Regulation of Persons
35%of exam
Broker-DealersAgentsInvestment AdvisersIARsRegistrationExclusions
Securities + Issuers
9%of exam
Remedies + Administration
11%of exam
Communication + Ethics
45%of exam
Quick Facts
- Exam
- Series 63
- Body
- NASAA (FINRA-administered)
- Questions
- 60 scored + 5
- Pass
- 43/60 (72%)
- Time
- 75 min
- Fee
- $147
- Basis
- Uniform Securities Act
- Format
- Closed book MCQ
Registration Filing
Application, Consent, Bond, Fee, Effective
Consent: service of processBond: if discretion/custodyEffective: noon 30th day
Broker-Dealer vs Agent
Broker-Dealer
- Firm/entity
- Form BD
- Net capital
Agent
- Individual
- Form U4
- Represents BD
Firm vs person
Must Register?
- Firm trades for others→Broker-dealer(Form BD)
- Individual solicits sales→Agent(Form U4)
- Firm advises for fee→Investment adviser(Form ADV)
- Individual gives advice→IAR(Form U4)
- Clerical, no solicitation→No registration(Excluded)
- Only existing out-of-state→No BD registration(Snowbird)
- Issuer sells own→Not a BD(Excluded)
- Reps exempt securities→Not an agent(Excluded)
Defined Persons
- Person
- Individual or entity
- Broker-dealer
- Firm trading securities
- Agent
- Individual representing BD/issuer
- Investment adviser
- Firm advising for fees
- IAR
- Individual giving advice
- Issuer
- Entity selling securities
- Administrator
- State securities regulator
- Institutional client
- Bank, insurer, fund
State vs Federal Adviser
State (USA)
- Under $100M
- Administrator registers
- Form ADV state
Federal Covered
- $110M+ AUM
- SEC registers
- Notice filing only
Size sets regulator
Not a Broker-Dealer
- Agent acting
- Person, not BD
- Issuer
- Sells own securities
- Bank/trust
- Excluded entityEXCL
- No state office
- Only existing clients
- No place here
- Institutional clients only
- 30-day rule
- Vacationing existing clients
Not an Agent
- Clerical/admin
- No solicitation
- Exempt issuer reps
- Govt securitiesEXEMPT
- Bank/trust reps
- Excluded securities
- No commission
- Exempt transactions
- Underwriter only
- Issuer-to-BD
- Employees only
- No public sale
Registration Filing
- Form U4
- Individual registration
- Form BD
- Broker-dealer firm
- Form ADV
- Investment adviser
- Consent to service
- Appoint Administrator agent
- Net capital/bond
- Financial requirement
- Effective noon
- 30th day default
- Renewal
- December 31 expiry
- U5 termination
- Within 30 days
Agent Transfers
- Change firms
- All three notify
- Old BD
- Files U5
- New BD
- Files U4
- Agent
- Updates U4 amendment
- Multiple states
- Register each one
- License non-transfer
- Tied to firm
Exempt Transactions
Unsolicited, Institutional, Fiduciary, Underwriter, Private
Unsolicited: customer orderInstitutional: bank/fundFiduciary: executorPrivate: <=10 offerees
Exclusion vs Exemption
Exclusion
- Not the definition
- Never that person
- Persons concept
Exemption
- Fits definition
- Relieved of registration
- Securities concept
Outside vs excused
Exempt From Registration?
- US/muni/Canadian govt→Exempt security(Type-based)
- Bank or insurer→Exempt security(Institution)
- Exchange listed→Federal covered(Blue-chip)
- Customer-initiated order→Exempt transaction(Unsolicited)
- Sold to institution→Exempt transaction(Institutional)
- Executor or trustee→Exempt transaction(Fiduciary)
- <=10 offerees→Exempt transaction(Private)
- None apply→Must register(Full filing)
Exempt Securities
- US/municipal
- Government bonds
- Canadian govt
- Foreign sovereign
- Bank/savings
- Insured institution
- Insurance
- Not variable products
- Federal covered
- Listed/Investment Company
- Nonprofit
- Religious/charitable
- Commercial paper
- 270-day prime
- Employee plan
- Benefit securities
Exempt Securities
Government, Bank, Insurance, Nonprofit, Covered
Government: US/muniBank: insuredInsurance: fixed onlyCovered: listed/fund
Exempt Security vs Transaction
Exempt Security
- Type of issue
- Govt/bank paper
- Always exempt
Exempt Transaction
- How it sold
- Unsolicited/institutional
- Per trade
What vs how
Exempt Transactions
- Isolated nonissuer
- Occasional secondary sale
- Unsolicited
- Customer-initiated orderCOMMON
- Institutional
- Bank, insurer, fund
- Underwriter
- Issuer to BD
- Fiduciary
- Executor, trustee, sheriff
- Private placement
- <=10 offerees
- Preorganization
- <=10 subscribers
- Existing holders
- Rights/dividends
Registration Methods
- Notification
- Filing for seasoned
- Coordination
- With SEC filingIPO
- Qualification
- State-only offering
- Effective coordination
- When SEC clears
- Effective qualification
- Administrator order
- Registration period
- One year typically
Administrator Toolkit
Rules, Orders, Investigate, Subpoena, Enjoin
Orders: deny/suspend/revokeSubpoena: recordsNo criminal sentencing
Civil vs Criminal
Civil
- Rescission/damages
- No willful needed
- 3yr / 2yr
Criminal
- $5,000 / 3 years
- Willful required
- 5-year statute
Money vs prison
Which Remedy?
- Stop ongoing violation→Cease and desist(Administrator)
- Bar a registrant→Revoke order(After hearing)
- Urgent registrant risk→Summary suspension(Pending hearing)
- Investor wants money→Civil rescission(Price + interest)
- Willful fraud→Criminal referral(Court only)
- Challenge an order→Appeal court(60 days)
Administrator Powers
- Make rules
- Not laws
- Issue orders
- Deny, suspend, revoke
- Investigate
- In or out state
- Subpoena
- Witnesses, records
- Cease and desist
- Stop violation
- Summary suspension
- Pending hearing
- No criminal sentence
- Courts onlyLIMIT
- Public interest
- Plus protection
Penalties + Liability
- Criminal
- $5,000 / 3 years
- Statute criminal
- 5 years prosecute
- Civil rescission
- Price plus interest
- Civil suit limit
- 3yr / 2yr
- Recovery
- Cost, interest, attorney
- Right of rescission
- Buyer accepts/sues
- No willful needed
- Civil liability
- Appeal order
- 60 days court
Discretion vs Time/Price
Discretion
- What/how much/action
- Needs writing
- Before trading
Time/Price
- When to execute
- No written needed
- Same trade day
Choice vs timing
Communication Rules
- No guarantees
- Performance promises prohibited
- No misleading registration
- License not approval
- Disclose conflicts
- Material facts
- Advertising filing
- Administrator may require
- Social media
- Firm supervision
- Email/digital
- Retained correspondence
- New account info
- Suitability basis
- Margin agreement
- Signed promptly after
Prohibited Practices
- Churning
- Excessive trading commissions
- Unauthorized trade
- No discretion granted
- Commingling
- Firm/customer funds mixed
- Selling away
- Off-firm transactions
- Front running
- Trade ahead orders
- Market manipulation
- Painting the tape
- Borrowing client funds
- Generally prohibited
- Sharing in account
- Proportional, written consent
Custody + Discretion
- Custody
- Holds cash/securities
- Discretion
- What, how much, action
- Time/price only
- Not discretion
- Written authorization
- Before discretionary trade
- Oral discretion
- Time/price 1 day
- Suitability
- Match client objectives
- Best interest
- Reg BI standard
Common Traps
Exclusion vs exemption
Exclusion = persons ≠ Exemption = securities
Security vs transaction
Security = type ≠ Transaction = how sold
BD vs agent
BD is firm ≠ Agent is individual
Rules vs orders
Rules apply broadly ≠ Orders apply specifically
Administrator vs court
Administrator bars registrant ≠ Court imposes prison
Discretion vs time/price
Discretion needs writing ≠ Time/price does not
Last Minute
- 1.Pass: 43 of 60 scored questions
- 2.Exclusion = person; exemption = security
- 3.Agent = individual; BD = firm
- 4.Unsolicited orders are exempt transactions
- 5.Govt, bank, insurer = exempt securities
- 6.Consent to service appoints Administrator
- 7.Registration effective noon 30th day
- 8.Administrator cannot impose prison
- 9.Criminal: $5,000 fine, 3 years prison
- 10.Civil limit: 3yr or 2yr
- 11.Discretion needs prior written authorization
- 12.No performance guarantees ever allowed
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