "free" services such as research reports; real time stock quotes; etc these arrangements are permitted as long as the "free" services directly benefit the adviser's clients.

The investment adviser allocates block trades to customer accounts using a method other than pro rata distribution.

NOT ALLOWED:::: This list is not all inclusive. Also note other investment adviser conflicts that cannot be "cued" by having the customer sign that they "know" about it are:

taking securities positions in the advisers personal account that differ from the positions being taken in clients accounts.

Selling securities owned by the adviser to the advisers clients.

Reg SP - SEC regulation - (Statement of privacy) was enacted at the end of the year 2000. It requires BD, IA and investment companies to send initial and annual privacy notices to customers outlining the firms policies and practices on the collection and disclosure of non-public personal information to any other person, In addition, the Opt-Out notice the firm must provide an "opt-out" notice along with the initial notice, explaining how a customer can be excluded from any discloses that the firm makes to others. These notices can be delivered in writing(e.g. by mail) or electronically, if the customer agrees. The notices can also be posted on the firms web-site, as long as the customer must acknowledge receipt of the notice as a step in the process of obtaining a financial product of service.

The essence of the rule is that personal account information collected from an individual customer account cannot be disclosed to others unless the firm details it in its privacy policy the information that it might disclose to others (e.g selling the customers name, address and phone number to a marketing organization). In addition, the firm must permit the customer to "opt out" of any such discloses.

"aggregated" information does not fall under this policy for eg, customer account balances, info given to a third party to make a transaction, or maintain service a customer account,. Any request made by court of law, or requests by SEC or FINRA does not fall under this policy.

Money Laundering is the conversion of illegally obtained funds into apparently legitimate money. PATRIOT act anti-money laundering procedure and reporting to other financial institutions. which include BD and IA.

Any new customer name must be matched to the terrorist watch list maintained by the Department of Homeland Security. Any foreigner that wishes to open an account must present a copy of their foreign passport and they must have a U.S tax I.D number.

The money laundering regulations require financial institutions to implement an AML (anti money laundering) program, with procedures to detect and report money laundering activities.

Includes SAR (suspicious Activities report)must be filed with FinCEN (financial crimes Enforcement Network - part of the department of treasury). if there are any suspicious activities on the part of a client where the amount involved is 5,000 or more. The report must be filed within 30 days, and the client cannot be told that the report is being filed.

Currency transaction report (CTR) - must be filed with FinCEN for cash deposits or withdrawals of amounts over $10,000. The report is required for "structurings" where clients break apart their transactions into amounts under $10,000 to avoid reporting. These must be aggregated over 2 week windows and reported as well. The report must be filed within 15 days, and the client cannot be told the report is being filed.

To offer a promissory note, both the salesperson and the note must be registered in the State. Only promissory notes that have maturities of 9 months or less, that are investment grade, and that are sold in minimum increments of $50,000, are exempt from State registration. Thus, smaller note offerings (under $50,000) to smaller investors are non-exempt and must be registered and unrated note offerings or non-investment grade note offerings must also be registered in the State.

Tell tail signs of Promissory note fraud - Statements that the notes are guaranteed or insured - especially by bogus foreign entities.

promises of above market rates of return (an above market rate of return is not offered by a low risk investment, but rather by a high risk investment).

Statement that the notes are risk free (these are corporate issues that have risk of default).

The labeling of a start up company's notes as prime ( since only established companies with history of operations and earning can be called prime) and

Offers of promissory notes from a stranger who does not know the customers financial situation.

BANK LOCATION IN A BANK SETTING- Not making required disclosures to customers that buy securities in a bank location is a prohibited practice. NASAA has a model rule for securities branches that are located within bank settings. These are FINRA member BD that specialize in marketing securities, usually mutual funds, by signing agreements with saving and loans. As apart f the agreement, the member firm sets up a kiosk in each S&L branch, and licenses some of the employees of the S&L(such as tellers) to sell mutual funds. that bank employee magically transforms into a registered representative of the fiNRA member firm, selling securities to the customer. If a branch is located in a bank where deposits are being taken, wherever possible, the physical location where the member's services are conducted should be distinct from the area where deposits are taken. The members name shall be clearly displayed;

at, or prior to, opening an account for the customer the member firm must give (both orally and in writing) the NOT-NOT-MAY disclosure that:

the account is NOT FDIC insured

securities products are NOT deposits and that they are not guaranteed by the financial institution. '

security products are subject to investment risk and MAY lose value.

NASAA requires the member firm to make reasonable efforts to obtain written acknowledgement of the receipt of these disclosures when opening an account.

Similar disclaimers are required in any communications sent to customers by the BD operating within financial institution.




The administrator has the power to conduct these investigations both in the state, and outside the state.

Investigations can be private or public, when conducting a private investigation the Administrator does not give out any info about the investigation - either before, during or after. However, the administrator can share info among its employees and offices during a private investigation.

The administrator can publish info concerning a violation, or concerning acts or practices that tend to operate as a fraud. Thus, the administrator can broadcast to the world, any violations committed by a person, thus deterring any potential offenders.

The administrator can subpoena persons to testify and to produce records for these investigations. If the subpoena are not obeyed, the administrator can enforce the subpoena by petitioning the appropriate court. These investigations can take place in the Administrators State or in any State.

The administrator can compel any individual to testify, even if the testimony might tend to incriminate that person. (this is permitted as long as that States law guarantees that the edvidence cannot be used to prosecute that individual. Otherwise the individual can use his or her 5th Amendment right against self-incrimination to not testify).

Civil liability -not intending to deceive or defraud- the customer who lost money must be paid back including interest.

Criminal Liability - intended to defraud or deceive or if that person commits a serious felony, criminal liabilities and criminal penalties apply. A customer must be paid back plus interest, and the person who violated the Act can be made to pay fines/or go to jail.

please note there is no such thing as civil penalties.

there are only criminal Penalties.

a fine in most states is $5,000 but can vary state to state.

Imprisonment up to 3 years but this can vary from state to state.

if the person convicted of violating the law can prove they didn't have any knowledge of the rule or order, then they cannot be imprisoned but they still can be fines.

proceedings seeking criminal penalties cannot start later than 5 years after the date of the alleged violation. please note the state administrator many vary this time period.