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					S6 3 O n lin e C la s s
U s in g th e c o u r s e m a te r ia l
Th e S e rie s 6 3 is th e in d iv id u a l s ta te le v e l
re g is tra tio n n e c e s s a ry in c e rta in s ta te s in a d d itio n
to a p p ro p ria te fe d e ra l te s tin g . Th e "U n ifo rm
S e c u ritie s A g e n t S ta te L a w E x a m in a tio n " s u ffic e s
fo r a ll s ta te s re q u irin g th e e x a m (th e re is n o t a
s e p a ra te te s t fo r e a c h s ta te ), a n d is e a s ily
tra n s fe ra b le fro m d e a le r to d e a le r o r fro m s ta te to
s ta te . Th e e x a m its e lf is g iv e n o n th e le a rn in g
c e n te r's s y s te m a n d is 7 5 -m in u te , m u ltip le -c h o ic e
fo rm a t w ith 6 0 q u e s tio n s , o f w h ic h th e c a n d id a te m u s t c o rre c tly a n s w e r 7 0 % , o r 4 2
q u e s tio n s . Th e q u e s tio n s te n d to b e lo n g a n d w o rd y w ith e x c e lle n t "d is tra c to rs "
(w ro n g a n s w e rs ) - w a tc h o u t fo r "e x c e p t," "n o t," d o u b le n e g a tiv e s , a n d ro m a n
n u m e ra l s tru c tu rin g o f a n s w e rs .

Th is s tu d y c o u rs e c o v e rs a ll o f th e to p ic s lis te d in th e S e rie s 6 3 e x a m o u tlin e . Th e
c o u rs e is s tru c tu re d a s fo u r c h a p te rs :

C h a p te r 1 . R e g is tra tio n o f P e rs o n s
C h a p te r 2 . S e c u ritie s
C h a p te r 3 . B u s in e s s P ra c tic e s
C h a p te r 4 . A d m in is tra tiv e P ro v is io n s
Th ro u g h o u t e a c h c h a p te r y o u w ill n o tic e s a m p le e x a m q u e s tio n s th a t a re d e s ig n e d
to re in fo rc e th e m a te ria l. C a re fu lly re v ie w th e s e q u e s tio n s a s th e y a p p e a r to e n s u re
th a t y o u c a n a p p ly y o u r k n o w le d g e o f th e c o u rs e m a te ria l to th e e x a m fo rm a t. A s y o u
p ro c e e d th ro u g h e a c h c h a p te r, y o u s h o u ld m a k e n o te s to y o u rs e lf c o n c e rn in g fa c ts
a n d c o n c e p ts th a t y o u fin d to b e m o re d iffic u lt o r h a rd e r to re m e m b e r.

Th e re is a ls o a re v ie w q u iz a t th e e n d o f e a c h c h a p te r. A s y o u a n s w e r th e q u e s tio n s ,
it is im p o rta n t th a t y o u p a rtic ip a te in th e le a rn in g p ro c e s s b y jo ttin g d o w n k e y w o rd s ,
w ritin g o u t a ll c o m p u ta tio n s , a n d m a rk in g y o u r a n s w e rs to th e q u e s tio n s . S tu d ie s
h a v e p ro v e n th a t if y o u a c tiv e ly p a rtic ip a te in th e le a rn in g p ro c e s s , re te n tio n o f th e
m a te ria l is g re a tly e n h a n c e d .

A fte r y o u a n s w e r a ll th e q u e s tio n s in th e q u iz , p re s s th e "G ra d e Te s t" b u tto n a n d
y o u r s c o re w ill a p p e a r a t th e b o tto m o f th e q u iz . A fe e d b a c k w in d o w w ill a p p e a r
b e n e a th e a c h q u e s tio n . F o r in c o rre c t a n s w e rs , th e w in d o w w ill s h o w th e c o rre c t
a n s w e r a n d e x p la in w h y it is c o rre c t. A fte r g ra d in g y o u rs e lf, re v ie w th e a n s w e rs a n d
th e m a te ria l in th e c h a p te r. To ta k e th e q u iz o v e r, p re s s th e "R e s e t" b u tto n a t th e
b o tto m o f th e q u iz .

N e x t, re v ie w th e C o u rs e O u tlin e to re fa m ilia riz e y o u rs e lf w ith th e c o u rs e c o n c e p ts .
(Th e C o u rs e O u tlin e is a S tu d y A id , w h ic h y o u c a n a c c e s s fro m th is c o u rs e 's title
s c re e n .) Y o u c a n e ith e r v ie w th e C o u rs e O u tlin e o n lin e o r p rin t o u t a c o p y o f it.
R e v ie w in g th is o u tlin e is a g re a t w a y to p u t in to p e rs p e c tiv e th e in fo rm a tio n o n th e
S e rie s 6 3 e x a m .

O n c e y o u h a v e c o m p le te d y o u r re v ie w o f th e c o u rs e o u tlin e , lis te n to p a rt o n e o f
y o u r a u d io ta p e s /C D . Th e s e ta p e s /C D a re a c o n c is e le c tu re o f th e U n ifo rm
S e c u ritie s A c t. Y o u w ill fin d th e S tu d y G u id e u s e fu l w h e n lis te n in g to th is le c tu re .
Th is S tu d y G u id e , w h ic h c a n a ls o b e a c c e s s e d fro m th e c o u rs e 's title s c re e n ,
c o n ta in s a re p rin t o f th e A c t a n d w ill s e rv e a s a g u id e in fo llo w in g th e ta p e /C D . Y o u
c a n e ith e r v ie w it o n th e s c re e n o r p rin t it o u t.
A fte r y o u h a v e lis te n e d to th e a u d io le c tu re , re tu rn to y o u r C B T/W B T c h a p te r e x a m s
a n d c o n tin u e to ta k e e a c h e x a m s e q u e n tia lly u n til y o u h a v e s c o re d 9 0 % . O n c e y o u
h a v e a tta in e d th is le v e l, c o m p le te th e p ro g re s s te s t. Th is te s t is a c o m p re h e n s iv e
m e a s u re o f y o u r u n d e rs ta n d in g o f a ll o f th e m a te ria l p re s e n te d in th e S e rie s 6 3
c o u rs e . Y o u s h o u ld b e a b le to s c o re 8 0 % o n th is e x a m in a tio n b e fo re y o u c o n tin u e .

U n d e rs ta n d in g a ll o f th e m a te ria l th a t y o u 'v e c o m p le te d , h o w e v e r, d o e s n o t a s s u re
s u c c e s s o n th e e x a m . M o s t s tu d e n ts fin d th a t th e p ro b le m w ith p a s s in g th e e x a m is
n o t th a t th e y d o n o t u n d e rs ta n d th e m a te ria l, b u t in s te a d th e y s h o u ld u n d e rs ta n d th e
a p p lic a tio n .

Th e re fo re , th e fin a l s te p is fo r y o u to d e v e lo p th is s k ill. To a c c o m p lis h th is s te p y o u
w ill n e e d to c o m p le te P ra c tic e F in a l 1 & 2 a n d o u r D ia g n o s tic F in a ls . Th e s e te s ts
c o n s is t o f q u e s tio n s th a t s im u la te th o s e o n th e a c tu a l e x a m a n d a re in te n d e d to h e lp
y o u d e te rm in e y o u r s tro n g p o in ts a n d w e a k p o in ts . A ls o , th e s e p ra c tic e te s ts s h o u ld
e n a b le y o u to b e c o m e m o re c o m fo rta b le w ith th e te s tin g p ro c e s s . O u r a u d io
ta p e s /C D a ls o c o n ta in a re v ie w o f P ra c tic e F in a l 1 to o ffe r y o u a d d itio n a l h e lp in
u n d e rs ta n d in g th is m a te ria l.

Y o u m a y a ls o fin d it h e lp fu l to re v ie w th e Te s t Ta k in g Te c h n iq u e s , w h ic h y o u c a n
a c c e s s fro m th e s tu d y a id s e c tio n o f th e title s c re e n . Th is s tu d y a id p ro v id e s s e v e ra l
s u g g e s tio n s a n d e x e rc is e s th a t m a y im p ro v e y o u r a b ility to s e le c t th e c o rre c t
a n s w e rs o n th e e x a m .

O n c e y o u h a v e ta k e n a n d re v ie w e d th e P ra c tic e
F in a ls , y o u a re re a d y to ta k e o u r D ia g n o s tic F in a l
E x a m s . E a c h e x a m is c o m p o s e d o f 5 0 q u e s tio n s
a n d is in te n d e d to c lo s e ly re s e m b le th e S e rie s 6 3
e x a m in s tru c tu re a n d c o n te n t. S in c e th is is a n
e x a m s im u la tio n , y o u s h o u ld ta k e e a c h te s t c lo s e d
b o o k a n d a llo w y o u rs e lf o n e h o u r. W h e n y o u fin is h
th e e x a m , c h e c k y o u r a n s w e rs a n d re v ie w th e
q u e s tio n s th a t y o u m is s e d . B e s u re to p a y s p e c ia l
a tte n tio n to th e ra tio n a le s in o rd e r to d e te rm in e
y o u r s tre n g th s a n d w e a k n e s s e s s o th a t y o u c a n
b e tte r fo c u s y o u r s tu d y tim e . M a k e u s e o f th e
D ia g n o s tic S c o rin g C h a rt to p o in t o u t y o u r
p ro b le m a re a s . If y o u a re a b le to s c o re 8 0 % o n th e s e e x a m s , y o u s h o u ld b e
p re p a re d to ta k e th e S e rie s 6 3 e x a m . If y o u a re u n a b le to a c h ie v e a n 8 0 % s c o re ,
y o u s h o u ld e ith e r c o n s id e r c o m in g to o n e o f o u r c la s s e s o r p o s tp o n e ta k in g th e
e x a m u n til y o u h a v e a b e tte r g ra s p o f th e m a te ria l.

R e m e m b e r, th e te s t is tric k y a n d o b v io u s ly d iffic u lt--y o u m u s t u n d e rs ta n d th e
m a te ria l w e ll in o rd e r to p a s s . D o n 't b e fo o le d b y th e fa c t th a t th e re is a re a s o n a b ly
s m a ll a m o u n t o f m a te ria l a n d th a t it is a s h o rte r e x a m th a n m o s t--it is a to u g h te s t
a n d y o u o n ly w a n t to h a v e to ta k e it o n c e . D o n 't ta k e th is a s s ig n m e n t to o lig h tly ; a
s o lid s ix to e ig h t h o u rs o f s tu d y is a m in im u m re q u ire m e n t.

O n e la s t th in g . W e fu lly re c o g n iz e th a t m a n y s u c c e s s fu l
fin a n c ia l p ro fe s s io n a ls a re fe m a le , a s a re m a n y o f th e ir c lie n ts . In o rd e r to m a k e th is
c o u rs e re a d m o re s m o o th ly , h o w e v e r, w e h a v e o c c a s io n a lly u s e d th e w o rd "h e " a s a
g e n d e r-n e u tra l p ro n o u n to re fe r to u n s p e c ifie d fin a n c ia l p ro fe s s io n a ls o r c lie n ts ,
w h e th e r th e y b e m a le o r fe m a le . W e h o p e th a t n o o n e is o ffe n d e d b y th is c h o ic e o f
w ritin g s ty le .

G o o d lu c k !


In tr o d u c tio n
C o n g ra tu la tio n s !… a n d w e lc o m e to B IS Y S E d u c a tio n
S e rv ic e s . In y o u r h a n d s is th e fin e s t tra in in g p ro g ra m fo r
th e S e rie s 6 3 e x a m a v a ila b le a n y w h e re . Th is c o u rs e is th e
m o s t u p -to -d a te , e a s y to re a d , a n d "o n ta rg e t" m a te ria l
a v a ila b le . B y e n ro llin g w ith u s , y o u jo in m a n y c a n d id a te s
w h o h a v e s u c c e s s fu lly tra in e d fo r o n e o r m o re q u a lific a tio n
e x a m in a tio n s re q u ire d b y th e s e c u ritie s in d u s try re g u la to rs .
B IS Y S E d u c a tio n S e rv ic e s h a s b e e n a le a d e r in p ro v id in g
th e m o s t e ffe c tiv e lic e n s in g p re p a ra tio n p o s s ib le . A t th e
s a m e tim e , o u r s ta ff is d e d ic a te d to p ro v id in g a n e n jo y a b le
a n d re w a rd in g le a rn in g e x p e rie n c e .

W e 'v e le a rn e d th a t if th e c a n d id a te is g iv e n th e p ro p e r
fra m e o f re fe re n c e , a n d u n d e rs ta n d s th e ta s k a t h a n d ,
s u c c e s s is th e lik e ly o u tc o m e . To h e lp y o u b e tte r p re p a re
fo r th e S e rie s 6 3 e x a m , B IS Y S E d u c a tio n S e rv ic e s h a s
p a c k a g e d fo r y o u th is e a s y to u s e le a rn in g p ro g ra m . Th e s e
s tu d y m a te ria ls a re c o n s ta n tly c h a n g e d to p ro v id e y o u w ith
th e m o s t u p -to -d a te in fo rm a tio n p o s s ib le , in c lu d in g a n y n e w
p ro d u c ts o r c o n c e p ts re c e n tly a d d e d to th e e x a m a n d a n y c h a n g e s in th e ru le s a n d
la w s th a t a p p ly .

If y o u w ill d ilig e n tly fo llo w th e s te p s o f th is s tu d y p ro g ra m , y o u w ill b e s u c c e s s fu l o n
th e e x a m . W e b o th h a v e o n ly o n e g o a l in m in d … y o u r p a s s in g th e S e rie s 6 3 e x a m .
W o rk w ith u s , d e v o te y o u rs e lf to th is s tu d y p ro g ra m , a n d w e 'll b o th w in .
A b o u t th e E x a m
Th e U n ifo rm S e c u ritie s A g e n t S ta te L a w E x a m in a tio n w a s p re p a re d b y th e N o rth
A m e ric a n S e c u ritie s A d m in is tra to rs A s s o c ia tio n (N A S A A ) in c o o p e ra tio n w ith
re p re s e n ta tiv e s o f th e s e c u ritie s in d u s try a n d in d u s try a s s o c ia tio n s . Th e e x a m in a tio n ,
w h ic h c o v e rs p rin c ip le s o f s ta te s e c u ritie s re g u la tio n re fle c te d in th e U n ifo rm
S e c u ritie s A c t (a s a m e n d e d to d a te ), h a s th re e p rin c ip a l o b je c tiv e s :

1.
To e d u c a te a g e n t a p p lic a n ts re g a rd in g s ta te s e c u ritie s la w s a n d th e c o n c e p ts o f fa ir
d e a lin g w ith in v e s to rs ;
2.
To p ro v id e a b a s is fo r s ta te s e c u ritie s a d m in is tra to rs to d e te rm in e th e le v e l o f a g e n t
a p p lic a n ts ' k n o w le d g e o f s ta te s e c u ritie s la w s a n d re g u la tio n s w ith a s in g le u n ifo rm
e x a m in a tio n ; a n d
3.
To re d u c e th e b u rd e n o n th e in d u s try re s u ltin g fro m m u ltip le s ta te la w e x a m in a tio n
re q u ire m e n ts .

Th is s tu d y g u id e is d e s ig n e d to a s s is t tra in e e s in p re p a rin g fo r th e e x a m in a tio n .

Th e e x a m in a tio n c o n s is ts o f 6 0 m u ltip le c h o ic e q u e s tio n s . C a n d id a te s m u s t a n s w e r
4 2 q u e s tio n s c o rre c tly to a tta in a p a s s in g s c o re (7 0 % ). C a n d id a te s h a v e 7 5 m in u te s
to c o m p le te th e e x a m in a tio n . Th e fo llo w in g s u m m a ry in d ic a te s th e re la tiv e
im p o rta n c e g iv e n to th e p a rtic u la r s e c tio n s o f th e S tu d y G u id e a n d th e U n ifo rm
S e c u ritie s A c t:

R e g is tra tio n o f P e rs o n s
                                                                                                                            30%
S e c u ritie s
                                                                                                                            25%
B u s in e s s P ra c tic e s
                                                                                                                            35%
A d m in is tra tiv e P ro v is io n s
                                                                                                                              10%
E a c h q u e s tio n in th e e x a m in a tio n , th e w e ig h tin g o f th e c o m p o s ite e x a m in a tio n , th e
e x a m in a tio n s tu d y g u id e , a n d th e m e th o d in w h ic h th e e x a m in a tio n is a d m in is te re d
h a s b e e n a p p ro v e d b y a c o m m itte e o f N A S A A . Th e e x a m in a tio n a n d s tu d y g u id e w ill
re c e iv e o n g o in g re v ie w b y a c o m m itte e o f s ta te a n d fe d e ra l s e c u ritie s re g u la to rs . In
a d d itio n , e a c h te s t s e s s io n w ill in c lu d e 5 a d d itio n a l q u e s tio n s th a t w ill n o t b e s c o re d .
Th e s e a d d itio n a l q u e s tio n s w ill b e re v ie w e d fo r fu tu re in c lu s io n in th e e x a m b a n k .

C o m p u te r D e liv e r e d E x a m in a tio n s
In th e U .S ., th e e x a m in a tio n is g iv e n a t th e le a rn in g c e n te r's s y s te m c o m p u te r
te rm in a ls a t le a rn in g c e n te rs lo c a te d in m a jo r c itie s . A fte r a p p ly in g fo r th e
e x a m in a tio n , th e c a n d id a te n o rm a lly re c e iv e s
a w ritte n n o tic e o f e n ro llm e n t w ith in 1 0 b u s in e s s d a y s a n d a d ire c to ry o f th e U .S .
le a rn in g c e n te rs , w ith th e ir a d d re s s e s a n d te le p h o n e n u m b e rs .
Th e c a n d id a te c a n th e n m a k e a n in d iv id u a l
a p p o in tm e n t fo r th e e x a m a t th e le a rn in g c e n te r
o f h is o r h e r c h o ic e o n re g u la r b u s in e s s d a y s , d u rin g n o rm a l b u s in e s s h o u rs .

Th e b ro c h u re /d ire c to ry w h ic h th e c a n d id a te re c e iv e s w ith th e n o tic e o f e n ro llm e n t
e x p la in s th e s im p le p ro c e d u re s u s e d in ta k in g th e e x a m a t th e c o m p u te r te rm in a l.
Ty p in g s k ills a re n o t re q u ire d . U p o n c o m p le tio n o f th e e x a m in a tio n , th e le a rn in g
c e n te r's te s tin g s y s te m p ro m p tly s c o re s a n d d is p la y s th e g ra d e fo r th e e x a m o n th e
te rm in a l s c re e n .

Y o u s h o u ld a rriv e a t th e te s t c e n te r a b o u t 1 5 -3 0 m in u te s b e fo re y o u r s c h e d u le d
a p p o in tm e n t tim e .

Id e n tific a tio n
In o rd e r to g a in a d m is s io n to a te s t c e n te r, a
c a n d id a te m u s t p ro v id e th e c e n te r w ith o n e
fo rm o f p e rs o n a l id e n tific a tio n , w h ic h m u s t
c o n ta in th e c a n d id a te 's s ig n a tu re a n d
p ic tu re . Th is re q u ire m e n t c a n u s u a lly b e
m e t b y p re s e n ta tio n o f th e c a n d id a te 's
d riv e r's lic e n s e , a m ilita ry id e n tific a tio n , a
p a s s p o rt o r s im ila r ty p e o f o ffic ia l d o c u m e n t. In
s itu a tio n s w h e re th is id e n tific a tio n re q u ire m e n t
c a n n o t b e m e t b y a c a n d id a te , th e s p o n s o rin g firm s h o u ld c a ll th e E x a m in a tio n s
S e c tio n o f th e N A S D M e m b e rs h ip D e p a rtm e n t (3 0 1 -5 9 0 -6 6 9 3 ) p rio r to th e
a p p o in tm e n t d a te s o th a t a lte rn a te a rra n g e m e n ts c a n b e m a d e .


1 . R e g is tr a tio n o f P e r s o n s

Ag e n t

Th e te rm a g e n t, u n d e r th e A c t, m e a n s a n in d iv id u a l w h o re p re s e n ts a b ro k e r/d e a le r
o r is s u e r in e ffe c tin g o r a tte m p tin g to e ffe c t p u rc h a s e s o r s a le s o f s e c u ritie s . Th is
in c lu d e s a n in d iv id u a l, s u c h a s th e s e c re ta ry o f a s a le s m a n , w h o is a u th o riz e d to
a c c e p t o rd e rs . Th e s e c re ta ry m u s t b e re g is te re d a s a n a g e n t u n d e r th e A c t.
R e g is te re d re p re s e n ta tiv e s o f b ro k e r/d e a le rs a re th e m o s t c o m m o n e x a m p le o f
a g e n ts .

Th e te rm a g e n t d o e s n o t in c lu d e a n in d iv id u a l w h o re p re s e n ts a n is s u e r in e ffe c tin g
tra n s a c tio n s in th e fo llo w in g e x e m p te d s e c u ritie s :

1.
a n y s e c u rity is s u e d o r g u a ra n te e d b y th e U n ite d S ta te s , a n y s ta te , o r a n y p o litic a l
s u b d iv is io n o f a s ta te .
2.
a n y s e c u rity is s u e d o r g u a ra n te e d b y C a n a d a , a n y C a n a d ia n p ro v in c e , a n y p o litic a l
s u b d iv is io n o f a n y p ro v in c e , o r a n y o th e r fo re ig n g o v e rn m e n t w ith w h ic h th e U n ite d
S ta te s c u rre n tly m a in ta in s d ip lo m a tic re la tio n s , if th e s e c u rity is re c o g n iz e d a s a v a lid
o b lig a tio n b y th e is s u e r.

3.
a n y s e c u rity is s u e d b y a b a n k .

4.
c o m m e rc ia l p a p e r.

5.
a n in v e s tm e n t c o n tra c t is s u e d in c o n n e c tio n w ith a n e m p lo y e e b e n e fit p la n .

H e re 's a n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m :

U n d e r th e U n ifo rm S e c u ritie s A c t, th e te rm a g e n t w o u ld N O T in c lu d e a ll o f th e
fo llo w in g E X C E P T a n in d iv id u a l w h o re p re s e n ts a n is s u e r in e ffe c tin g tra n s a c tio n s in
A.
a c ity o f M o n tre a l g e n e ra l o b lig a tio n b o n d .
B.
c o m m o n s to c k is s u e d b y a b a n k .
C .
a N e w J e rs e y Tu rn p ik e R e v e n u e b o n d .
D .
c o m m e rc ia l p a p e r w ith a m a tu rity o f 1 9 m o n th s .
D . A s lo n g a s th e in d iv id u a l re p re s e n ts th e IS S U E R in a tra n s a c tio n in v o lv in g
e x e m p te d s e c u ritie s , h e o r s h e is n o t in c lu d e d in th e d e fin itio n o f "a g e n t." Th e tric k
h e re is n o tic in g th a t 1 9 m o n th c o m m e rc ia l p a p e r is n o t e x e m p t w h ile th e o th e r
c h o ic e s a re . A s y o u w ill s e e la te r, th e re a re s e v e ra l re q u ire m e n ts in a d d itio n to
m a tu rity in o rd e r fo r c o m m e rc ia l p a p e r to b e e x e m p t.

In a d d itio n , th e te rm d o e s n o t in c lu d e a n
in d iv id u a l w h o re p re s e n ts a n is s u e r w h o
e ffe c ts e x e m p te d tra n s a c tio n s . A n
in d iv id u a l is a ls o n o t c o n s id e re d to b e
a n a g e n t if h e o r s h e e ffe c ts tra n s a c tio n s
w ith e m p lo y e e s , p a rtn e rs , o r d ire c to rs o f
th e is s u e r if n o c o m m is s io n o r o th e r
re m u n e ra tio n is g iv e n fo r s o lic itin g a n y
p e rs o n in th e s ta te . If a n in d iv id u a l is n o t
c o n s id e re d to b e a n a g e n t u n d e r th e
A c t, re g is tra tio n a s a n a g e n t is n o t
n e c e s s a ry . P le a s e re m e m b e r th a t th e s e
e x e m p tio n s a p p ly to in d iv id u a ls
re p re s e n tin g a n is s u e r. R a re ly w o u ld
w e fin d a n in d iv id u a l re p re s e n tin g a
b ro k e r/d e a le r w h o w o u ld n o t m e e t th e
d e fin itio n o f a g e n t. A b o u t th e o n ly tim e w o u ld b e th e c a s e o f a p a rtn e r, o ffic e r, o r
d ire c to r o f a b ro k e r/d e a le r (o r is s u e r, fo r th a t m a tte r), o r a p e rs o n o c c u p y in g a s im ila r
s ta tu s o r p e rfo rm in g s im ila r fu n c tio n s , w h o is a n a g e n t o n ly if h e o r s h e o th e rw is e
fa lls w ith in th is d e fin itio n . In o th e r w o rd s , a n o ffic e r, e tc ., o f a b ro k e r/d e a le r w h o is
n o t a t a ll in v o lv e d w ith s a le s o r s a le s s u p e rv is io n w o u ld n o t b e d e fin e d a s a n a g e n t.

Th e re fo re , th e te rm a g e n t, u n d e r th e U n ifo rm S e c u ritie s A c t, w o u ld n o t in c lu d e :

1.
a p e rs o n w h o re p re s e n ts a n is s u e r in a n e x e m p t tra n s a c tio n .
2.
a b a n k , s a v in g s in s titu tio n , o r tru s t c o m p a n y .
a n o ffic e r o f a b ro k e r/d e a le r w h o d o e s n o t e ffe c t o r a tte m p t to e ffe c t p u rc h a s e s o r
s a le s o f s e c u ritie s (o r s u p e rv is e th o s e a c tio n s ).
3.
4.
a c le ric a l p e rs o n w ith n o a u th o rity to a c c e p t o rd e rs .
5.
a p e rs o n w h o re p re s e n ts a n is s u e r in e ffe c tin g tra n s a c tio n s in w h ic h n o c o m m is s io n s
a re p a id .
6.
a n o ffic e r s e llin g h is o w n c o m p a n y 's s to c k to h is e m p lo y e e s a n d n o c o m m is s io n is
p a id to th e o ffic e r fo r s o lic itin g p u rc h a s e s .
7.
a p e rs o n w h o re p re s e n ts a n is s u e r in tra n s a c tio n s w ith a n u n d e rw rite r.

If a n a g e n t v io la te s th e U n ifo rm S e c u ritie s A c t, h e c o u ld b e s u b je c t to :

1.
a c rim in a l p e n a lty .
2.
a c iv il p e n a lty .
3.
s u s p e n s io n o r re v o c a tio n o f h is lic e n s e .
Th e te rm a g e n t, u n d e r th e U n ifo rm S e c u ritie s A c t, is s y n o n y m o u s w ith s a le s p e rs o n .
W h e n a p e rs o n is a c tin g a s a n a g e n t, h e is p u rc h a s in g o r s e llin g s e c u ritie s fo r th e
a c c o u n t o f a c u s to m e r a n d e a rn in g a c o m m is s io n o n th e tra n s a c tio n .

H e re 's a n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m :

U n d e r th e U n ifo rm S e c u rity A c t, th e te rm a g e n t w o u ld N O T in c lu d e a n y o f th e
fo llo w in g E X C E P T
A.
a n in d iv id u a l w h o re p re s e n ts a n is s u e r in tra n s a c tio n s in e x e m p t s e c u ritie s .
B.
a n in d iv id u a l w h o re p re s e n ts a b ro k e r/d e a le r in a tra n s a c tio n in a n e x e m p t s e c u rity .
C .
a re c e p tio n is t w h o d ire c ts c a lls fo r tra d e in fo rm a tio n to th e a p p ro p ria te in d iv id u a l.
D .
th e v ic e p re s id e n t o f p e rs o n n e l fo r a n a tio n a l b ro k e ra g e firm .
B . M o s t o f th e e x c lu s io n s fro m th e te rm a g e n t re fe r to a n in d iv id u a l re p re s e n tin g a n
is s u e r. Th e re is a lm o s t n o c a s e w h e re a n in d iv id u a l re p re s e n tin g a b ro k e r/d e a le r is
n o t a n a g e n t. O f c o u rs e c le ric a l p e rs o n s , a s in (C ) a re n o t a g e n ts a n d a n o ffic e r w ith
n o a p p a re n t s a le s fu n c tio n (w e a s s u m e th e p e rs o n n e l d e p a rtm e n t d o e s n 't s e ll) a re
n o t d e fin e d a s a g e n ts e ith e r.


B r o k e r /D e a le r

Th e te rm b ro k e r/d e a le r m e a n s a n y p e rs o n e n g a g e d in th e b u s in e s s o f e ffe c tin g
tra n s a c tio n s in s e c u ritie s fo r th e a c c o u n t o f o th e rs o r fo r h is o w n a c c o u n t. Th e te rm
d o e s n o t in c lu d e
1.
a n a g e n t,
2.
is s u e r,
3.
b a n k , s a v in g s in s titu tio n , o r tru s t c o m p a n y .
4.
Th e te rm b ro k e r/d e a le r a ls o d o e s n o t in c lu d e a p e rs o n w h o h a s n o p la c e o f b u s in e s s
in a p a rtic u la r s ta te if:
a.
h e e ffe c ts th e tra n s a c tio n in th e s ta te e x c lu s iv e ly w ith o r th ro u g h :
(1 )
th e is s u e rs o f th e s e c u ritie s in v o lv e d in th e tra n s a c tio n s ,
(2 )
o th e r b ro k e r/d e a le rs ,
(3 )
b a n k s , s a v in g s in s titu tio n s , tru s t c o m p a n ie s , in s u ra n c e c o m p a n ie s , in v e s tm e n t
c o m p a n ie s , p e n s io n o r p ro fit-s h a rin g tru s ts , o r o th e r fin a n c ia l in s titu tio n s o r
in s titu tio n a l b u y e rs , o r
b.
th e p e rs o n is lic e n s e d p ro p e rly in th e s ta te in w h ic h th e firm m a in ta in s a p la c e o f
b u s in e s s (n o t in th is s ta te ) a n d th e o n ly b u s in e s s th e firm d o e s in th is s ta te is w ith a n
e x is tin g c u s to m e r o f th e firm w h o is n o t a re s id e n t in th is s ta te .

H e re 's a n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m :

U n d e r th e U n ifo rm S e c u ritie s A c t, a ll o f th e fo llo w in g a re e x c lu d e d fro m th e d e fin itio n
o f "b ro k e r/d e a le r" E X C E P T
A.
a g e n ts .
B.
is s u e rs .
C .
a p e rs o n w ith n o p la c e o f b u s in e s s in th e s ta te w h o s e o n ly c lie n ts in th is s ta te a re
o th e r b ro k e r/d e a le rs .
D .
a p e rs o n w ith a p la c e o f b u s in e s s in th is s ta te w h o s e o n ly tra n s a c tio n s a re fo r h is
o w n a c c o u n t a n d ris k .
D . A g e n ts , is s u e rs a n d b a n k s a re n o t b ro k e r/d e a le rs . Th e re is a n e x c lu s io n fo r a n
"o u t-o f-s ta te " firm w h o o n ly d e a ls w ith o th e r b ro k e r/d e a le rs a n d c e rta in
"s o p h is tic a te d " in v e s to rs s u c h a s b a n k s , in s u ra n c e c o m p a n ie s a n d in v e s tm e n t
c o m p a n ie s . C h o ic e D is m e re ly a p e rs o n lim itin g th e ir a c tiv ity to th e d e a le r o r
p rin c ip a l fu n c tio n o f a b ro k e r/d e a le r.


In v e s tm e n t Ad v is e r
Th e N a tio n a l S e c u ritie s M a rk e ts Im p ro v e m e n t A c t o f 1 9 9 6 (N S M IA ), h a d a m a jo r
e ffe c t u p o n s ta te re g u la tio n o f in v e s tm e n t a d v is e rs . M o s t im p o rta n tly , it b ifu rc a te d
(s p lit in tw o ) th e re s p o n s ib ility fo r e n fo rc e m e n t b e tw e e n th e s ta te s a n d th e S E C .
B a s ic a lly , a ll in v e s tm e n t a d v is e rs m a n a g in g m o re th a n $ 3 0 m illio n o r u n d e r c o n tra c t
to a re g is te re d in v e s tm e n t c o m p a n y , re g is te r w ith th e S E C o n ly a n d th o s e m a n a g in g
le s s th a n $ 2 5 m illio n re g is te r w ith e a c h a p p ro p ria te s ta te . F ro m $ 2 5 to $ 3 0 m illio n ,
th e a d v is e r c a n c h o o s e . A F e d e ra lly C o v e re d A d v is e r m e a n s a p e rs o n w h o is
re g is te re d w ith th e S E C u n d e r th e In v e s tm e n t A d v is e rs A c t o f 1 9 4 0 a n d , th e re fo re , is
n o t re g is te re d w ith th e s ta te s . Th e s ta te s d o , h o w e v e r re s e rv e th e rig h t to re q u ire
in v e s tm e n t a d v is o ry re p re s e n ta tiv e s to re g is te r.
A s ig n ific a n t o u tg ro w th o f N S M IA h a s b e e n th a t th e U n ifo rm A c t h a s b e e n m o d ifie d
s o th a t in a la rg e n u m b e r o f a re a s , it c lo s e ly re s e m b le s th e '4 0 A c t. M o s t s ta te s
re q u ire th e filin g o f th e F o rm A D V a n d w ill a c c e p t th e P a rt II o f th e A D V fo r th e
b ro c h u re d is c lo s u re re q u ire m e n ts , ju s t lik e th e fe d e ra l la w .

Th e te rm in v e s tm e n t a d v is e r in c lu d e s a n y p e rs o n w h o , fo r c o m p e n s a tio n :

1.
e n g a g e s in th e b u s in e s s o f a d v is in g o th e rs , e ith e r d ire c tly o r th ro u g h p u b lic a tio n s o r
w ritin g s , a s to th e v a lu e o f s e c u ritie s o r a s to th e a d v is a b ility o f in v e s tin g in ,
p u rc h a s in g , o r s e llin g s e c u ritie s , o r
2.
a s p a rt o f a re g u la r b u s in e s s , is s u e s , o r p ro m u lg a te s a n a ly s e s o r re p o rts c o n c e rn in g
s e c u ritie s .

Th e te rm in v e s tm e n t a d v is e r d o e s n o t in c lu d e th e fo llo w in g :
1.
b a n k , s a v in g s in s titu tio n , o r tru s t c o m p a n y .
2.
la w y e r, a c c o u n ta n t, e n g in e e r, o r te a c h e r w h o s e p e rfo rm a n c e o f th e s e s e rv ic e s is
s o le ly in c id e n ta l to th e p ra c tic e o f h is p ro fe s s io n .
3.
b ro k e r/d e a le r w h o s e p e rfo rm a n c e o f th e s e s e rv ic e s is s o le ly in c id e n ta l to th e
c o n d u c t o f h is b u s in e s s , if h e re c e iv e s n o s p e c ia l c o m p e n s a tio n fo r th e m .
4.
p u b lis h e r o f a n y b o n a fid e n e w s p a p e r, n e w s c o lu m n , n e w s le tte r, n e w s m a g a z in e , o r
b u s in e s s o r fin a n c ia l p u b lic a tio n o f g e n e ra l, re g u la r, a n d p a id c irc u la tio n th a t d o e s
n o t c o n s is t o f th e re n d e rin g o f a d v ic e o n th e b a s is o f th e s p e c ific in v e s tm e n t s itu a tio n
o f e a c h c lie n t.
5.
in v e s tm e n t a d v is e r re p re s e n ta tiv e s . A n in v e s tm e n t a d v is e r re p re s e n ta tiv e is d e fin e d
a s a n y p a rtn e r, o ffic e r, d ire c to r o f (o r p e rs o n o c c u p y in g a s im ila r s ta tu s o r p e rfo rm in g
s im ila r fu n c tio n s ), o r o th e r in d iv id u a l e m p lo y e d b y o r a s s o c ia te d w ith a n in v e s tm e n t
a d v is e r, e x c e p t c le ric a l o r a d m in is tra tiv e p e rs o n s , w h o
a.
m a k e s a n y re c o m m e n d a tio n s o r o th e rw is e re n d e rs a d v ic e re g a rd in g s e c u ritie s
b.
m a n a g e s a c c o u n ts o r p o rtfo lio s o f c lie n ts
c.
d e te rm in e s w h ic h re c o m m e n d a tio n o r a d v ic e re g a rd in g s e c u ritie s s h o u ld b e g iv e n
d.
s o lic its , o ffe rs , o r n e g o tia te s fo r th e s a le o f, o r s e lls , in v e s tm e n t a d v is o ry s e rv ic e s
e.
s u p e rv is e s e m p lo y e e s w h o p e rfo rm a n y o f th e fo re g o in g .
P le a s e n o te th a t th e U n ifo rm S e c u ritie s A c t d o e s n o t h a v e th e p ro v is io n fo r e x c lu d in g
p e rs o n s w h o s e a d v ic e s o le ly re la te s to g o v e rn m e n t s e c u ritie s .

H e re 's a n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m :

U n d e r th e U n ifo rm S e c u ritie s A c t, th e te rm in v e s tm e n t a d v is e r d o e s n o t in c lu d e
I.
th e tru s t d e p a rtm e n t o f a b a n k .
II.
a p u b lis h e r o f a n e w s le tte r w h ic h m o n ito rs th e p e rfo rm a n c e o f 5 0 0 le a d in g m u tu a l
fu n d s a n d ra n k s th e m b y o b je c tiv e .
III.
a la w y e r w h o s p e c ia liz e s in e s ta te p la n n in g , s u g g e s ts s e v e ra l d iffe re n t m u tu a l fu n d s
to a c lie n t w h o h a s ju s t re c e iv e d a s u b s ta n tia l in h e rita n c e .
A.
I a n d II o n ly
B.
I a n d III o n ly
C .
II a n d III o n ly
D .
I, II a n d III
D . Th e p u b lis h e r o f a n e w s le tte r ra n k in g m u tu a l fu n d s w o u ld n o t b e c o n s id e re d to b e
a n in v e s tm e n t a d v is e r u n d e r th e A c t s in c e n o a d v ic e is g iv e n o n th e s p e c ific
in v e s tm e n t s itu a tio n o f e a c h c lie n t. B a n k s a re N E V E R in v e s tm e n t a d v is e rs a n d th e
la w y e r's a c tiv itie s s e e m to b e in c id e n ta l to h is p ra c tic e .

Th is d e fin itio n is m o d e le d a fte r th a t u s e d in th e In v e s tm e n t A d v is e rs A c t. It
re c o g n iz e s th e fa c t th a t b ro k e r/d e a le rs c o m m o n ly g iv e a c e rta in a m o u n t o f a d v ic e to
th e ir c u s to m e rs a s p a rt o f th e ir re g u la r b u s in e s s a n d th a t th is s h o u ld n o t b rin g th e m
u n d e r th e In v e s tm e n t A d v is e rs A c t. H o w e v e r, if th e b ro k e r/d e a le r is s p e c ific a lly
c o m p e n s a te d fo r s u c h a d v ic e , h e w o u ld b e s u b je c t to th e A c t. Th e im p o rta n t
d is tin c tio n c o n c e rn s w h y th e c o m p e n s a tio n w a s p a id . Is it fo r a d v ic e o r fo r o th e r
s e rv ic e s to w h ic h a d v ic e is m e re ly in c id e n ta l? R e c e n t a m e n d m e n ts to th e U n ifo rm
S e c u ritie s A c t h a v e b ro u g h t it m u c h c lo s e r to th e F e d e ra l A c t re g a rd in g ru le s d e a lin g
w ith in v e s tm e n t a d v is e rs .

Th e A c t a ls o e x e m p ts c e rta in p e rs o n s , d e fin e d a s in v e s tm e n t a d v is e rs , b u t e x e m p t
fro m re g is tra tio n . A p e rs o n w h o h a s n o p la c e o f b u s in e s s in th is s ta te is e x e m p t if:
1.
h is o n ly c lie n ts in th e s ta te a re o th e r in v e s tm e n t a d v is e rs , b ro k e r/d e a le rs , b a n k s ,
s a v in g s in s titu tio n s , tru s t c o m p a n ie s , in s u ra n c e c o m p a n ie s , in v e s tm e n t c o m p a n ie s ,
e m p lo y e e b e n e fit p la n s w ith a t le a s t $ 1 ,0 0 0 ,0 0 0 in a s s e ts , c e rta in n o n p ro fit e n titie s
s u c h a s c o lle g e e n d o w m e n t fu n d s , g o v e rn m e n t a g e n c ie s o r p o litic a l s u b d iv is io n s
(c itie s , e tc .), o r
2.
d u rin g a n y 1 2 -m o n th p e rio d , h e d o e s n o t d ire c t b u s in e s s c o m m u n ic a tio n s in to th is
s ta te in a n y m a n n e r to m o re th a n fiv e c lie n ts o th e r th a n th o s e s p e c ifie d in (1 ) a b o v e .

Th e re fo re , u n d e r th e A c t, if a n in v e s tm e n t a d v is e r h a s n o p la c e o f b u s in e s s in a s ta te ,
h e d o e s n o t h a v e to b e re g is te re d in th a t s ta te if h e d e a ls o n ly w ith c e rta in
s o p h is tic a te d c u s to m e rs . E x a m p le s o f c u s to m e rs a n in v e s tm e n t a d v is e r c o u ld d e a l
w ith a n d n o t b e re g is te re d in a p a rtic u la r s ta te in c lu d e :
1.
banks
2.
b ro k e r/d e a le rs
3.
in v e s tm e n t c o m p a n ie s
4.
in s u ra n c e c o m p a n ie s
5.
tru s t c o m p a n ie s
6.
p e n s io n o r p ro fit-s h a rin g tru s ts (a t le a s t $ 1 ,0 0 0 ,0 0 0 in a s s e ts )
7.
a n o th e r in v e s tm e n t a d v is e r a c tin g a s a tru s te e

In th e d e s c rip tio n o f p u b lis h e r, it s h o u ld b e n o te d th a t b o n a fid e is a n in te g ra l p a rt o f
th e d e fin itio n . A p e rs o n w h o d is trib u te s a h o t tip s h e e t to a ttra c t c lie n ts w o u ld n o t, fo r
e x a m p le , b e c o n s id e re d a p u b lis h e r. Th e p u b lis h e rs o f F o rb e s w o u ld n o t b e
c o n s id e re d to b e in v e s tm e n t a d v is e rs , b u t a n y o n e s e llin g s u b s c rip tio n s to a m a rk e t
le tte r p ro v id in g in v e s tm e n t a d v ic e w o u ld b e c o n s id e re d a n in v e s tm e n t a d v is e r u n d e r
th e A c t if th e a d v ic e re la te d to s p e c ific
c lie n t s itu a tio n s .
In v e s tm e n t a d v is e rs a re n o t e x e m p t fro m s ta te re g is tra tio n re q u ire m e n ts s im p ly
b e c a u s e th e y a re re g is te re d u n d e r fe d e ra l la w w ith th e S E C . In s o m e s ta te s , th e y
a re s u b je c t to re c o rd k e e p in g re q u ire m e n ts , h a v e to file a d v e rtis in g lite ra tu re w ith th e
A d m in is tra to r, a n d m a y h a v e to re g is te r a n y a g e n t o r th e y e m p lo y a s a n in v e s tm e n t
a d v is e r re p re s e n ta tiv e .

H e re 's a n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m :

U n d e r th e U n ifo rm S e c u ritie s A c t, th e d e fin itio n o f a n in v e s tm e n t a d v is e r w o u ld
in c lu d e a (n )
A.
bank.
B.
la w y e r a d v is in g c lie n ts h o w to in v e s t th e la rg e in ju ry s e ttle m e n t s h e ju s t w o n fo r
th e m . Th is a d v ic e is b ille d fo r s e p a ra te ly fro m h e r fe e fo r w in n in g th e c a s e .
C .
in v e s tm e n t a d v is e r re p re s e n ta tiv e .
D .
A ll o f th e a b o v e a re e x c lu d e d fro m th e d e fin itio n .
B . W h ile la w y e rs a re g e n e ra lly e x c lu d e d fro m th e d e fin itio n o f in v e s tm e n t a d v is e r,
th a t e x c lu s io n o n ly h o ld s tru e if th e a d v ic e g iv e n is s o le ly in c id e n ta l to th e p ra c tic e o f
h e r p ro fe s s io n a n d N O s e p a ra te fe e s a re c h a rg e d . Th e s e p a ra te b illin g h e re is w h a t
lo s e s th e e x c lu s io n . R e m e m b e r, in v e s tm e n t a d v is e r re p re s e n ta tiv e s a re n o t
in v e s tm e n t a d v is e rs ; ju s t a s a g e n ts a re n o t b ro k e r/d e a le rs .

H e re 's a n o th e r e x a m p le o f a q u e s tio n y o u m a y s e e o n th e e x a m :

U n d e r th e U n ifo rm S e c u ritie s A c t, th e te rm in v e s tm e n t a d v is e r re p re s e n ta tiv e w o u ld
N O T in c lu d e a (n )
A.
o ffic e r o f a re g is te re d in v e s tm e n t a d v is e r firm w h o s e re s p o n s ib ility in c lu d e s
s u p e rv is io n o f s o lic ito rs .
B.
a s s o c ia te d p e rs o n o f th e firm w h o , fro m tim e to tim e , m a k e s s p e c ific
re c o m m e n d a tio n s to c lie n ts .
C .
p a y ro ll c le rk e m p lo y e d b y a n a d v is o ry firm w h o s e re s p o n s ib ilitie s in c lu d e c o m p u tin g
th e e a rn in g s o f in v e s tm e n t a d v is e r re p re s e n ta tiv e s .
D .
n e w e m p lo y e e o f a n a d v is o ry firm w h o h a s o n ly b e e n a b le to s ig n u p tw o c lie n ts in
h is firs t fo u r m o n th s .
C . C le ric a l a n d a d m in is tra tiv e p e rs o n n e l a re e x c lu d e d fro m th e d e fin itio n o f
in v e s tm e n t a d v is e r re p re s e n ta tiv e . R e m e m b e r, th e d e fin itio n in c lu d e s a n y o n e w h o
m a k e s re c o m m e n d a tio n s (e v e n if o n ly u p o n o c c a s io n ), m a n a g e s a c c o u n ts , s o lic its
a c c o u n ts o r s u p e rv is e s a n y o f th e a b o v e .

In v e s tm e n t a d v is e rs , u n d e r th e A c t, c a n n o t ta k e o r h a v e c u s to d y o f a n y s e c u ritie s o r
fu n d s o f a n y c lie n t if:
1.
th e A d m in is tra to r, b y ru le , p ro h ib its c u s to d y , o r

2.
th e in v e s tm e n t a d v is e r fa ils to n o tify th e A d m in is tra to r th a t h e h a s c u s to d y o f th e
s e c u ritie s o r fu n d s .
A n y in v e s tm e n t a d v is e r's c o m p e n s a tio n , u n d e r th e A c t, m a y b e b a s e d u p o n th e
a v e ra g e v a lu e o f fu n d s m a n a g e d o v e r a p e rio d o f tim e . Th e in v e s tm e n t a d v is e r's
c o m p e n s a tio n c a n n o t b e b a s e d u p o n a p e rc e n ta g e o f c a p ita l g a in s a n d lo s s e s
g e n e ra te d in a c lie n t's a c c o u n t.
Th is ty p e o f c o m p e n s a tio n is g e n e ra lly p ro h ib ite d u n d e r th e U n ifo rm S e c u ritie s A c t.
Th e re a re s o m e e x c e p tio n s , h o w e v e r, b u t y o u s h o u ld a lw a y s v ie w it a s w ro n g u n le s s
th e q u e s tio n re fe rs to a n e x c e p tio n to th e ru le .

W ra p F e e P ro g ra m s
E a rlie r, w e s ta te d th a t b ro k e r/d e a le rs w e re e x c lu d e d fro m th e d e fin itio n o f in v e s tm e n t
a d v is e r a s lo n g a s th e y re c e iv e d n o s p e c ia l c o m p e n s a tio n fo r th e ir s e rv ic e s . Th e
m o s t c o m m o n w a y th a t e x c lu s io n is lo s t is w h e n th e firm o ffe rs a w ra p fe e p ro g ra m .

W ra p fe e a rra n g e m e n ts c o n s o lid a te th e s e rv ic e s o f a b ro k e r/d e a le r w ith e ith e r a n in -
h o u s e o r o u ts id e th ird p a rty in v e s tm e n t a d v is e r. U n d e r th e s e p ro g ra m s , a n a n n u a l,
a s s e t-b a s e d fe e is c h a rg e d to th e c lie n t th a t c o v e rs a ll s e rv ic e s o ffe re d to th a t c lie n t.
Th e s e s e rv ic e s in c lu d e c o m m is s io n s , re s e a rc h , c u s to d y a n d , m o s t im p o rta n tly fo r
o u r d is c u s s io n , in v e s tm e n t a d v is e . S in c e th e firm is re c e iv in g c o m p e n s a tio n , w h e th e r
o r n o t a tra d e ta k e s p la c e , it m e e ts th e d e fin itio n o f in v e s tm e n t a d v is e r.

R e g is tra tio n is re q u ire d e v e n w h e n th e     a d v is e is b e in g o ffe re d b y a th ird p a rty a s th e
firm a n d its a g e n ts m a y b e s o lic itin g o r      s e llin g a d v is o ry s e rv ic e s to th e ir c lie n ts .
A n o th e r re a s o n is th a t o n e w h o a s s is ts    a c lie n t in e v a lu a tin g a n d s e le c tin g a n
in v e s tm e n t a d v is e r is d e e m e d to b e a n    a d v is e r.

To in s u re th a t c lie n ts u n d e rs ta n d th e re la tio n s h ip , d is c lo s u re u s in g a w ra p fe e
b ro c h u re is n e c e s s a ry . In v e s tm e n t a d v is e rs n o rm a lly m a k e d is c lo s u re to th e ir c lie n ts
b y u s e o f th e F o rm A D V P a rt II (o r a d o c u m e n t c o n ta in in g e s s e n tia lly th e s a m e
in fo rm a tio n ). Th o s e firm s s p o n s o rin g a w ra p fe e p ro g ra m m u s t, in a d d itio n to th e
u s u a l d is c lo s u re d o c u m e n t, fu rn is h e a c h c lie n t o r p ro s p e c tiv e c lie n t o f a w ra p fe e
p ro g ra m a s e p a ra te w ritte n d is c lo s u re s ta te m e n t. Th is s ta te m e n t m u s t c o n ta in a t
le a s t th e in fo rm a tio n re q u ire d b y P a rt II o f th e A D V a s w e ll a s a c o m p le te d e s c rip tio n
o f th e w o rk in g s o f th e w ra p fe e p ro g ra m .

Th is d is c lo s u re s ta te m e n t m u s t b e a tta c h e d to th e P a rt II a n d file d w ith th e
A d m in is tra to r. Th e d is c lo s u re s ta te m e n t m u s t b e d e liv e re d to a c lie n t o r p ro s p e c tiv e
c lie n t
1.
n o t le s s th a n 4 8 h o u rs p rio r to e n te rin g in to a w ra p fe e p ro g ra m c o n tra c t w ith a c lie n t,
or
2.
a t th e tim e o f e n te rin g in to a n y w ra p fe e p ro g ra m c o n tra c t, if th e a d v is o ry c lie n t h a s a
rig h t to te rm in a te th e c o n tra c t w ith o u t p e n a lty w ith in 5 b u s in e s s d a y s a fte r e n te rin g
th e c o n tra c t.


P e rs o n
Th e te rm p e rs o n , u n d e r th is A c t, re fe rs to a n in d iv id u a l, a c o rp o ra tio n , a p a rtn e rs h ip ,
a n a s s o c ia tio n , a jo in t s to c k c o m p a n y , a tru s t w h e re th e in te re s ts o f th e b e n e fic ia rie s
a re e v id e n c e d b y a s e c u rity , a n u n in c o rp o ra te d o rg a n iz a tio n , a g o v e rn m e n t, o r a
p o litic a l s u b d iv is io n o f a g o v e rn m e n t. Th e e x a m w ill w a n t y o u to k n o w th a t th is is a
v e ry b ro a d d e fin itio n .


L ic e n s in g R e q u ir e m e n ts
It is u n la w fu l fo r a n y p e rs o n to :

1.
tra n s a c t b u s in e s s in a s ta te a s a n a g e n t u n le s s th a t p e rs o n is re g is te re d a s a n a g e n t
u n d e r th e A c t.
2.
tra n s a c t b u s in e s s in a s ta te a s a b ro k e r/d e a le r u n le s s h e is re g is te re d a s a
b ro k e r/d e a le r u n d e r th e A c t.
3.
e m p lo y a n a g e n t u n le s s th e a g e n t is re g is te re d :
a.
a n a g e n t's re g is tra tio n is n o t e ffe c tiv e d u rin g a n y p e rio d w h e n h e is n o t a s s o c ia te d
w ith a p a rtic u la r re g is te re d b ro k e r/d e a le r o r a p a rtic u la r is s u e r.
b.
w h e n a n a g e n t b e g in s o r te rm in a te s a c o n n e c tio n w ith a b ro k e r/d e a le r o r is s u e r, o r
b e g in s o r te rm in a te s th o s e a c tiv itie s w h ic h m a y m a k e h im a n a g e n t, th e a g e n t a n d
th e b ro k e r/d e a le r o r is s u e r m u s t p ro m p tly n o tify th e A d m in is tra to r.
4.
tra n s a c t b u s in e s s in a s ta te a s a n in v e s tm e n t a d v is e r u n le s s :
a.
h e is re g is te re d a s a n in v e s tm e n t a d v is e r.
b.
h e h a s n o p la c e o f b u s in e s s in th is s ta te a n d
(1 )
h is o n ly c lie n ts in th e s ta te a re in v e s tm e n t c o m p a n ie s o r in s u ra n c e c o m p a n ie s o r
b a n k s , b ro k e r/d e a le rs , o th e r in v e s tm e n t a d v is e rs , e m p lo y e e b e n e fits p la n s w ith
a s s e ts in e x c e s s o f $ 1 ,0 0 0 ,0 0 0 , o r
(2 )
d u rin g a n y p e rio d o f 1 2 c o n s e c u tiv e m o n th s h e d o e s n o t d ire c t c o m m u n ic a tio n s in
th is s ta te in a n y m a n n e r to m o re th a n 5 c lie n ts o th e r th a n th o s e s p e c ifie d in
p a ra g ra p h (1 .) a b o v e .
5.
b e re g is te re d a s a n in v e s tm e n t a d v is e r a n d e m p lo y a n in v e s tm e n t a d v is e r
re p re s e n ta tiv e u n le s s th e in v e s tm e n t a d v is e r re p re s e n ta tiv e is re g is te re d u n d e r th is
A c t. J u s t a s a n a g e n t w ith a b ro k e r/d e a le r, th e re g is tra tio n o f a n in v e s tm e n t a d v is e r
re p re s e n ta tiv e is n o t e ffe c tiv e d u rin g a n y p e rio d w h e n h e is n o t e m p lo y e d b y a n
in v e s tm e n t a d v is e r re g is te re d u n d e r th e A c t. W h e n a n in v e s tm e n t a d v is e r
re p re s e n ta tiv e b e g in s o r te rm in a te s e m p lo y m e n t w ith a n in v e s tm e n t a d v is e r, th e
in v e s tm e n t a d v is e r m u s t p ro m p tly n o tify th e A d m in is tra to r. P le a s e n o te th a t, u n lik e
th e a g e n t fo r th e b ro k e r/d e a le r, w h e re b o th th e a g e n t a n d th e b ro k e r/d e a le r m u s t
n o tify th e s ta te o f a n y c h a n g e o f e m p lo y m e n t, o n ly th e a d v is e r n o tifie s th e s ta te o f a
c h a n g e to th e in v e s tm e n t a d v is e r re p re s e n ta tiv e .

E v e ry re g is tra tio n e x p ire s o n e y e a r fro m its e ffe c tiv e d a te u n le s s it is re n e w e d . Th e
re n e w a l d a te s o f b ro k e r/d e a le rs , in v e s tm e n t a d v is e rs , a n d a g e n ts re g is tra tio n s v a ry
fro m s ta te to s ta te , b u t fo r th e e x a m , a re a lw a y s D e c e m b e r 3 1 . A n in itia l o r re n e w a l
re g is tra tio n m a y b e o b ta in e d b y filin g a n a p p lic a tio n w ith th e A d m in is tra to r to g e th e r
w ith a "C o n s e n t to S e rv ic e o f P ro c e s s ." Th e a p p lic a tio n s h a ll c o n ta in in fo rm a tio n
re q u ire d b y th e ru le s c o n c e rn in g m a tte rs s u c h a s th e a p p lic a n t's :

1.
fo rm a n d p la c e o f o rg a n iz a tio n .
2.
p ro p o s e d m e th o d o f d o in g b u s in e s s … w ill th e firm h a v e c u s to d y , e x e rc is e d is c re tio n ,
e tc .
3.
q u a lific a tio n s a n d b u s in e s s h is to ry (in th e c a s e o f a b ro k e r/d e a le r o r in v e s tm e n t
a d v is e r th is in fo rm a tio n w o u ld b e re q u e s te d fo r a n y p a rtn e r, o ffic e r, d ire c to r, o r
p e rs o n o f s im ila r s ta tu s , o r p e rfo rm in g s im ila r fu n c tio n s , o r c o n tro llin g th e
b ro k e r/d e a le r o r in v e s tm e n t a d v is e r a n d , fo r in v e s tm e n t a d v is e rs , s u c h in fo rm a tio n
c o n c e rn in g a n y e m p lo y e e ).
4.
b e in g th e s u b je c t o f a n in ju n c tio n o r a d m in is tra tiv e o rd e r o r c o n v ic tio n o f a
m is d e m e a n o r in v o lv in g a s e c u rity o r a n y a s p e c t o f th e s e c u ritie s b u s in e s s a n d a n y
c o n v ic tio n o f a fe lo n y .
5.
fin a n c ia l c o n d itio n a n d h is to ry .
6.
s a le s lite ra tu re . S in c e th e A c t h a s in c o rp o ra te d th e fe d e ra l b ro c h u re ru le u n d e r th e
U n ifo rm S e c u ritie s A c t, a p p lic a tio n fo r re g is tra tio n a s a n in v e s tm e n t a d v is e r w o u ld
in c lu d e filin g a n y th in g th a t th e a d v is e r p la n s to u s e a s a b ro c h u re .

Th e C o n s e n t to S e rv ic e o f P ro c e s s is a le g a l d o c u m e n t w ith a le g a l a g re e m e n t u n d e r
w h ic h th e b ro k e r/d e a le r, a g e n t, o r in v e s tm e n t a d v is e r g iv e s th e p o w e r to th e
A d m in is tra to r to a c c e p t le g a l p ro c e s s in p la c e o f th e re g is tra n t. In o th e r w o rd s , th e
U n ifo rm S e c u ritie s A c t re c o g n iz e s th a t y o u w ill b e lic e n s e d in m a n y s ta te s . Th e
A d m in is tra to rs o f th o s e s ta te s d o n 't w a n t th e b u rd e n o f h a v in g to h a v e a p ro c e s s
s e rv e r h u n t y o u d o w n in th e e v e n t a n a c tio n is ta k e n a g a in s t y o u . Th is C o n s e n t to
S e rv ic e o f P ro c e s s m e a n s th a t y o u h a v e a g re e d th a t s e rv ic e to th e A d m in is tra to r h a s
th e s a m e e ffe c t a s if y o u w e re p e rs o n a lly s e rv e d in y o u r h o m e o r o ffic e a n d is
re q u ire d in e v e ry s ta te in w h ic h y o u a re re g is te re d .
In s o m e s ta te s a p p lic a n ts fo r in itia l re g is tra tio n a re re q u ire d to p u b lis h a n
a n n o u n c e m e n t o f th e ir a p p lic a tio n in s p e c ifie d n e w s p a p e rs . If th e re is n o d e n ia l
o rd e r o r p e rtin e n t p e n d in g p ro c e e d in g , a re g is tra tio n b e c o m e s e ffe c tiv e a t n o o n o n
th e 3 0 th d a y a fte r th e a p p lic a tio n is file d . O f c o u rs e , th e A d m in is tra to r m a y s p e c ify
a n e a rlie r e ffe c tiv e d a te . H e o r s h e m a y a ls o d e fe r th e e ffe c tiv e d a te u n til n o o n o n
th e 3 0 th d a y a fte r th e filin g o f a n y a m e n d m e n t.

R e g is tra tio n o f a b ro k e r/d e a le r a u to m a tic a lly c o n s titu te s
re g is tra tio n o f a n y a g e n t w h o is a p a rtn e r, o ffic e r, o r o th e r
p e rs o n o f s im ila r s ta tu s o r s im ila r fu n c tio n s . N a tu ra lly , e v e ry
a p p lic a n t m u s t p a y a filin g fe e s p e c ific a lly e s ta b lis h e d fo r th a t a p p lic a n t's c a te g o ry
(b ro k e r/d e a le r, a g e n t, o r in v e s tm e n t a d v is e r). If th e a p p lic a tio n is d e n ie d o r
w ith d ra w n , th e A d m in is tra to r re ta in s th e fe e .

R e g is te re d b ro k e r/d e a le rs o r in v e s tm e n t a d v is e rs m a y file a n a p p lic a tio n fo r th e
re g is tra tio n o f a s u c c e s s o r fo r th e u n e x p ire d p o rtio n o f th e y e a r. A t th e tim e o f s u c h
filin g , th e s u c c e s s o r d o e s n o t e v e n h a v e to e x is t. Th e re is n o filin g fe e , b u t, o f c o u rs e ,
th e re is a n a n n u a l re n e w a l fe e .

H e re 's a n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m :

U n d e r th e U n ifo rm S e c u ritie s A c t, w h ic h o f th e fo llo w in g a u to m a tic a lly b e c o m e
re g is te re d a s a n a g e n t w h e n a b ro k e r/d e a le r re g is tra tio n b e c o m e s e ffe c tiv e ?
A.
O n ly th e d e s ig n a te d s u p e rv is o ry p rin c ip a l
B.
A n y p a rtn e r, o ffic e r o r p e rs o n o f s im ila r s ta tu s o r s im ila r fu n c tio n
C .
A ll a g e n ts c u rre n tly re g is te re d th ro u g h th a t b ro k e r/d e a le r w ith th e N A S D
D .
N o one
B . A ll th o s e w ith m a n a g e m e n t re s p o n s ib ilitie s w ith th e firm a re a u to m a tic a lly
re g is te re d a s a g e n ts w h e n a b ro k e r/d e a le r b e c o m e s re g is te re d in a s ta te . Th is
in c lu d e s p a rtn e rs , o ffic e rs , d ire c to rs a n d o th e rs p e rfo rm in g s im ila r d u tie s .

H e re 's a n o th e r e x a m p le o f a q u e s tio n y o u m a y s e e o n th e e x a m :

U n d e r th e U n ifo rm S e c u ritie s A c t, w h ic h o f th e fo llo w in g a re tru e re g a rd in g th e
re g is tra tio n o f a s u c c e s s o r firm ?
A.
Th e a p p ro p ria te filin g fe e m u s t b e s u b m itte d w ith th e a p p lic a tio n .
B.
Th e s u c c e s s o r firm m u s t b e in e x is te n c e p rio r to th e filin g o f th e a p p lic a tio n .
C .
Th e re g is tra tio n o f th e s u c c e s s o r firm w ill b e e ffe c tiv e u n til th e D e c e m b e r 3 1 s t
re n e w a l d a te .
D .
A ll o f th e a b o v e .
C . Th e re is n o filin g fe e n e c e s s a ry n o r is it e v e n re q u ire d th a t th e s u c c e s s o r firm
e v e n b e in e x is te n c e a t th e tim e o f filin g . Th e re g is tra tio n is e ffe c tiv e fo r th e
u n e x p ire d p o rtio n o f th e y e a r a n d th e n m u s t b e re n e w e d (w ith a re n e w a l fe e , o f
c o u rs e ) e a c h D e c e m b e r 3 1 s t.


C a p ita l R e q u ir e m e n ts
Th e ru le s m a y re q u ire a m in im u m c a p ita l fo r re g is te re d
b ro k e r/d e a le rs a n d in v e s tm e n t a d v is e rs . If th e a d v is e r
h a s c u s to d y o f c lie n t fu n d s o r s e c u ritie s , th e re is a
m in im u m n e t w o rth re q u ire m e n t o f $ 3 5 ,0 0 0 . O n th e
o th e r h a n d , if th e a d v is e r h a s d is c re tio n a ry a u th o rity
o v e r th e fu n d s o r s e c u ritie s , b u t d o e s n o t h a v e c u s to d y ,
th e m in im u m n e t w o rth re q u ire m e n t is $ 1 0 ,0 0 0 . If th e
a d v is e r's n e t w o rth fa lls b e lo w th e m in im u m re q u ire d ,
it m u s t n o tify th e A d m in is tra to r n o la te r th a n th e c lo s e
o f th e n e x t b u s in e s s d a y . W ith in o n e m o re b u s in e s s
d a y , th e in v e s tm e n t a d v is e r m u s t file a re p o rt w ith th e
A d m in is tra to r th a t in c lu d e s


     •

a tria l b a la n c e o f a ll le d g e r a c c o u n ts

     •

a s ta te m e n t o f a ll c lie n t fu n d s o r s e c u ritie s w h ic h a re n o t s e g re g a te d

     •

a c o m p u ta tio n o f th e a g g re g a te a m o u n t o f m o n e y o w e d b y c u s to m e rs

     •

a s ta te m e n t a s to th e n u m b e r o f c lie n t a c c o u n ts .
If th e a d v is e r c a n 't m e e t th e s e c a p ita l re q u ire m e n ts , th e A d m in is tra to r w ill re q u ire th e
in v e s tm e n t a d v is e r to p o s t a s u re ty b o n d , u s u a lly in a n a m o u n t n o t le s s th a n $ 3 5 ,0 0 0
a n d m a y d e te rm in e its c o n d itio n s . A p p ro p ria te d e p o s its o f c a s h o r s e c u ritie s s h a ll b e
a c c e p te d in s te a d o f a b o n d a n d n o b o n d is u s u a lly re q u ire d o f a re g is tra n t w h o s e n e t
w o rth e x c e e d s th e m in im u m re q u ire m e n ts lis te d a b o v e . Th e re a re a ls o b o n d in g
re q u ire m e n ts fo r b ro k e r/d e a le rs a n d a g e n ts a n d , a s w ith a d v is e rs , th e ty p e a n d
a m o u n t w ill v a ry w ith th e p re s e n c e o r a b s e n c e o f c u s to d y a n d /o r d is c re tio n a n d , in
th e c a s e o f b ro k e r/d e a le rs , th e a m o u n t o f n e t c a p ita l m a in ta in e d .
B o n d s m u s t p ro v id e fo r s u it th e re o n b y a n y p e rs o n h a v in g a c a u s e fo r a c tio n a ris in g
u n d e r th e c iv il lia b ilitie s s e c tio n s o f th e A c t, in o th e r w o rd s , th e in ju re d p a rty . Th e
b o n d s h a ll a ls o p ro v id e th a t n o s u it m a y b e m a in ta in e d to e n fo rc e a n y lia b ility o n th e
b o n d u n le s s th e s u it is b ro u g h t w ith in th re e y e a rs a fte r th e s a le o r o th e r a c t o n w h ic h
th e s u it is b a s e d , o r tw o y e a rs a fte r d is c o v e ry , w h ic h e v e r is s o o n e r.

H e re 's a n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m :

U n d e r th e U n ifo rm S e c u ritie s A c t, th e A d m in is tra to r m a y re q u ire w h ic h o f th e
fo llo w in g o f a p p lic a n ts fo r re g is tra tio n ?
I.
P u b lis h in g a n a n n o u n c e m e n t o f th e a p p lic a tio n in o n e o r m o re n e w s p a p e rs in th e
s ta te
II.
M in im u m n e t c a p ita l re q u ire m e n ts fo r b ro k e r/d e a le r a n d a g e n ts
III.
A s u re ty b o n d fo r a d v is e rs w h o e ith e r m a in ta in c u s to d y o f c u s to m e r fu n d s a n d
s e c u ritie s o r m a in ta in in v e s tm e n t d is c re tio n
A.
I a n d II o n ly
B.
I a n d III o n ly
C .
II a n d III o n ly
D .
I, II a n d III
B . Th e A d m in is tra to r m a y re q u ire p u b lis h in g o f a n n o u n c e m e n ts in s p e c ifie d
n e w s p a p e rs . W h ile s u re ty b o n d s a re g e n e ra lly re q u ire d o f b ro k e r/d e a le rs a n d a g e n ts ,
th e y a re o n ly re q u ire d o f in v e s tm e n t a d v is e rs w h o m a in ta in c u s to d y a n d /o r e x e rc is e
d is c re tio n . Th e re a re n e t c a p ita l o r o th e r fin a n c ia l re q u ire m e n ts fo r b ro k e r/d e a le rs
a n d in v e s tm e n t a d v is e rs , N O T fo r a g e n ts .


R e c o r d K e e p in g

R e g is te re d b ro k e r/d e a le rs a n d in v e s tm e n t a d v is e rs a re re q u ire d to m a k e a n d k e e p
s u c h a c c o u n ts , c o rre s p o n d e n c e , m e m o ra n d a , p a p e rs , b o o k s a n d o th e r re c o rd s a s
th e A d m in is tra to r p re s c rib e s . Th e s e re c o rd s m u s t b e p re s e rv e d fo r th re e y e a rs b y
b ro k e r/d e a le rs a n d fiv e y e a rs b y a d v is e rs u n le s s th e A d m in is tra to r p re s c rib e s
o th e rw is e . Th e y m u s t a ls o file a n y fin a n c ia l re p o rts re q u ire d b y th e A d m in is tra to r.
If in fo rm a tio n in a n y d o c u m e n t file d b e c o m e s in a c c u ra te
o r in c o m p le te in a n y m a te ria l re s p e c t, th e re g is tra n t m u s t
p ro m p tly file a c o rre c tin g a m e n d m e n t u n le s s n o tific a tio n
o f th e c o rre c tio n h a s b e e n p ro p e rly m a d e u n d e r th e
ru le s . A ll re q u ire d re c o rd s a re s u b je c t a t a n y tim e to
s u c h re a s o n a b le p e rio d ic , s p e c ia l, o r o th e r e x a m in a tio n s
b y re p re s e n ta tiv e s o f th e A d m in is tra to r a s th e
A d m in is tra to r d e e m s n e c e s s a ry o r a p p ro p ria te in th e
p u b lic in te re s t, o r fo r th e p ro te c tio n o f in v e s to rs . To
a v o id u n n e c e s s a ry d u p lic a tio n o f e x a m in a tio n s , th e
A d m in is tra to r m a y c o o p e ra te w ith th e s e c u ritie s
a d m in is tra to rs o f o th e r s ta te s , th e S e c u ritie s a n d
E x c h a n g e C o m m is s io n , a n d a n y n a tio n a l s e c u ritie s
e x c h a n g e o r n a tio n a l s e c u ritie s a s s o c ia tio n re g is te re d u n d e r th e S e c u ritie s
E xcha n ge A ct of 1 93 4 .


D e n ia l, R e v o c a tio n , S u s p e n s io n , C a n c e lla tio n a n d W ith d r a w a l o f
R e g is tr a tio n

Th e A d m in is tra to r h a s th e a u th o rity to d e n y , s u s p e n d o r re v o k e a n y re g is tra tio n o f a
b ro k e r/d e a le r, a g e n t o r in v e s tm e n t a d v is e r, if h e fin d s th a t th e o rd e r is in th e p u b lic
in te re s t a n d th a t th e a p p lic a n t o r re g is tra n t:




1.
h a s file d a n a p p lic a tio n fo r re g is tra tio n w h ic h w a s in c o m p le te in a n y m a te ria l re s p e c t,
o r c o n ta in e d a n y s ta te m e n t w h ic h w a s fa ls e o r m is le a d in g w ith re s p e c t to a n y
m a te ria l fa c t.
2.
h a s w illfu lly v io la te d o r fa ile d to c o m p ly w ith a n y p ro v is io n o f th e A c t.
3.
h a s b e e n c o n v ic te d , w ith in th e p a s t 1 0 y e a rs , o f a n y m is d e m e a n o r in v o lv in g a
s e c u rity o r a n y a s p e c t o f th e s e c u ritie s b u s in e s s , o r a n y fe lo n y .
4.
is p e rm a n e n tly o r te m p o ra rily e n jo in e d b y a c o u rt o f c o m p e te n t ju ris d ic tio n fro m
e n g a g in g in o r c o n tin u in g a n y c o n d u c t o r p ra c tic e re la te d to th e s e c u ritie s b u s in e s s .
5.
is th e s u b je c t o f a n o rd e r o f th e A d m in is tra to r d e n y in g , s u s p e n d in g o r re v o k in g h is
re g is tra tio n .
6.
is th e s u b je c t o f a n o rd e r e n te re d w ith in th e p a s t te n y e a rs b y th e s e c u ritie s
a d m in is tra to r o f a n o th e r s ta te o r th e S E C th a t th e p e rs o n h a s w illfu lly v io la te d th e
S e c u ritie s A c t o f 1 9 3 3 , th e S e c u ritie s E x c h a n g e A c t o f 1 9 3 4 , th e In v e s tm e n t
C o m p a n y A c t o f 1 9 4 0 , th e In v e s tm e n t A d v is e rs A c t o f 1 9 4 0 , o r th e C o m m o d ity
E x c h a n g e A c t, o r s e c u ritie s o r c o m m o d itie s la w o f a n y o th e r s ta te .
7.
h a s e n g a g e d in d is h o n e s t o r u n e th ic a l p ra c tic e s in th e s e c u ritie s b u s in e s s .
8.
is in s o lv e n t, e ith e r in th a t h is lia b ilitie s e x c e e d h is a s s e ts o r in th a t h e c a n n o t m e e t
h is o b lig a tio n s a s th e y m a tu re . S u c h a n o rd e r e n te re d a g a in s t a b ro k e r/d e a le r o r
in v e s tm e n t a d v is e r w o u ld re q u ire a fin d in g o f in s o lv e n c y .
9.
is n o t q u a lifie d o n th e b a s is o f fa c to rs s u c h a s tra in in g , e x p e rie n c e , a n d k n o w le d g e
o f th e s e c u ritie s b u s in e s s .
10.
h a s fa ile d re a s o n a b ly to s u p e rv is e a g e n ts if h e is a b ro k e r/d e a le r, o r a d v is e r
re p re s e n ta tiv e s if h e is a n in v e s tm e n t a d v is e r.
11.
h a s fa ile d to p a y th e p ro p e r filin g fe e . In th a t c a s e , th e A d m in is tra to r m a y o n ly e n te r
a d e n ia l o rd e r a n d th e o rd e r w ill b e v a c a te d w h e n th e d e fic ie n c y h a s b e e n c o rre c te d .
W ith d ra w a l fro m re g is tra tio n a s a b ro k e r/d e a le r, a g e n t, in v e s tm e n t a d v is e r o r
in v e s tm e n t a d v is e r re p re s e n ta tiv e b e c o m e s e ffe c tiv e th irty d a y s a fte r re c e ip t o f a n
a p p lic a tio n to w ith d ra w o r w ith in a s h o rte r p e rio d o f tim e a s th e A d m in is tra to r m a y
d e te rm in e u n le s s a re v o c a tio n o r s u s p e n s io n p ro c e e d in g is p e n d in g w h e n th e
a p p lic a tio n is file d .
Th e A d m in is tra to r m a y n o t in s titu te a s u s p e n s io n o r re v o c a tio n p ro c e e d in g o n th e
b a s is o f a fa c t o r tra n s a c tio n o f w h ic h h e is a w a re w h e n re g is tra tio n b e c o m e s
e ffe c tiv e , u n le s s th e p ro c e e d in g is in s titu te d w ith in th e n e x t 3 0 d a y s .

H e re 's a n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m :

U n d e r th e U n ifo rm S e c u ritie s A c t, th e A d m in is tra to r m a y ta k e a c tio n a g a in s t a
b ro k e r/d e a le r if
I.
th e firm is u n a b le to m e e t its o b lig a tio n s a s th e y c o m e d u e .
II.
th e A d m in is tra to r d is c o v e rs th a t th e firm w a s th e s u b je c t o f a n o rd e r o f re v o c a tio n b y
a n o th e r s ta te 's A d m in is tra to r 1 2 y e a rs a g o .
III.
o n e o f th e firm 's a g e n ts (w h o h a p p e n s to o w n a lm o s t 2 % o f th e c o rp o ra tio n 's
o u ts ta n d in g s to c k ) d e c la re s b a n k ru p tc y .
A.
I o n ly
B.
I a n d III o n ly
C .
II a n d III o n ly
D .
I, II a n d III
A . In s o lv e n c y o f a b ro k e r/d e a le r, in v e s tm e n t a d v is e r o r a g e n t is a c a u s e fo r a c tio n
u n d e r th e A c t. C h o ic e II w o u ld b e a c tio n a b le if it w a s w ith in 1 0 y e a rs . Th e
b a n k ru p tc y o f a n a g e n t w h o is a m in o rity s h a re h o ld e r is n o t c a u s e fo r a c tio n a g a in s t
th e b ro k e r/d e a le r.

In a p p ly in g th e ru le s c o n c e rn in g d e n ia l o r re v o c a tio n , o th e r p e rtin e n t p ro v is io n s
in c lu d e :
1.
Th e A d m in is tra to r m a y n o t e n te r a n o rd e r:
a.
a g a in s t a b ro k e r/d e a le r o n th e b a s is o f th e la c k o f q u a lific a tio n o f a n y o n e o th e r th a n
th e b ro k e r/d e a le r (if h e is a n in d iv id u a l) o r a n a g e n t o f th e b ro k e r/d e a le r.
b.
a g a in s t a n in v e s tm e n t a d v is e r o n th e b a s is o f th e la c k o f q u a lific a tio n o f a n y p e rs o n
o th e r th a n th e in v e s tm e n t a d v is e r h im s e lf (if h e is a n in d iv id u a l) o r a n y o th e r p e rs o n
re p re s e n tin g th e in v e s tm e n t a d v is e r in a c tio n s m a k in g h im a n in v e s tm e n t a d v is e r.
c.
s o le ly o n th e b a s is o f la c k o f e x p e rie n c e if th e a p p lic a n t o r re g is tra n t is q u a lifie d b y
tra in in g , k n o w le d g e , o r b o th .
2.
Th e A d m in is tra to r s h a ll c o n s id e r th a t:
a.
a n a g e n t w h o w ill w o rk u n d e r th e s u p e rv is io n o f a re g is te re d b ro k e r/d e a le r d o e s n o t
n e e d to h a v e th e s a m e q u a lific a tio n s a s th e b ro k e r/d e a le r.
b.
a n in v e s tm e n t a d v is e r is n o t n e c e s s a rily q u a lifie d s o le ly o n th e b a s is o f e x p e rie n c e
a s a b ro k e r/d e a le r o r a g e n t. If h e fin d s th a t a n a p p lic a n t fo r re g is tra tio n a s a
b ro k e r/d e a le r is n o t q u a lifie d a s a n in v e s tm e n t a d v is e r, h e m a y c o n d itio n th e
re g is tra tio n a s a b ro k e r/d e a le r o n h is n o t d o in g b u s in e s s in th e s ta te a s a n
in v e s tm e n t a d v is e r.
3.
Th e a d m in is tra to r m a y p ro v id e fo r a n e x a m in a tio n , w ritte n o r o ra l, o r b o th , to b e
ta k e n b y a n y c la s s o f o r a ll a p p lic a n ts a n d p e rs o n s re p re s e n tin g a n in v e s tm e n t
a d v is e r in a c ts w h ic h m a k e h im a n in v e s tm e n t a d v is e r.
Th e A d m in is tra to r m a y s u m m a rily p o s tp o n e o r s u s p e n d re g is tra tio n p e n d in g th e fin a l
d e te rm in a tio n o f a n y p ro c e e d in g s . In th is c a s e , th e A d m in is tra to r s h a ll p ro m p tly
n o tify th e a p p lic a n t o r re g is tra n t, a s w e ll a s th e e m p lo y e r o r p ro s p e c tiv e e m p lo y e r,
th a t s u c h o rd e r h a s b e e n e n te re d , th e re a s o n s fo r th e o rd e r, a n d th a t w ith in 1 5 d a y s
a fte r th e re c e ip t o f w ritte n re q u e s t, th e m a tte r w ill b e s e t d o w n fo r a h e a rin g . If a
h e a rin g is n o t re q u e s te d o r o rd e re d , th e o rd e r re m a in s in e ffe c t u n til m o d ifie d o r
v a c a te d b y th e A d m in is tra to r.

Th e re a re q u e s tio n s o n th e e x a m th a t lo o k ju s t lik e th e fo llo w in g tw o p o in ts :
1.
Th e A d m in is tra to r m a y c a n c e l th e re g is tra tio n o r a p p lic a tio n if h e fin d s th a t a
re g is tra n t o r a p p lic a n t:
A.
is n o lo n g e r in e x is te n c e .
B.
h a s c e a s e d to d o b u s in e s s .
C .
is s u b je c t to a n a d ju d ic a tio n o f m e n ta l in c o m p e te n c e , o r c o n tro l o f a c o m m itte e ,
c o n s e rv a to r, o r g u a rd ia n .
D .
c a n n o t b e lo c a te d a fte r a re a s o n a b le s e a rc h .
E.
a ll o f th e a b o v e .
E is c o rre c t.
2.
To e n te r a n o rd e r re la te d to d e n ia l o r re v o c a tio n , th e re m u s t b e :
A.
a p p ro p ria te p rio r n o tic e to th e re g is tra n t o r a p p lic a n t.
B.
o p p o rtu n ity fo r h e a rin g .
C .
w ritte n fin d in g s o f fa c t a n d c o n c lu s io n s o f la w .
D .
a ll o f th e a b o v e .
D is c o rre c t.

Th e A d m in is tra to r is g iv e n b ro a d p o w e rs to e n fo rc e th e U n ifo rm S e c u ritie s A c t. To
s u m m a riz e , th e A d m in is tra to r, u n d e r th e A c t, m a y d o th e fo llo w in g :
1.
s u b p o e n a w itn e s s e s , b o o k s , re c o rd s , p a p e rs , a n d c o rre s p o n d e n c e re la tin g to a
s e c u ritie s in v e s tig a tio n .
2.
re q u ire a ffid a v its to b e file d b y p e rs o n s re la tin g to a p a rtic u la r in v e s tig a tio n .

3.
c a n c e l a re g is tra tio n if a re g is tra n t o r a p p lic a n t is n o lo n g e r in e x is te n c e o r h a s
c e a s e d d o in g b u s in e s s a s a b ro k e r/d e a le r o r a g e n t.
4.
d e n y , s u s p e n d , o r re v o k e a re g is tra tio n if h e fin d s th a t
a n a p p lic a n t o r re g is tra n t h a s v io la te d a n y p ro v is io n s
o f th e A c t, e n g a g e d in d is h o n e s t p ra c tic e s , o r h a s
b e e n c o n v ic te d w ith in th e p a s t 1 0 y e a rs o f a fe lo n y o r
m is d e m e a n o r re la tin g to s e c u ritie s .
5.
s u b p o e n a w itn e s s e s w h e th e r th e y liv e w ith in o r o u ts id e o f th e s ta te .
6.
b e g in a n in v e s tig a tio n if h e fe e ls a v io la tio n w ill o c c u r e v e n if it h a s n o t y e t o c c u rre d .
H e d o e s n o t h a v e to w a it u n til th e v io la tio n o c c u rs in o rd e r to b e g in a n in v e s tig a tio n .
7.
s u m m a rily s u s p e n d th e re g is tra tio n o f a n a g e n t, b ro k e r/d e a le r o r in v e s tm e n t a d v is e r.
H o w e v e r, th e p e rs o n s u s p e n d e d w ill re c e iv e n o tific a tio n o f th e o rd e r a n d m u s t b e
g iv e n th e o p p o rtu n ity to h a v e a h e a rin g o n th e m a tte r.

H e re 's a n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m :

W h ic h o f th e fo llo w in g p o w e rs a re g ra n te d to th e A d m in is tra to r b y th e U n ifo rm
S e c u ritie s A c t?
I.
H e m a y e x a m in e a b ro k e r/d e a le r's re c o rd s a t a n y tim e , w ith o u t n o tic e , e v e n a c ro s s
s ta te lin e s .
II.
H e m a y c a n c e l th e re g is tra tio n o f a b ro k e r/d e a le r w h o c a n n o t b e lo c a te d a fte r a
re a s o n a b le s e a rc h o r h a s e n g a g e d in a n u n e th ic a l b u s in e s s p ra c tic e .
III.
H e m a y n o t ta k e a c tio n to re v o k e a n a g e n t's re g is tra tio n b a s e d u p o n a p re v io u s
d is c ip lin a ry a c t in w h ic h h e is a w a re w h e n re g is tra tio n b e c o m e s e ffe c tiv e u n le s s h e
d o e s s o w ith in 3 0 d a y s .
IV .
H e m a y re q u ire th e filin g o f a c o n s e n t to s e rv ic e b y a ll a g e n ts , b ro k e r/d e a le rs a n d
in v e s tm e n t a d v is e rs re g is te rin g in h is s ta te , e v e n if th e y a re re s id e n ts o f th a t s ta te .
A.
I, II, III a n d IV
B.
I, II a n d III o n ly
C .
I, III a n d IV o n ly
D .
III a n d IV o n ly
C . Th e A d m in is tra to r is o n e p o w e rfu l p e rs o n . Th e p ro b le m w ith II is th a t th e
A d m in is tra to r c a n 't c a n c e l th e re g is tra tio n o f a firm w h o h a s e n g a g e d in a n u n e th ic a l
o r p ro h ib ite d b u s in e s s p ra c tic e . Th a t w o u ld in v o lv e re v o c a tio n w h ic h w o u ld o n ly b e
d o n e a fte r o p p o rtu n ity fo r a h e a rin g .


U n it 2 – Se c u r ity
Th e te rm s e c u rity , u n d e r th e A c t, m e a n s b u t is n o t lim ite d to a n y :
1.
n o te
15.
o il a n d g a s d rillin g p ro g ra m s
2.
s to c k
16.
re a l e s ta te c o n d o m in iu m s a n d c o o p e ra tiv e s
3.
tre a s u ry s to c k
17.
in te re s ts in fa rm la n d s o r a n im a ls
4.
bond
18.
c o m m o d ity o p tio n c o n tra c ts
5.
d e b e n tu re
19.
w h is k e y w a re h o u s e re c e ip ts
6.
e v id e n c e o f in d e b te d n e s s
20.
m u lti-le v e l d is trib u to rs h ip a rra n g e m e n ts
7.
c e rtific a te o f in te re s t o r p a rtic ip a tio n in a n y p ro fit s h a rin g a g re e m e n t
21.
m e rc h a n d is e m a rk e tin g s c h e m e s
8.
c o lla te ra l-tru s t c e rtific a te
22.
lis te d s to c k o p tio n s
9.
p re o rg a n iz a tio n c e rtific a te o r s u b s c rip tio n
23.
in te re s t in a re a l e s ta te in v e s tm e n t tru s t
10.
tra n s fe ra b le s h a re
24.
c e rtific a te o f in te re s t in a n o il w e ll le a s e
11.
in v e s tm e n t c o n tra c t
12.
v o tin g -tru s t c e rtific a te
25.
lim ite d p a rtn e rs h ip in te re s ts
13.
c e rtific a te o f d e p o s it fo r a s e c u rity
26.
in te re s t in a u n it in v e s tm e n t tru s t
14.
c e rtific a te o f in te re s t o r p a rtic ip a tio n in a n o il, g a s , o r m in in g title , o r le a s e in
p a y m e n ts o u t o f p ro d u c tio n u n d e r s u c h a title o r le a s e

In g e n e ra l, th e te rm s e c u rity a p p lie s to a n y in te re s t o r in s tru m e n t c o m m o n ly k n o w n
a s a s e c u rity , o r a n y c e rtific a te o f in te re s t o r p a rtic ip a tio n in , te m p o ra ry o r in te rim
c e rtific a te fo r, re c e ip t fo r, g u a ra n te e o f, o r w a rra n t o r rig h t to s u b s c rib e to o r
p u rc h a s e a n y o f th e fo re g o in g .

In v e s tm e n t c o n tr a c ts m a y b e c o n s id e re d s e c u ritie s u n d e r c e rta in c irc u m s ta n c e s .
Th e F e d e ra l c o u rts h a v e d e te rm in e d th a t th e b a s ic te s t to b e u s e d to d e te rm in e
w h e th e r a n in v e s tm e n t is a s e c u rity c o n c e rn s th e fo llo w in g tw o q u e s tio n s :

1.
Is th e in v e s tm e n t in a c o m m o n e n te rp ris e ?
2.
Is th e in v e s to r le d to e x p e c t p ro fits b e c a u s e o f th e m a n a g e ria l e ffo rts o f a th ird p a rty ,
s u c h a s a p ro m o te r?
In v e s tm e n ts w h ic h a re c o n s id e re d s e c u ritie s , s in c e th e y a ffirm a tiv e ly a n s w e r th e s e
tw o q u e s tio n s , in c lu d e c o m m o d ity o p tio n c o n tra c ts , w h is k e y w a re h o u s e re c e ip ts , o il
a n d g a s d rillin g p ro g ra m s , re a l e s ta te c o n d o m in iu m s , c a ttle p ro g ra m s , e q u ip m e n t
le a s in g p ro g ra m s , m u ltile v e l d is trib u to rs h ip a rra n g e m e n ts , a n d m e rc h a n d is in g
m a rk e tin g s c h e m e s .

Th e te rm s e c u rity d o e s n o t in c lu d e a n y :
1.
in s u ra n c e o r e n d o w m e n t p o lic y o r a n n u ity c o n tra c t u n d e r w h ic h a n in s u ra n c e
c o m p a n y p ro m is e s to p a y a fix e d s u m o f m o n e y , e ith e r in a lu m p s u m o r p e rio d ic a lly
fo r life , o r s o m e o th e r s p e c ifie d p e rio d . Th e re fo re , a fix e d a n n u ity is e x e m p t u n d e r
th e A c t, b u t a v a ria b le a n n u ity is n o t.
2.
K e o g h p la n s , In d iv id u a l R e tire m e n t A c c o u n ts o r o th e r re tire m e n t p la n s .
3.
c o m m o d ity o r fu tu re s c o n tra c ts , a lth o u g h o p tio n s o n c o m m o d itie s w o u ld b e
s e c u ritie s .
4.
p e rs o n a l re s id e n c e . W h ile th e re a re m a n y c a s e s w h e re a c o n d o m in iu m p u rc h a s e d in
a re s o rt a re a w ith a re n ta l p o o l a rra n g e m e n t w o u ld b e a s e c u rity , a c o n d o u s e d a s a
p rin c ip a l re s id e n c e d e fin ite ly w o u ld n o t.

5.
c u rre n c y a n d c o lle c tib le s , h o w e v e r fo re ig n c u rre n c y o p tio n s a re a s e c u rity .
W e h a v e fo u n d th a t it's m u c h e a s ie r to re m e m b e r th e fe w th in g s th a t a re n o t a
s e c u rity , ra th e r th a n re m e m b e r a ll th o s e th a t a re .

H e re 's a n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m :

A ll o f th e fo llo w in g w o u ld b e c o n s id e re d s e c u ritie s E X C E P T
A.
a n in v e s tm e n t c o n tra c t.
B.
a c a ttle fe e d in g p ro g ra m .
C .
a n e v id e n c e o f in d e b te d n e s s .
D .
v a lu a b le je w e lry fro m a n e s ta te s a le .
D . C o lle c tib le s a re n o t c o n s id e re d to b e s e c u ritie s . If y o u lo o k e d a t th e je w e lry in
te rm s o f its p re c io u s m e ta l c o n te n t, p re c io u s m e ta ls a re n o t s e c u ritie s e ith e r.


S a le /S e ll a n d O ffe r /O ffe r to S e ll

Th e te rm s s a le o r s e ll in c lu d e e v e ry c o n tra c t o f s a le o f, c o n tra c t to s e ll, o r d is p o s itio n
o f, a s e c u rity o r in te re s t in a s e c u rity fo r v a lu e . In o th e r w o rd s , th e d e fin itio n in c lu d e s
a n y d is p o s itio n o f a s e c u rity fo r c o n s id e ra tio n .
Th e te rm s o ffe r o r o ffe r to s e ll in c lu d e e v e ry a tte m p t o r o ffe r to d is p o s e o f, o r
s o lic ita tio n o f a n o ffe r to b u y , a s e c u rity o r in te re s t in a s e c u rity fo r v a lu e .

Th e te rm s s a le , s e ll, o ffe r a n d o ffe r to s e ll in c lu d e th e fo llo w in g :
1.
a s e c u rity g iv e n o r d e liv e re d w ith , o r a s a b o n u s o n a c c o u n t o f, a n y p u rc h a s e o f
s e c u ritie s . S u c h s e c u ritie s a re c o n s id e re d to c o n s titu te p a rt o f th e s u b je c t o f th e
p u rc h a s e a n d to h a v e b e e n o ffe re d a n d s o ld fo r v a lu e .
2.
a g ift o f a s s e s s a b le s to c k is c o n s id e re d to in v o lv e a n o ffe r a n d s a le u n d e r th e A c t. A
g ift o f n o n a s s e s s a b le s to c k is n o t c o n s id e re d a s a le u n d e r th e A c t. A s s e s s a b le s to c k
(la s t is s u e d a b o u t 5 0 y e a rs a g o ) is c o m m o n s to c k is s u e d b e lo w p a r v a lu e fo r w h ic h
th e is s u e r o r a c re d ito r (in th e e v e n t o f b a n k ru p tc y ) h a s th e rig h t to a s s e s s c u rre n t
s h a re h o ld e rs fo r th e b a la n c e o f th e u n p a id p a r. A ll s to c k to d a y is "fu lly p a id a n d
n o n a s s e s s a b le ."
3.
th e s a le o r o ffe r o f a w a rra n t o r rig h t to p u rc h a s e o r s u b s c rib e to a n o th e r s e c u rity o r
a s e c u rity c o n v e rtib le in to a n o th e r s e c u rity is c o n s id e re d to in c lu d e a n o ffe r o f th e
o th e r s e c u rity .

Th e te rm s s a le , s e ll, a n d o ffe r to s e ll d o n o t in c lu d e a n y
1.
b o n a fid e p le d g e o r lo a n o f s e c u ritie s lik e u s in g s to c k a s c o lla te ra l fo r a lo a n .
2.
s to c k d iv id e n d , w h e th e r th e d is trib u tin g c o rp o ra tio n is th e is s u e r o r n o t, if n o th in g o f
v a lu e is g iv e n b y s to c k h o ld e rs fo r th e d iv id e n d o th e r th a n th e s u rre n d e r o f a rig h t to a
c a s h o r p ro p e rty d iv id e n d , w h e n s u c h e le c tio n is a v a ila b le .
3.
a c t in c id e n ta l to a c la s s v o te b y s to c k h o ld e rs , p u rs u a n t to th e c e rtific a te o f
in c o rp o ra tio n o r a p p lic a b le s ta tu te , o n a m e rg e r, c o n s o lid a tio n , re c la s s ific a tio n o f
s e c u ritie s , o r s a le o f c o rp o ra te a s s e ts in c o n s id e ra tio n o f th e is s u a n c e o f s e c u ritie s
o f a n o th e r c o rp o ra tio n , o r
4.
a c t in c id e n ta l to a ju d ic ia lly a p p ro v e d re o rg a n iz a tio n in w h ic h a s e c u rity is is s u e d in
e x c h a n g e fo r o th e r o u ts ta n d in g s e c u ritie s , c la im s , o r p ro p e rty in te re s ts o r p a rtly in
e x c h a n g e a n d p a rtly in c a s h .

H e re 's a n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m :

U n d e r th e U n ifo rm S e c u ritie s A c t, th e te rm s a le , s e ll a n d o ffe r to s e ll d o N O T in c lu d e
any
A.
g ift o f a s s e s s a b le s to c k .
B.
o ffe r o f s to c k rig h ts o r w a rra n ts .
C .
a c tio n ta k e n re g a rd in g a m e rg e r o r c o n s o lid a tio n .
D .
s p e c ia l p ro m o tio n w h e re s to c k in o n e c o m p a n y is g iv e n (a t n o c h a rg e ) to a ll
p u rc h a s e rs o f a n e w b o n d is s u e th e b ro k e r/d e a le r is u n d e rw ritin g .
C . A tra n s fe r o f s to c k d u e to a m e rg e r, c o n s o lid a tio n , re o rg a n iz a tio n o r th e lik e , is n o t
a s a le o r o ffe r to s e ll. A g ift o f a s s e s s a b le s to c k is , a s th e g ift h a s "s trin g s a tta c h e d ."
S to c k rig h ts a n d w a rra n ts b e in g o ffe re d c o n s titu te a n o ffe r to s e ll. C h o ic e (D ) is a
b o n u s g iv e n o n a c c o u n t o f a p u rc h a s e o f o th e r s e c u ritie s a n d is a lw a y s a s a le .

Th e te rm is s u e r, u n d e r th e A c t, m e a n s a n y p e rs o n w h o is s u e s o r p ro p o s e s to is s u e
a n y s e c u rity . Th e te rm n o n -is s u e r tra n s a c tio n re fe rs to a tra n s a c tio n n o t d ire c tly o r
in d ire c tly fo r th e b e n e fit o f th e is s u e r.


Is s u e r

B a s ic a lly , th e re a re o n ly tw o ty p e s o f is s u e r tra n s a c tio n s :
1.
p rim a ry d is trib u tio n s
2.
s e c o n d a ry d is trib u tio n s


G u a r a n te e d
Th e w o rd g u a ra n te e d , u n d e r th e U n ifo rm S e c u ritie s A c t, m e a n s g u a ra n te e d a s to th e
p a y m e n t o f p rin c ip a l, in te re s t, o r d iv id e n d s . A p a re n t c o rp o ra tio n m a y g u a ra n te e th e
p a y m e n t o b lig a tio n s o n a s u b s id ia ry 's s e c u ritie s .


F ra u d

Th e la w d e fin e s th is te rm in a v e ry fu n n y w a y . H e re is a d ire c t q u o te :

F ra u d , d e c e it, a n d d e fra u d a re n o t lim ite d to c o m m o n -la w d e c e it.
W h a t d o e s th a t re a lly m e a n ? It re fe rs to th e o ld B ritis h c o m m o n la w s y s te m w h ic h is
th e b a s is o f m u c h o f o u r la w . W h a t N A S A A is try in g to te ll u s is th a t fra u d is m u c h
m o re th a n w h a t o n e w o u ld th in k o f c o m m o n ly . J u s t re m e m b e r th a t it is a v e ry b ro a d
te rm a n d th a t a d e fra u d e d p e rs o n h a s fiv e y e a rs to b rin g a c a s e to tria l.


M e th o d o f R e g is te r in g S e c u r itie s

It is u n la w fu l fo r a p e rs o n to o ffe r o r s e ll a s e c u rity in a n y s ta te u n le s s it is e ith e r
re g is te re d o r e x e m p te d fro m re g is tra tio n .

Th e re a re d iffe re n t m e th o d s o f re g is te rin g a s e c u rity --b y n o tific a tio n , c o o rd in a tio n , o r
q u a lific a tio n .

N o tific a tio n (F ilin g )
Th e fo llo w in g s e c u ritie s m a y b e re g is te re d b y n o tific a tio n , w h e th e r o r n o t th e y a re
a ls o e lig ib le fo r re g is tra tio n b y c o o rd in a tio n o r q u a lific a tio n .

A n y s e c u rity w h o s e is s u e r a n d a n y p re d e c e s s o rs h a v e b e e n in c o n tin u o u s o p e ra tio n
fo r a t le a s t 3 y e a rs a n d fo r w h ic h a re g is tra tio n s ta te m e n t h a s b e e n file d u n d e r th e
S e c u ritie s A c t o f 1 9 3 3 if:
1.
th e re h a s b e e n n o d e fa u lt d u rin g th e c u rre n t fis c a l y e a r in th e p a y m e n t o f p rin c ip a l,
in te re s t o r d iv id e n d s o n a n y s e c u rity o f th e is s u e r w ith a fix e d m a tu rity o r fix e d
in te re s t o r d iv id e n d p ro v is io n . Th is in c lu d e s lo n g -te rm le a s e s .
2.
th e is s u e r h a s a to ta l n e t w o rth o f $ 4 ,0 0 0 ,0 0 0 o r n e t w o rth o f $ 2 ,0 0 0 ,0 0 0 a n d p re ta x
in c o m e fo r a t le a s t 2 o f th e 3 p re c e d in g fis c a l y e a rs .
3.
th e is s u e r is a n A m e ric a n c o m p a n y o r h a s a n A m e ric a n a g e n t a p p o in te d .
4.
th e is s u e r h a s a c la s s o f e q u ity s e c u ritie s re g is te re d u n d e r th e 1 9 3 4 A c t fo r
s e c o n d a ry m a rk e t tra d in g e ith e r o n a n e x c h a n g e o r o v e r-th e -c o u n te r.
5.
fo r a p e rio d o f a t le a s t 3 0 d a y s d u rin g th e p re v io u s 3 m o n th s , th e re h a v e b e e n a t
le a s t 4 m a rk e t m a k e rs .
6.
e a c h u n d e rw rite r is a n N A S D m e m b e r a n d h a s a g re e d to a m a x im u m u n d e rw ritin g
s p re a d o f 1 0 % .
7.
th e s e c u rity is a n e q u ity s e c u rity , th e o ffe rin g p ric e is a t le a s t $ 5 p e r s h a re .
P le a s e n o te : N o tific a tio n is n o t a v a ila b le in a ll s ta te s !

To re g is te r b y n o tific a tio n , a re g is tra tio n s ta te m e n t m u s t b e s u b m itte d c o n ta in in g th e
fo llo w in g in fo rm a tio n a n d a c c o m p a n ie d b y th e fo llo w in g d o c u m e n ts :
1.
a s ta te m e n t d e m o n s tra tin g e lig ib ility fo r re g is tra tio n b y n o tific a tio n .
2.
th e n a m e , a d d re s s , fo rm o r o rg a n iz a tio n , s ta te a n d d a te o f o rg a n iz a tio n , a n d g e n e ra l
c h a ra c te r a n d lo c a tio n o f th e b u s in e s s o f th e is s u e r a n d a n y s ig n ific a n t s u b s id ia ry .
3.
th e n a m e a n d a d d re s s o f a n y p e rs o n o n w h o s e b e h a lf a n y p a rt o f th e o ffe rin g is
m a d e in a n o n -is s u e r d is trib u tio n , a s w e ll a s th e a m o u n t o f s e c u ritie s o f th e is s u e r h e
h o ld s a n d a s ta te m e n t o f h is re a s o n s fo r m a k in g th e o ffe rin g .
4.
a d e s c rip tio n o f th e s e c u rity b e in g re g is te re d .
If th e re is n o s to p o rd e r in e ffe c t a n d n o p ro c e e d in g p e n d in g u n d e r th e A c t, a
re g is tra tio n , w h e n th e s e c u rity is to b e re g is te re d b y n o tific a tio n , b e c o m e s e ffe c tiv e :
1.
c o n c u rre n tly w ith th e e ffe c tiv e n e s s o f th e fe d e ra l re g is tra tio n s ta te m e n t if n o s to p
o rd e r is p e n d in g .
2.
u p o n th e s a tis fa c tio n o f th e a b o v e fo u r c o n d itio n s if th a t ta k e s p la c e a fte r fe d e ra l
e ffe c tiv e n e s s .

C o o r d in a tio n
If a re g is tra tio n s ta te m e n t h a s b e e n file d u n d e r
th e S e c u ritie s A c t o f 1 9 3 3 c o n c e rn in g a n
o ffe rin g , a s e c u rity m a y b e re g is te re d b y
c o o rd in a tio n . If th e s e c u rity is to b e re g is te re d
b y c o o rd in a tio n , th e re g is tra tio n s ta te m e n t m u s t c o n ta in th e fo llo w in g in fo rm a tio n :

1.
th re e c o p ie s o f th e la te s t p ro s p e c tu s file d u n d e r th e S e c u ritie s A c t o f 1 9 3 3 .
2.
if th e A d m in is tra to r re q u ire s , a c o p y o f th e a rtic le s o f in c o rp o ra tio n a n d b y -la w s , a
c o p y o f a n y a g re e m e n ts w ith th e u n d e rw rite rs , a c o p y o f a n y in d e n tu re o r o th e r
in s tru m e n t c o v e rin g th e s e c u rity , a n d a s p e c im e n o f th e s e c u rity .
3.
if th e A d m in is tra to r re q u e s ts , a n y o th e r in fo rm a tio n o r d o c u m e n ts file d u n d e r th e
S e c u ritie s A c t o f 1 9 3 3 .
4.
a s ta te m e n t in d ic a tin g th a t fu tu re a m e n d m e n ts to th e fe d e ra l p ro s p e c tu s w ill b e
p ro m p tly fo rw a rd e d .
Th e re g is tra tio n s ta te m e n t a u to m a tic a lly b e c o m e s e ffe c tiv e w h e n th e fe d e ra l
re g is tra tio n s ta te m e n t b e c o m e s e ffe c tiv e if
1.
n o s to p o rd e r is in e ffe c t o r p ro c e e d in g p e n d in g .
2.
th e re g is tra tio n s ta te m e n t h a s b e e n o n file w ith th e A d m in is tra to r fo r a t le a s t 1 0 d a y s .
3.
a s ta te m e n t o f th e m a x im u m a n d m in im u m p ro p o s e d o ffe rin g p ric e s , d is c o u n ts , a n d
c o m m is s io n s h a s b e e n o n file fo r tw o fu ll b u s in e s s d a y s .

Q u a lific a tio n
A n y s e c u rity m a y b e re g is te re d b y q u a lific a tio n .


C lic k y o u r m o u s e H E R E to o p e n a p o p -u p
w in d o w s o th a t y o u m a y s e e th e in fo rm a tio n
th a t is re q u ire d w h e n a s e c u rity is re g is te re d b y
q u a lific a tio n . It is n o t n e c e s s a ry fo r y o u to k n o w a ll o f th is … w e ju s t w a n te d y o u to
s e e w h y is s u e rs p re fe r filin g o r c o o rd in a tio n to q u a lific a tio n . Th e k e y in fo rm a tio n is
th a t if a s e c u rity is re g is te re d b y q u a lific a tio n , th e re g is tra tio n s ta te m e n t b e c o m e s
e ffe c tiv e w h e n th e A d m in is tra to r s o o rd e rs . Th e A d m in is tra to r re q u ire s th a t a
p ro s p e c tu s b e s e n t to p u rc h a s e rs p rio r to , o r a t th e tim e o f, th e s a le . A n e w ly fo rm e d
c o m p a n y re g is te rin g s e c u ritie s fo r th e firs t tim e in a s ta te w o u ld h a v e to re g is te r its
s e c u ritie s b y q u a lific a tio n .
W h e n a s e c u rity is re g is te re d b y q u a lific a tio n , th e re g is tra tio n s ta te m e n t m u s t c o n ta in th e
fo llo w in g in fo rm a tio n :

      1 . th e n a m e , a d d re s s a n d fo rm o f o rg a n iz a tio n , s ta te a n d d a te o f o rg a n iz a tio n , a n d g e n e ra l
      c h a ra c te r a n d lo c a tio n o f th e b u s in e s s o f th e is s u e r a n d a n y s ig n ific a n t s u b s id ia ry , a s w e ll a s
      a d e s c rip tio n o f its p h y s ic a l p ro p e rtie s a n d e q u ip m e n t, a n d a s ta te m e n t o f th e g e n e ra l
      c o m p e titiv e c o n d itio n s in th e in d u s try .

      2 . in fo rm a tio n c o n c e rn in g e v e ry d ire c to r a n d o ffic e r o f th e is s u e r o r a n y p e rs o n o c c u p y in g a
      s im ila r s ta tu s o r p e rfo rm in g s im ila r fu n c tio n s in c lu d in g

            a. his name, address, and principal occupation for the past five years.

            b. the amount of securities of the issuer held by him on a specified date.

            c. the amount of the securities covered by the registration statement to which he intends to
            subscribe.

            d. a description of any material interest in any material transaction with the issuer during the past
            three years or proposed to be effected.

      3. information concerning those individuals covered by (2) above related to the remuneration paid
      during the past 12 months and estimated to be paid during the next 12 months by the issuers to all of
      these persons in total.

      4. information specified in (2) above concerning any person owning 10% or more of the outstanding
      shares of any class of equity security of the issuer.

      5. information specified in (2) above concerning any promoter if the issuer was organized within the
      past three years and a statement indicating any amount paid to him and the consideration for such
      payment.

      6. if any part of the offering is to be made in a non-issuer distribution, information with respect to the
      person on behalf of which such distribution is to be made, including his name and address, the amount
      of securities held by him, a description of any material interest in any material transaction with the
      issuer effected within the past three years or proposed to be effected and a statement of his reasons for
      making the offering.

      7. the capitalization and long-term debt of the issuer, including:

            a. a description of each security.

            b. a statement of the amount and kind of consideration for which the issuer has issued any
            securities within the past two years or is obligated to issue.

      8. the kind and amount of securities to be offered, including:

            a. the proposed offering price.

            b. any variation from this price for such groups as underwriters.

            c. the basis upon which the offering is to be made if other than for cash.

            d. the estimated total underwriting and selling discounts or commissions and finders’ fee.

            e. the estimated amounts of other selling expenses.
          f. the name and address of every underwriter and person receiving a finder’s fee.

          g. a copy of any underwriting or selling group agreement relating to the distribution.

     9. the estimated cash proceeds to be received by the issuer, the purposes for which the proceeds are to
     be used and the amount to be used for each purpose.

     10. a description of any stock options or other security options outstanding or to be created in
     connection with the offering, together with the amount of such options to be held by persons covered
     by (2), (4), (5), (6), or (8) above.

     11. complete information concerning any management or other material contract made or to be made if
     related to the filing of the registration statement or made during the past two years.

     12. a copy of any prospectus, pamphlet, or advertisement or other sales literature to be used in
     connection with the offering.

     13. a specimen of the security being registered, a copy of the issuer’s articles of incorporation and by-
     laws, and a copy of any indenture or other instrument covering the security to be registered.

     14. a signed copy of an opinion of counsel stating whether the security sold will be legally issued, fully
     paid, and non-assessable and, if a debt security, a binding obligation of the issuer.

     15. the written consent of any accountant, engineer, or other person whose profession gives authority
     to his statement if he is named as having prepared or certified a report or valuation used in connection
     with the registration.

     16. a balance sheet of the issuer dated within 4 months prior to filing the registration statement, a profit
     and loss statement and analysis of surplus for each of the 3 fiscal years preceding the balance sheet
     date.

     17. any other information required by the Administrator.

H e re 's a n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m :

U n d e r th e U n ifo rm S e c u ritie s A c t, re g is tra tio n b y q u a lific a tio n w o u ld b e re q u ire d fo r
I.
a tw o -y e a r-o ld c o m p a n y p re p a rin g a n in itia l p u b lic o ffe rin g (IP O ) in 1 5 s ta te s
s im u lta n e o u s ly .
II.
a fiv e -y e a r-o ld c o m p a n y w ith o v e r $ 1 0 ,0 0 0 ,0 0 0 in n e t w o rth p la n s its firs t o ffe rin g o f
s to c k in o n e s ta te o n ly .
III.
a o n e -y e a r-o ld c o m p a n y th a t w e n t p u b lic n in e m o n th s a g o a n d w a s "b lu e -s k y e d " in 5
s ta te s . Th e y n o w w is h to o ffe r th e s to c k in th is s ta te .
A.
I a n d II o n ly
B.
I a n d III o n ly
C .
II a n d III o n ly
D .
I, II a n d III
C . A s c h o ic e I is p re p a rin g a m u ltis ta te p u b lic o ffe rin g , it w ill p ro b a b ly c h o o s e
c o o rd in a tio n , a m u c h s im p le r p ro c e s s th a n q u a lific a tio n . E v e n th o u g h II is o ld
e n o u g h a n d la rg e e n o u g h to u s e filin g o r n o tific a tio n , it is n o t e lig ib le s in c e it h a s
n e v e r m a d e a filin g w ith th e S E C , o n e o f th e re q u ire m e n ts fo r re g is tra tio n b y
n o tific a tio n . E v e n th o u g h III h a s b e e n th e p re v io u s s u b je c t o f a n S E C re g is tra tio n
(h a d to b e to is s u e in m o re th a n o n e s ta te ), it is n o t e lig ib le fo r n o tific a tio n (it's
y o u n g e r th a n th re e y e a rs o ld ) a n d it c a n 't c o o rd in a te s in c e re g is tra tio n is o n ly ta k in g
p la c e in o n e s ta te .


P r o v is io n s G e n e r a lly Ap p lic a b le to R e g is tr a tio n

A re g is tra tio n s ta te m e n t m a y b e file d b y :
1.
th e is s u e r.
2.
a n y o th e r p e rs o n o n w h o s e b e h a lf th e o ffe rin g is to b e m a d e .
3.
a re g is te re d b ro k e r/d e a le r.

Th e p e rs o n filin g s h a ll p a y a filin g fe e . Th is is u s u a lly a s p e c ifie d p e rc e n ta g e o f th e
m a x im u m a g g re g a te o ffe rin g p ric e a t w h ic h th e s e c u ritie s a re to b e o ffe re d in th e
s ta te w ith a s p e c ifie d m in im u m a n d m a x im u m a m o u n t. If th e re g is tra tio n s ta te m e n t is
w ith d ra w n b e fo re th e e ffe c tiv e d a te o r a p re -e ffe c tiv e s to p o rd e r is e n te re d , th e
A d m in is tra to r s h a ll re ta in p a rt o r a ll o f th e fe e .

A re g is tra tio n s ta te m e n t m u s t s p e c ify :
1.
th e a m o u n t o f s e c u ritie s to b e o ffe re d in th e s ta te .
2.
th e s ta te s in w h ic h th e re g is tra tio n s ta te m e n t in c o n n e c tio n w ith th e o ffe rin g h a s
b e e n o r w ill b e file d .
3.
a n y a d v e rs e o rd e r, ju d g e m e n t, o r d e c re e e n te re d in c o n n e c tio n w ith th e o ffe rin g b y
a n y re g u la to ry a u th o rity o r c o u rt.
If a n y d o c u m e n t file d u n d e r th e A c t fo r a p e rio d o f fiv e y e a rs s p e c ifie d b y th e s ta te is
s till a c c u ra te , it m a y b e in c o rp o ra te d b y re fe re n c e in th e re g is tra tio n s ta te m e n t. Th e
a d m in is tra to r m a y p e rm it th e o m is s io n o f a n y ite m o f in fo rm a tio n o r d o c u m e n t a n d , in
th e c a s e o f a n o n -is s u e r d is trib u tio n , in fo rm a tio n m a y n o t b e re q u ire d u n le s s it is
k n o w n th a t s u c h in fo rm a tio n c a n b e fu rn is h e d w ith o u t u n re a s o n a b le e ffo rt o r
expense.

Th e A d m in is tra to r m a y re q u ire , a s a c o n d itio n o f re g is tra tio n b y q u a lific a tio n o r
c o o rd in a tio n , th a t:
1.
a n y s e c u rity is s u e d w ith in th e p a s t th re e y e a rs o r to b e is s u e d to a p ro m o te r fo r a
c o n s id e ra tio n s u b s ta n tia lly d iffe re n t fro m th e p u b lic o ffe rin g p ric e , o r to a n y p e rs o n
fo r a c o n s id e ra tio n o th e r th a n c a s h , b e d e p o s ite d in e s c ro w .
2.
th e p ro c e e d s fro m th e s a le o f th e re g is te re d s e c u rity in th e s ta te b e im p o u n d e d u n til
th e is s u e r re c e iv e s a s p e c ifie d
a m o u n t fro m th e s a le o f th e s e c u rity .

Th e A d m in is tra to r m a y re q u ire , a s a c o n d itio n o f re g is tra tio n , th a t a n y s e c u rity
re g is te re d b y q u a lific a tio n o r c o o rd in a tio n b e s o ld o n ly o n a s p e c ifie d fo rm o f c o n tra c t
a n d th a t a s ig n e d c o p y o f e a c h c o n tra c t b e file d w ith th e A d m in is tra to r o r p re s e rv e d
fo r a p e rio d s p e c ifie d u p to th re e y e a rs .

E v e ry re g is tra tio n s ta te m e n t is e ffe c tiv e fo r o n e y e a r fro m its e ffe c tiv e d a te o r a n y
lo n g e r p e rio d d u rin g w h ic h th e s e c u rity is b e in g o ffe re d o r d is trib u te d , e x c e p t d u rin g
th e tim e a s to p o rd e r is in e ffe c t. A ll o u ts ta n d in g s e c u ritie s o f th e s a m e c la s s a s a
re g is te re d s e c u rity a re c o n s id e re d to b e re g is te re d fo r th e p u rp o s e o f a n y n o n -is s u e r
tra n s a c tio n :
1.
s o lo n g a s th e re g is tra tio n s ta te m e n t is e ffe c tiv e .
2.
b e tw e e n th e 3 0 th d a y a fte r th e e n try o f a n y s to p o rd e r s u s p e n d in g o r re v o k in g th e
e ffe c tiv e n e s s o f th e re g is tra tio n s ta te m e n t, a n d o n e y e a r fro m th e e ffe c tiv e d a te o f
th e re g is tra tio n s ta te m e n t. A re g is tra tio n s ta te m e n t m a y n o t b e w ith d ra w n fo r o n e
y e a r fro m its e ffe c tiv e d a te if a n y s e c u ritie s o f th e s a m e c la s s a re o u ts ta n d in g .
O th e rw is e , s u c h s ta te m e n t c a n b e w ith d ra w n a t th e d is c re tio n o f th e A d m in is tra to r.

S o lo n g a s th e re g is tra tio n s ta te m e n t is e ffe c tiv e , th e A d m in is tra to r m a y re q u ire th e
p e rs o n filin g to file n o t m o re th a n q u a rte rly to k e e p th e in fo rm a tio n in th e s ta te m e n t
re a s o n a b ly c u rre n t a n d to d is c lo s e th e p ro g re s s o f th e o ffe rin g .

A re g is tra tio n s ta te m e n t re la tin g to a s e c u rity is s u e d b y a fa c e a m o u n t c e rtific a te
c o m p a n y o r a re d e e m a b le s e c u rity is s u e d b y a n o p e n e n d m a n a g e m e n t c o m p a n y o r
u n it in v e s tm e n t tru s t (a s d e fin e d in th e In v e s tm e n t C o m p a n y A c t o f 1 9 4 0 ) m a y b e
a m e n d e d a fte r its e ffe c tiv e d a te to in c re a s e th e s e c u ritie s p ro p o s e d to b e o ffe re d .
Th is a m e n d m e n t b e c o m e s e ffe c tiv e w h e n th e A d m in is tra to r o rd e rs . E v e ry p e rs o n
filin g s u c h a n a m e n d m e n t m u s t p a y a filin g fe e w ith re s p e c t to th e a d d itio n a l
s e c u ritie s p ro p o s e d .


D e n ia l, S u s p e n s io n a n d R e v o c a tio n o f R e g is tr a tio n

Th e A d m in is tra to r m a y is s u e a s to p o rd e r d e n y in g e ffe c tiv e n e s s to , o r s u s p e n d in g o r
re v o k in g th e e ffe c tiv e n e s s o f, a n y re g is tra tio n s ta te m e n t if it is fo u n d :

1.
th a t th e o rd e r is in th e p u b lic in te re s t a n d
2.
th a t:
a.
th e s ta te m e n t is in c o m p le te in a n y m a te ria l
re s p e c t o r c o n ta in s a n y s ta te m e n t c o n s id e re d
to b e fa ls e o r m is le a d in g w ith re s p e c t to a n y m a te ria l fa c t.
b.
a n y p ro v is io n o f th e A c t o r a n y re g u la tio n h a s b e e n w illfu lly v io la te d b y :
(1 )
th e p e rs o n filin g th e s ta te m e n t.
(2 )
th e is s u e r, a n y p a rtn e r, o ffic e r o r d ire c to r o f th e is s u e r o r a n y p e rs o n c o n tro llin g o r
c o n tro lle d b y th e is s u e r if th e p e rs o n filin g th e s ta te m e n t is c o n tro lle d b y o r a c tin g fo r
th e is s u e r.
(3 )
a n y u n d e rw rite r
c.
th e s e c u rity re g is te re d o r to b e re g is te re d is th e s u b je c t o f a n y a d m in is tra tiv e s to p
o rd e r, in ju n c tio n o f a n y c o u rt o f c o m p e te n t ju ris d ic tio n e n te re d u n d e r a n y o th e r
fe d e ra l o r s ta te a c t; h o w e v e r, th e A d m in is tra to r m a y n o t in s titu te a p ro c e e d in g
a g a in s t a n e ffe c tiv e re g is tra tio n s ta te m e n t m o re th a n o n e y e a r fro m th e d a te o f th e
o rd e r o r in ju n c tio n a n d n o t u n le s s th e o rd e r o r in ju n c tio n w a s b a s e d u p o n fa c ts w h ic h
w o u ld c o n s titu te g ro u n d s fo r a s to p o rd e r.
d.
th e is s u e r's e n te rp ris e o r m e th o d o f b u s in e s s in c lu d e s ille g a l a c tiv itie s .
e.
th e o ffe rin g h a s w o rk e d o r te n d e d to w o rk a fra u d u p o n p u rc h a s e rs .
f.
th e o ffe rin g is m a d e w ith u n re a s o n a b le a m o u n ts o f u n d e rw rite rs ' a n d s e lle rs '
d is c o u n ts , c o m m is s io n s , o r o th e r c o m p e n s a tio n , o r p ro m o te rs ' p ro fits o r p a rtic ip a tio n ,
o r u n re a s o n a b le a m o u n ts o r k in d s o f o p tio n s .
g.
a s e c u rity s o u g h t to b e re g is te re d b y n o tific a tio n is n o t e lig ib le .
h.
a s e c u rity s o u g h t to b e re g is te re d b y c o o rd in a tio n a n d th e re is a fa ilu re to c o m p ly
w ith re q u ire m e n ts .
i.
th e a p p lic a n t o r re g is tra n t h a s fa ile d to p a y th e p ro p e r filin g fe e (o n ly a d e n ia l o rd e r
m a y b e e n te re d in th is c a s e a n d th is is v a c a te d w h e n th e d e fic ie n c y is c o rre c te d ).

Th e A d m in is tra to r m a y n o t in s titu te a s to p o rd e r p ro c e e d in g a g a in s t a n e ffe c tiv e
re g is tra tio n s ta te m e n t o n th e b a s is o f a fa c t o r tra n s a c tio n k n o w n to h im w h e n th e
s ta te m e n t b e c a m e e ffe c tiv e u n le s s th e p ro c e e d in g is in s titu te d w ith in th e n e x t 3 0
days.
Th e A d m in is tra to r m a y p o s tp o n e o r s u s p e n d th e e ffe c tiv e n e s s o f th e re g is tra tio n
s ta te m e n t p e n d in g fin a l d e te rm in a tio n o f a n y p ro c e e d in g . In s u c h c a s e , th e
a p p ro p ria te p e rs o n s m u s t b e n o tifie d th a t th e o rd e r h a s b e e n e n te re d a n d th e
re a s o n s fo r e n te rin g th e o rd e r a n d th a t w ith in 1 5 d a y s a fte r re c e ip t o f a w ritte n
re q u e s t, th e re w ill b e a h e a rin g . If n o h e a rin g is re q u e s te d o r o rd e re d , th e
A d m in is tra to r, a fte r n o tic e o f a n d o p p o rtu n ity fo r h e a rin g to e a c h p e rs o n , m a y m o d ify ,
v a c a te , o r e x te n d th e o rd e r u n til fin a l d e te rm in a tio n .

E x c e p t in th e p re c e d in g c a s e re la te d to th e fin a l d e te rm in a tio n o f a p ro c e e d in g , n o
s to p o rd e r m a y b e e n te re d w ith o u t:
1.
a p p ro p ria te p rio r n o tic e to th e a p p lic a n t o r re g is tra n t, th e is s u e r, a n d th e p e rs o n o n
w h o s e b e h a lf th e s e c u ritie s a re to b e o r h a v e b e e n o ffe re d .
2.
o p p o rtu n ity fo r h e a rin g .
3.
w ritte n fin d in g s o f fa c t a n d c o n c lu s io n s o f la w .
Th e A d m in is tra to r m a y v a c a te o r m o d ify a s to p o rd e r if h e fin d s th a t th e c o n d itio n s
p ro m p tin g its e n try h a v e c h a n g e d o r th a t it is o th e rw is e in th e p u b lic in te re s t.


E x e m p t S e c u r itie s

S e c u ritie s e x e m p t fro m re g is tra tio n a n d a d v e rtis in g filin g re q u ire m e n ts o f th e A c t, b u t
n o t its a n ti-fra u d p ro v is io n s , in c lu d e :
1.
U .S . G o v e rn m e n t a n d m u n ic ip a l s e c u ritie s .
2.
C a n a d ia n s e c u ritie s o r s e c u ritie s o f a n y o th e r fo re ig n g o v e rn m e n t w ith w h ic h th e
U n ite d S ta te s c u rre n tly m a in ta in s d ip lo m a tic re la tio n s .
3.
s e c u ritie s is s u e d b y b a n k s o rg a n iz e d in th e U n ite d S ta te s .
4.
s e c u ritie s is s u e d b y fe d e ra l s a v in g s a n d lo a n a s s o c ia tio n s , o r a n y b u ild in g a n d lo a n
o r s im ila r a s s o c ia tio n o rg a n iz e d u n d e r s ta te la w s .
5.
s e c u ritie s is s u e d b y a n d re p re s e n tin g a n in te re s t in o r a d e b t o f o r g u a ra n te e d b y
a n y in s u ra n c e c o m p a n y o rg a n iz e d in th e U n ite d S ta te s (n o t in c lu d in g a n n u ity
c o n tra c ts o r in v e s tm e n t c o n tra c ts , u n d e r w h ic h th e p ro m is e d p a y m e n ts a re n o t in
fix e d d o lla rs b u t d e p e n d u p o n th e in v e s tm e n t re s u lts o f a fu n d in v e s te d in s e c u ritie s ).
6.
s e c u ritie s is s u e d o r g u a ra n te e d b y a n y le g a lly o rg a n iz e d c re d it u n io n o r in d u s tria l
lo a n a s s o c ia tio n .
7.
s e c u ritie s is s u e d o r g u a ra n te e d b y a n y c o m m o n c a rrie r, p u b lic u tility , o r h o ld in g
c o m p a n y w h ic h is
a.
s u b je c t to th e ju ris d ic tio n o f th e In te rs ta te C o m m e rc e C o m m is s io n .
b.
re g is te re d u n d e r th e P u b lic U tility H o ld in g C o m p a n y a c t o f 1 9 3 5 (o r a s u b s id ia ry o f
s u c h a c o m p a n y ).
c.
re g u la te d in re s p e c t to ra te s a n d c h a rg e s b y a fe d e ra l o r s ta te g o v e rn m e n ta l
a u th o rity .
d.
re g u la te d in re s p e c t to is s u a n c e o r g u a ra n te e o f th e s e c u rity b y a g o v e rn m e n ta l
a u th o rity o f th e U n ite d S ta te s , a n y s ta te , C a n a d a , o r a n y C a n a d ia n p ro v in c e .
8.
s e c u ritie s lis te d o n th e N e w Y o rk , A m e ric a n , o r M id w e s t S to c k E x c h a n g e s (th e m o s t
re c e n t e d itio n o f th e la w s till re fe rs to th e C h ic a g o S to c k E x c h a n g e b y its o ld n a m e ),
a lo n g w ith a n y o th e r s e c u rity o f th e s a m e is s u e r o f s e n io r (if o u ts ta n d in g a t le a s t
th re e y e a rs w ith o u t d e fa u lt), o r e q u a l ra n k , a n y s e c u rity c a lle d fo r b y s u b s c rip tio n
rig h ts o r w a rra n ts s o lis te d , o r a n y w a rra n t o r rig h t to a c q u ire a n y o f th e fo re g o in g .
Th is is k n o w n a s th e b lu e c h ip e x e m p tio n . B y th e w a y , w h ile th e U n ifo rm A c t o n ly
re c o g n iz e s th e a b o v e th re e e x c h a n g e s a s "n a tio n a l" e x c h a n g e s , th e A c t d o e s
p ro v id e fo r e a c h A d m in is tra to r to in c lu d e a n y o f th e o th e r e x c h a n g e s fo r th e
e x e m p tio n in h is s ta te . N S M IA o f 1 9 9 6 c re a te d th e te rm "F e d e ra lly C o v e re d
S e c u rity " w h ic h , in a d d itio n to th o s e a b o v e , a d d e d N a s d a q N a tio n a l M a rk e t (N N M ),
(b u t n o t S m a llC a p ) a n d re g is te re d in v e s tm e n t c o m p a n ie s to th o s e s e c u ritie s e x e m p t
fro m s ta te re g is tra tio n .
9.
s e c u ritie s is s u e d fo r a n y th in g o p e ra te d n o t fo r p riv a te p ro fit b u t e x c lu s iv e ly fo r
re lig io u s , e d u c a tio n a l, b e n e v o le n t, c h a rita b le , fra te rn a l, s o c ia l, a th le tic , o r
re fo rm a to ry p u rp o s e s , o r a s a C h a m b e r o f C o m m e rc e , o r tra d e o r p ro fe s s io n a l
a s s o c ia tio n .
10.
c o m m e rc ia l p a p e r m a tu rin g w ith in n in e m o n th s o f th e d a te o f is s u a n c e , th a t is ,
is s u e d in m in im u m d e n o m in a tio n s o f $ 5 0 ,0 0 0 a n d is ra te d in o n e o f th e th re e h ig h e s t
ra tin g c a te g o rie s fro m a n a tio n a lly re c o g n iz e d ra tin g s e rv ic e , lik e S ta n d a rd & P o o r's
o r M o o d y 's .
11.
a n y in v e s tm e n t c o n tra c t is s u e d in c o n n e c tio n w ith a n e m p lo y e e 's s to c k p u rc h a s e ,
s a v in g s , p e n s io n , p ro fit s h a rin g , o r s im ila r b e n e fit p la n s o lo n g a s re q u ire d n o tic e is
g iv e n to th e A d m in is tra to r.
12.
in c e rta in s ta te s , s e c u ritie s is s u e d b y c o o p e ra tiv e s .


E x e m p te d T r a n s a c tio n s

Tra n s a c tio n s e x e m p t fro m re g is tra tio n a n d a d v e rtis in g filin g re q u ire m e n ts o f th e A c t,
b u t n o t its a n ti-fra u d p ro v is io n s , in c lu d e :
1.
a n y is o la te d n o n -is s u e r tra n s a c tio n .
2.
a n y n o n -is s u e r tra n s a c tio n b y o r th ro u g h a re g is te re d b ro k e r/d e a le r p u rs u a n t to a n
u n s o lic ite d o rd e r o r o ffe r to b u y (th e A d m in is tra to r m a y re q u ire th a t th e c u s to m e r
a c k n o w le d g e in a s p e c ifie d m a n n e r th a t th e s a le w a s u n s o lic ite d ).
3.
a n y tra n s a c tio n b e tw e e n th e is s u e r a n d a n u n d e rw rite r o r a m o n g u n d e rw rite rs .
4.
a n y tra n s a c tio n s e c u re d b y a re a l o r c h a tte l m o rtg a g e o r d e e d o f tru s t, o r b y a n
a g re e m e n t fo r th e s a le o f re a l e s ta te o r c h a tte ls if th e e n tire m o rtg a g e , d e e d o f tru s t,
o r a g re e m e n t to g e th e r w ith a ll e v id e n c e s o f in d e b te d n e s s (e .g ., b o n d s ) is o ffe re d
a n d s o ld a s a u n it.
5.
a n y tra n s a c tio n b y a n e x e c u to r, a d m in is tra to r, s h e riff, m a rs h a l, re c e iv e r in
b a n k ru p tc y , g u a rd ia n , o r c o n s e rv a to r.
6.
A n y tra n s a c tio n e x e c u te d b y a b o n a fid e p le d g e e w ith o u t a n y p u rp o s e o f e v a d in g th e
A c t.
7.
a n y o ffe r o r s a le to a b a n k , s a v in g s in s titu tio n , tru s t c o m p a n y , in s u ra n c e c o m p a n y ,
in v e s tm e n t c o m p a n y , p e n s io n o r p ro fit s h a rin g tru s t, o r o th e r fin a n c ia l in s titu tio n o r
in s titu tio n a l b u y e r. N o s p e c ific le v e l o f a s s e ts is n e c e s s a ry fo r th e b a n k , in s u ra n c e
c o m p a n y o r o th e r in s titu tio n a l b u y e r.
8.
a n y tra n s a c tio n p u rs u a n t to a n o ffe r d ire c te d to n o t m o re th a n 1 0 p e rs o n s (o th e r th a n
th o s e in (7 ) a b o v e ) in th e s ta te d u rin g a n y 1 2 c o n s e c u tiv e m o n th s , if:
a.
th e s e lle r re a s o n a b ly b e lie v e s th a t a ll th e b u y e rs in th e s ta te (o th e r th a n th o s e
s p e c ifie d in (7 )) a re p u rc h a s in g fo r in v e s tm e n t.
b.
n o c o m m is s io n o r o th e r re m u n e ra tio n is p a id o r g iv e n fo r s o lic itin g a n y b u y e r.
9.
a n y o ffe r o r s a le o f a p re o rg a n iz a tio n c e rtific a te o r s u b s c rip tio n , if:
a.
n o c o m m is s io n o r o th e r re m u n e ra tio n is g iv e n fo r s o lic itin g a n y p ro s p e c tiv e
s u b s c rib e r.
b.
th e n u m b e r o f s u b s c rib e rs is 1 0 o r le s s .
c.
n o p a y m e n t is m a d e b y th e s u b s c rib e r.
10.
a n y tra n s a c tio n p u rs u a n t to a n o ffe r to e x is tin g s e c u rity h o ld e rs o f th e is s u e r, if:
a.
n o c o m m is s io n o r o th e r re m u n e ra tio n is g iv e n fo r s o lic itin g a n y s e c u rity h o ld e r in th e
s ta te .
b.
th e is s u e r firs t file s a n o tic e s p e c ify in g th e te rm s o f th e o ffe r a n d th e A d m in is tra to r
d o e s n o t d is a llo w th e e x e m p tio n w ith in th e n e x t fiv e fu ll b u s in e s s d a y s .
11.
a n y o ffe r (b u t n o t s a le ) o f a s e c u rity fo r w h ic h re g is tra tio n s ta te m e n ts h a v e b e e n file d
u n d e r th is A c t a n d th e S e c u ritie s A c t o f 1 9 3 3 , if n o s to p o rd e r o r re fu s a l o rd e r is in
e ffe c t a n d n o p u b lic p ro c e e d in g lo o k in g to w a rd s u c h a n o rd e r is p e n d in g .
U p o n s p e c ifie d c o n d itio n s , a n A d m in is tra to r m a y d e n y o r re v o k e c e rta in e x e m p tio n s .
Th e o n ly o n e s y o u h a v e to k n o w fo r th e e x a m a re th e "B lu e C h ip " a n d th e n o n p ro fit
s e c u rity e x e m p tio n s a s w e ll a s a n y e x e m p t tra n s a c tio n . Th e b u rd e n o f p ro v in g a n
e x e m p tio n o r e x c e p tio n fro m a n y d e fin itio n is o n th e p e rs o n c la im in g it.
H e re 's a n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m :

U n d e r th e U n ifo rm S e c u ritie s A c t, w h ic h o f th e s e is tru e re g a rd in g re g is tra tio n o f
s e c u ritie s ?
I.
A s e c u rity w h ic h is e x e m p t fro m re g is tra tio n is e x e m p t fro m th e a d v e rtis in g a n d s a le s
lite ra tu re filin g re q u ire m e n ts .
II.
Th e A d m in is tra to r m a y e n te r a n o rd e r re v o k in g a s e c u rity e x e m p tio n w ith o u t p rio r
n o tic e to th e is s u e r.
III.
N o c la im fo r c iv il a c tio n m a y b e ta k e n a g a in s t th e is s u e r o f a n e x e m p t s e c u rity .
A.
I a n d II o n ly
B.
I a n d III o n ly
C .
II a n d III o n ly
D .
I, II a n d III
A . If a s e c u rity is e x e m p t fro m re g is tra tio n , o r if w e 're d e a lin g w ith a n e x e m p t
tra n s a c tio n , th e re is a n e x e m p tio n fro m th e filin g re q u ire m e n ts o f a d v e rtis in g a n d
s a le s lite ra tu re . If th e A d m in is tra to r fe e ls it is in th e p u b lic in te re s t to re v o k e th e
e x e m p tio n o f a p a rtic u la r s e c u rity , h e m a y d o s o w ith o u t p rio r n o tic e to th e is s u e r o r
o th e r p e rs o n s in v o lv e d . Th e is s u e r d o e s h a v e th e rig h t to a h e a rin g , g e n e ra lly w ith in
1 5 d a y s o f th e A d m in is tra to r re c e iv in g a w ritte n re q u e s t. J u s t b e c a u s e a s e c u rity is
e x e m p t fro m re g is tra tio n d o e s n 't m e a n th a t a n a g g rie v e d p u rc h a s e r c a n 't ta k e c iv il
a c tio n in th e a p p ro p ria te c o u rt o f la w . O n e m o re th in g , th e s e e x e m p t s e c u ritie s a n d
e x e m p t tra n s a c tio n s a re N O T e x e m p t fro m th e a n ti-fra u d p ro v is io n s o f th e A c t.

H e re 's a n o th e r e x a m p le o f a q u e s tio n y o u m a y s e e o n th e e x a m :

A ll o f th e fo llo w in g w o u ld b e e x e m p t tra n s a c tio n s u n d e r th e U n ifo rm S e c u ritie s A c t
EXC EPT
A.
a s a le o f s e c u ritie s b y a tru s te e in b a n k ru p tc y .
B.
th e o ffe r o f a s e c u rity fo r w h ic h re g is tra tio n s ta te m e n ts h a v e b e e n file d u n d e r th is A c t
a n d th e S e c u ritie s A c t o f 1 9 3 3 fo r w h ic h n o S to p O rd e r is p e n d in g . Th e is s u e is
e x p e c tin g a n e ffe c tiv e d a te n e x t w e e k .
C .
s to c k o ffe re d u n d e r a d is trib u tio n o f p re -e m p tiv e rig h ts w h e re n o c o m m is s io n o r
o th e r re m u n e ra tio n is p a id fo r s o lic itin g a n y s e c u rity h o ld e r in th e s ta te .
D .
a n y tra n s a c tio n p u rs u a n t to a n o ffe r d ire c te d to n o t m o re th a n 1 5 p e rs o n s in th e s ta te
d u rin g a n y 1 2 c o n s e c u tiv e m o n th s .
D . S a le s m a d e b y fid u c ia rie s , a s in c h o ic e A a re e x e m p t tra n s a c tio n s . If a
re g is tra tio n is p e n d in g , w ith n o a p p a re n t p ro b le m s , a n o ffe r (b u t n o t a s a le ), m a y b e
m a d e a s a n e x e m p t tra n s a c tio n . R ig h ts o ffe rin g s a re a lw a y s e x e m p t tra n s a c tio n s a s
lo n g a s th e te rm s d e s c rib e d h e re a re fo llo w e d . Th e p ro b le m w ith c h o ic e D is th a t
p riv a te p la c e m e n t lim ita tio n is 1 0 , n o t 1 5 .

O K , s o n o w w e 'v e d is c u s s e d e x e m p t s e c u ritie s a n d e x e m p t tra n s a c tio n s . H e re is a
s h o rt s u m m a ry th a t m a y h e lp y o u u n d e rs ta n d th e ir d iffe re n c e s a n d s im ila ritie s .

A n e x e m p t s e c u rity is e x e m p t fro m re g is tra tio n . S in c e th e p u rp o s e o f re g is te rin g a
s e c u rity is p ro te c tio n o f th e p u b lic , th e S ta te s h a v e e x e m p te d c e rta in is s u e rs e ith e r
b e c a u s e o f "w h o th e y a re " (fo r e x a m p le , g o v e rn e m e n t is s u e rs a n d n o n -p ro fit
o rg a n iz a tio n s a re u n lik e ly to d e fra u d th e p u b lic ) o r w h o e ls e th e y a re re g u la te d b y .
F o r e x a m p le , ra ilro a d s a re re g u la te d b y th e In te rs ta te C o m m e rc e C o m m is s io n ,
p u b lic u tilitie s b y th e v a rio u s s ta te P u b lic U tility C o m m is s io n s a n d N Y S E /A M E X , e tc .
lis te d s to c k s a n d N a s d a q N a tio n a l M a rk e t S e c u ritie s h a v e to m e e t s trin g e n t lis tin g
re q u ire m e n ts o f th e e x c h a n g e s o r N a s d a q . S in c e th e y a re e x e m p t fro m re g is tra tio n
w ith th e A d m in is tra to r, th e y a re a ls o e x e m p t fro m th e re q u ire m e n t to file a d s a n d
s a le s lite ra tu re .

A n e x e m p t tra n s a c tio n is e x e m p t fro m g e n e ra l o v e rv ie w b y th e A d m in is tra to r
b e c a u s e o f e ith e r th e n a tu re o f th e s a le o r th e p e rs o n to w h o m th e s a le is b e in g
m a d e . F o r e x a m p le , th e c la s s ic a l e x e m p t tra n s a c tio n is th e u n s o lic ite d tra d e w h e re
th e c lie n t c a lls th e a g e n t a n d re q u e s ts to b u y o r s e ll a p a rtic u la r s e c u rity . S in c e th e
la w is o n ly c o n c e rn e d w h e n a n "o ffe r to s e ll" o r "s a le " is m a d e , th is tra n s a c tio n is
e x e m p t. A n o th e r e x a m p le is th e "s a le " o f a s e c u rity to a fin a n c ia l in s titu tio n , s u c h a s
a b a n k , in s u ra n c e c o m p a n y o r in v e s tm e n t c o m p a n y . Th e A d m in is tra to r is b a s ic a lly
lo o k in g o u t fo r th e "little g u y " a n d th e la w is w ritte n to s ta te th a t tra n s a c tio n s w ith
th e s e ty p e s o f s o p h is tic a te d p u rc h a s e rs o f a re e x e m p t. S in c e th e tra n s a c tio n s a re
e x e m p t, th e re a re n o filin g re q u ire m e n ts fo r a d s a n d s a le s lite ra tu re .

N o w , w h a t a b o u t th e a p p a ra n t c o n fu s io n d e a lin g w ith e x e m p tio n fro m re g is tra tio n fo r
e x e m p t tra n s a c tio n s ? Th e U n ifo rm S e c u ritie s A c t p ro h ib its th e s a le o f s e c u ritie s in
th e s ta te u n le s s th e s e c u ritie s a re :
1.
re g is te re d in th e s ta te , o r
2.
e x e m p t fro m re g is tra tio n in th e s ta te , o r
3.
th e s u b je c t o f a n e x e m p t tra n s a c tio n .
W h a t th is m e a n s is th a t I c a n 't s e ll a n in d iv id u a l a n o n -e x e m p t c o m m o n s to c k in h is
s ta te u n le s s th a t s e c u rity is p ro p e rly re g is te re d . H o w e v e r, I c o u ld s e ll th a t s to c k to a
b a n k b e c a u s e e v e n th o u g h th e s e c u rity is n o t e x e m p t fro m re g is tra tio n , th e fa c t th a t I
a m s e llin g it in a n e x e m p t tra n s a c tio n a llo w s th e s a le w ith o u t th a t re g is tra tio n .

S o , w e d o n 't m e a n to s a y th a t e x e m p t tra n s a c tio n s a re e x e m p t fro m s e c u ritie s
re g is tra tio n . W h a t it m e a n s is th a t th e s e c u ritie s th a t a re th e s u b je c t o f a n e x e m p t
tra n s a c tio n d o n 't h a v e to re g is te r in th e s ta te e v e n if th e y w o u ld o th e rw is e h a v e to if
th e s a le w e re n o t b e in g m a d e a s a n e x e m p t tra n s a c tio n .

I k n o w th a t s o u n d s a b it c o n fu s in g , b u t I h o p e it h e lp s y o u s e e th e re la tio n s h ip
b e tw e e n th e tw o .


U n it 3 – B u s in e s s P r a c tic e s

In tr o d u c tio n

W h ile fra u d is a b ro a d te rm , th e re a re tw o th in g s y o u n e e d to re m e m b e r. F irs t, th e
e x a m w ill w a n t y o u to k n o w th a t it is "n o t lim ite d to c o m m o n -la w d e c e it." S e c o n d ly ,
w h e n e v e r th e q u e s tio n s d is c u s s fra u d , lo o k fo r th e w o rd w illfu l o r th in k o f th e w o rd
w illfu l, s in c e fra u d c a n n o t b e s o m e th in g a c c id e n ta l.

H e re 's a n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m :

A c tio n s c o n s id e re d to b e w illfu l v io la tio n s o f th e a n ti-fra u d p ro v is io n s o f th e U n ifo rm
S e c u ritie s A c t w o u ld in c lu d e
A.
th e c o n tro llin g s to c k h o ld e r o f a c o rp o ra tio n o ffe rs s o m e o f h is o w n s to c k fo r s a le .
B.
a n a g e n t re c o m m e n d in g a s to c k w h e n h e is u n a w a re th a t th e s e c u rity h a s n o t b e e n
re g is te re d in th is s ta te .
C .
a n in v e s tm e n t a d v is e r re p re s e n ta tiv e re c o m m e n d s th e p u rc h a s e o f a s to c k to
s e v e ra l o f h is c o n s e rv a tiv e c lie n ts . H e fa ils to te ll th e m th a t re lia b le s o u rc e s a re
p re d ic a tin g b a n k ru p tc y p ro c e e d in g s . N o n e o f h is c lie n ts ta k e h is re c o m m e n d a tio n .
D .
a ll o f th e a b o v e .
C . Th e re is n o th in g fra u d u le n t a b o u t A . W h ile th e a g e n t is m a k in g a n im p ro p e r
re c o m m e n d a tio n in B , it is n o t fra u d u le n t s in c e th e re is n o w illfu l in te n t. In c h o ic e C
th e a g e n t is a w a re o f th e n e w s a n d w illfu lly d e c lin e s to s h a re th a t w ith h is c lie n ts .
E v e n th o u g h n o tra d e w a s m a d e , th e a d v ic e w a s fra u d u le n t.

It is u n la w fu l fo r a n y p e rs o n , in c o n n e c tio n w ith a s e c u ritie s tra n s a c tio n , to :
1.
e m p lo y a n y d e v ic e , s c h e m e , o r a rtific e to d e fra u d ,
2.
m a k e a n y u n tru e s ta te m e n t o f a m a te ria l fa c t o r o m it s ta tin g a m a te ria l fa c t
n e c e s s a ry to m a k e s ta te m e n ts m a d e n o t m is le a d in g , o r
3.
e n g a g e in a n y a c t, p ra c tic e , o r c o u rs e o f b u s in e s s w h ic h o p e ra te s o r w o u ld o p e ra te
a s a fra u d o r d e c e it o n a n y p e rs o n .
E v e n th o u g h th is e x a m in a tio n d e a ls w ith in v e s tm e n t a d v is e rs , it is im p o rta n t to k n o w
th a t th e p ro v is io n s d e a lin g w ith fra u d a p p ly to a n y p e rs o n . Th is w o u ld in c lu d e , in
a d d itio n to in v e s tm e n t a d v is e rs , b ro k e r/d e a le rs , a g e n ts , b a n k s , e tc . It is a ls o
im p o rta n t to n o te th a t, u n lik e th e In v e s tm e n t A d v is e rs A c t o f '4 0 w h e re th e a n ti-fra u d
p ro v is io n s d o n o t re la te to s a le s o r o ffe rs to s e ll, th e U n ifo rm S e c u ritie s A c t fra u d
p ro v is io n s a p p ly to o ffe rs o r s a le s , a s w e ll a s a d v ic e . E v e n if th e tra n s a c tio n s re fe r to
e x e m p t s e c u ritie s o r e x e m p t tra n s a c tio n s , th e a n ti-fra u d p ro v is io n s a p p ly . F o r th e
e x a m , th e b e s t th in g to re m e m b e r is th a t th e re a re n o e x e m p tio n s fro m th e a n ti-fra u d
p ro v is io n s o f th e U n ifo rm S e c u ritie s A c t.

L e t's lo o k a t s o m e o f th e a n ti-fra u d p ro v is io n s s p e c ific a lly re la te d to in v e s tm e n t
a d v is o ry a c tiv ity .

It is u n la w fu l fo r a n in v e s tm e n t a d v is e r to e n te r o r to b e a p a rty to a n in v e s tm e n t
a d v is o ry c o n tra c t u n le s s it p ro v id e s in w r itin g th a t:

1.
th e in v e s tm e n t a d v is e r s h a ll n o t b e c o m p e n s a te d o n th e b a s is o f a s h a re o f th e
c a p ita l g a in s o r c a p ita l a p p re c ia tio n o n th e c lie n t's fu n d s .
2.
n o a s s ig n m e n t o f th e c o n tra c t m a y b e m a d e w ith o u t th e c o n s e n t o f th e o th e r p a rty to
th e c o n tra c t. P le d g in g th e c o n tra c t a s c o lla te ra l fo r a lo a n to th e a d v is e r
(h y p o th e c a tio n ) w o u ld b e c o n s id e re d a n a s s ig n m e n t.
3.
th e in v e s tm e n t a d v is e r, if a p a rtn e rs h ip , s h a ll n o tify th e o th e r p a rty to th e c o n tra c t o f
a n y c h a n g e in th e m e m b e rs h ip o f th e p a rtn e rs h ip w ith in a re a s o n a b le tim e a fte r th e
change.

A n in v e s tm e n t a d v is o ry c o n tra c t m a y p ro v id e fo r c o m p e n s a tio n b a s e d u p o n th e to ta l
v a lu e o f a fu n d a v e ra g e d o v e r a d e fin ite p e rio d o r a s o f a d e fin ite d a te . If a n
in v e s tm e n t a d v is e r is a p a rtn e rs h ip , n o a s s ig n m e n t is c o n s id e re d to b e m a d e if a
d e a th o r w ith d ra w a l re p re s e n ts o n ly a m in o rity in te re s t o f th e p a rtn e rs h ip o r th e
a d m is s io n o f n e w m e m b e rs to th e p a rtn e rs h ip is o n ly a m in o rity in te re s t. B u t, c h a n g e
to a m a jo rity in te re s t w o u ld b e c o n s id e re d a n a s s ig n m e n t a n d w o u ld re q u ire c lie n t
c o n s e n t.

Th e a b o v e d is c u s s io n is a lm o s t id e n tic a l to th a t fo u n d in
th e In v e s tm e n t A d v is e rs A c t o f 1 9 4 0 A c t. U n lik e th e '4 0 A c t,
h o w e v e r, th e re is n o d ire c t p ro v is io n fo r p e rfo rm a n c e b a s e d fe e s . H o w e v e r, th e re is
a s u b s e c tio n w h ic h w a s in c lu d e d in la te 1 9 8 6 th a t a u th o riz e s th e A d m in is tra to r to
p ro v id e fo r e x e m p tio n s b y ru le , o r o rd e r, to a c c o m m o d a te fe e s p e rm itte d u n d e r
S e c tio n 2 0 5 o f th e '4 0 A c t (p e rfo rm a n c e fe e s ). H o w e v e r, fo r te s t p u rp o s e s , y o u
s h o u ld a s s u m e th a t p e rfo rm a n c e fe e s a re N E V E R p e rm itte d u n le s s th e q u e s tio n
in d ic a te s th a t a n e x c e p tio n h a s b e e n m a d e .

N o in v e s tm e n t a d v is e r m a y ta k e o r h a v e c u s to d y o f a n y s e c u ritie s o r fu n d s o f a n y
c lie n ts u n le s s


     •
th e a d v is e r n o tifie s th e A d m in is tra to r in w ritin g th a t th e a d v is e r h a s o r m a y h a v e
c u s to d y .

     •

th e s e c u ritie s o f e a c h c lie n t a re s e g re g a te d , m a rk e d to id e n tify th e p a rtic u la r c lie n t
w h o is th e o w n e r a n d h e ld in s a fe k e e p in g in s o m e p la c e re a s o n a b ly fre e fro m ris k o f
d e s tru c tio n o r lo s s .

     •

a ll c lie n t fu n d s a re d e p o s ite d in o n e o r m o re b a n k a c c o u n ts c o n ta in in g o n ly c lie n ts '
fu n d s w ith th e a d v is e r a s a g e n t o r tru s te e fo r th o s e c lie n ts .

     •

th e in v e s tm e n t a d v is e r m a in ta in s a s e p a ra te re c o rd fo r e a c h c lie n t a c c o u n t s h o w in g
a ll tra n s a c tio n d e ta ils in v o lv in g th a t a c c o u n t.

     •

th e c lie n t is n o tifie d , in w ritin g , o f th e lo c a tio n o f th e fu n d s a n d s e c u ritie s a n d
re c e iv e s s ta te m e n ts o f h is /h e r a c c o u n t n o le s s fre q u e n tly th a n q u a rte rly .

     •

a t le a s t o n c e e a c h y e a r, a n a u d it o f th e s e a c c o u n ts is p e rfo rm e d b y a n in d e p e n d e n t
a c c o u n ta n t.
Y o u m u s t u n d e rs ta n d th a t th e te rm c u s to d y d o e s n o t in c lu d e p re p a y m e n ts o f
a d v is o ry fe e s o r in v e s tm e n t d is c re tio n . Y o u w ill n o te b y th e b re v ity o f th is p a ra g ra p h ,
th a t th e U n ifo rm S e c u ritie s A c t c o n ta in s v e ry little a b o u t c u s to d y . D is c lo s u re in
w ritin g is n e c e s s a ry w h e n e v e r a n a d v is e r is g o in g to a c t e ith e r a s a p rin c ip a l fo r h is
o w n a c c o u n t o r a s a n a g e n t fo r a th ird p a rty in h a n d lin g a s e c u ritie s tra n s a c tio n fo r a
c lie n t. In a d d itio n to d is c lo s u re , th e c lie n t's c o n s e n t m u s t b e o b ta in e d b e fo re
e x e c u tio n . Th e d is c lo s u re a n d c o n s e n t w o u ld b e re q u ire d w h e th e r th e tra n s a c tio n
w a s a b u y o r a s e ll. B ro k e r/d e a le rs d o n o t n e e d th e c lie n t c o n s e n t, a ll th a t is
n e c e s s a ry is th a t th e y d is c lo s e th e ir c a p a c ity o n th e tra d e c o n firm a tio n .

H e re 's a n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m :

Th e U n ifo rm S e c u ritie s A c t w o u ld c o n s id e r w h ic h o f th e fo llo w in g to b e a fra u d u le n t
o r p ro h ib ite d p ra c tic e o f a n in v e s tm e n t a d v is e r?
I.
S e llin g a re c o m m e n d e d s e c u rity to a c lie n t fro m th e firm 's o w n a c c o u n t w ith o u t
d is c lo s in g th a t fa c t
II.
M a in ta in in g c u s to d y o f a c lie n t's fu n d s o r s e c u ritie s w ith o u t n o tify in g th e
A d m in is tra to r
III.
F a ilu re to n o tify th e A d m in is tra to r th a t th e a d v is e r m a in ta in s fu ll d is c re tio n o v e r a ll
a c c o u n ts th a t p re p a y th e ir fe e s a t le a s t 6 m o n th s in a d v a n c e
A.
I a n d II o n ly
B.
I a n d III o n ly
C .
II a n d III o n ly
D .
I, II a n d III
A . It is re q u ire d th a t a n in v e s tm e n t a d v is e r a lw a y s d is c lo s e to h is c lie n ts th e p o te n tia l
c o n flic t o f in te re s t ra is e d b y s e llin g s e c u ritie s o u t o f th e firm 's in v e n to ry . It is a ls o
re q u ire d th a t n o tific a tio n b e g iv e n to th e A d m in is tra to r in o rd e r to m a in ta in c u s to d y o f
c u s to m e r fu n d s o r s e c u ritie s . D is c re tio n a n d p re -p a y m e n ts a re N O T c o n s id e re d to
b e c u s to d y a n d re q u ire n o n o tific a tio n to th e A d m in is tra to r.

A g e n ts a re p ro h ib ite d fro m e n g a g in g in d is h o n e s t o r u n e th ic a l b u s in e s s p ra c tic e s .
Th e s e p ro h ib itio n s a p p ly to b o th p u rc h a s e a n d s a le s a n d m a y o r m a y n o t b e
s p e c ific a lly d e s c rib e d in th e s ta te 's s e c u ritie s la w . S o m e p ra c tic e s a re e a s y to
id e n tify w h ile o th e rs a re n o t. S o m e o f th e a c tio n s w h ic h h a v e b e e n h e ld to b e
fra u d u le n t, d is h o n e s t, o r u n e th ic a l in c lu d e :
1.
fa ilin g to s ta te im p o rta n t fa c ts .
2.
te llin g a c u s to m e r th a t if a s e c u rity is re g is te re d w ith th e S E C o r s ta te s e c u ritie s
a d m in is tra to r, it m e a n s th a t it h a s b e e n a p p ro v e d b y th e re g u la to r.
3.
m a k in g in a c c u ra te s ta te m e n ts c o n c e rn in g c o m m is s io n s , m a rk u p s , o r m a rk d o w n s .
4.
m a k in g re c o m m e n d a tio n s o n th e b a s is o f m a te ria l in s id e in fo rm a tio n a b o u t th e
is s u e r n o t a v a ila b le to th e p u b lic .
5.
re n d e rin g in c o rre c t m a rk e t q u o ta tio n s .
6.
s h a rin g in th e p ro fits o r lo s s e s in a c u s to m e r's a c c o u n t:
a.
w ith o u t th e w ritte n c o n s e n t o f th e c u s to m e r.
b.
w ith o u t th e w ritte n c o n s e n t o f th e a g e n t's e m p lo y e r.
c.
in a n a c c o u n t n o t re la te d to th e a g e n t's p e rs o n a l in v e s tm e n t in th e a c c o u n t.
7.
e x e rc is in g d is c re tio n w ith o u t firs t o b ta in in g p rio r w ritte n p e rm is s io n fro m th e
c u s to m e r.
8.
te llin g a c u s to m e r th a t a s e c u rity w ill b e lis te d o n a n e x c h a n g e w ith o u t a n y
k n o w le d g e th a t s u c h lis tin g is to o c c u r.
9.
in te n tio n a lly n o t fo llo w in g a c u s to m e r's in s tru c tio n s .
10.
g u a ra n te e in g a p ro fit in a c u s to m e r's a c c o u n t.
11.
g u a ra n te e in g th a t a c u s to m e r w ill n o t b e p e rm itte d to lo s e .
12.
p ro m is in g to p e rfo rm s e rv ic e s fo r a c u s to m e r w ith o u t b e in g q u a lifie d o r w ith o u t re a lly
in te n d in g to p e rfo rm s u c h s e rv ic e s .
13.
b o rro w in g m o n e y fro m a c u s to m e r.
14.
n o t te llin g a c u s to m e r th a t c o m m is s io n s a n d ta x e s o n a tra n s a c tio n m a y b e la rg e r
th a n u s u a l.
15.
m a k in g tra n s a c tio n s n o t re c o rd e d o n th e e m p lo y e r's re c o rd s w ith o u t d is c lo s in g s u c h
a c tio n s to th e e m p lo y e r a n d re c e iv in g h is w ritte n p e rm is s io n .
16.
n o t m a k in g th e e m p lo y e r a w a re o f a c u s to m e r's w ritte n c o m p la in ts .
17.
s o lic itin g o rd e rs fo r s e c u ritie s w h ic h a re u n re g is te re d a n d n o n -e x e m p t.
18.
p a rtic ip a tin g in m a rk e t m a n ip u la tiv e tra n s a c tio n s , s u c h a s "w a s h s a le s ," w h ic h c re a te
a d is to rte d im p re s s io n o f a c tiv e tra d in g .
19.
m is re p re s e n tin g th e s ta tu s o f a c u s to m e r's a c c o u n t to th e c u s to m e r.
20.
m a k in g tra n s a c tio n s fo r a c u s to m e r w ith o u t a u th o rity .
21.
n o t o b ta in in g p rio r w ritte n a u th o riz a tio n w h e n a c c e p tin g o rd e rs fo r a c u s to m e r fro m a
th ird p a rty .
22.
c o m m in g lin g th e a g e n t's fu n d s w ith c u s to m e r fu n d s .
23.
m a k in g u n s u ita b le re c o m m e n d a tio n s o r tra n s a c tio n s , s u c h a s :
a.
c h u rn in g c u s to m e r a c c o u n ts , re c o m m e n d in g "e x c e s s iv e " tra n s a c tio n s .
b.
n o t m a k in g re a s o n a b le in q u iry o f c u s to m e rs a s to th e ir fin a n c ia l s itu a tio n , n e e d s a n d
o b je c tiv e s .
c.
n o t e x p la in in g im p o rta n t fa c ts a n d ris k s to c u s to m e rs .
d.
re c o m m e n d in g tra n s a c tio n s w ith o u t re a s o n a b le g ro u n d s .
24.
im p ly in g th a t th e a b ility o r e x p e rtis e o f th e b ro k e r/d e a le r o r a g e n t h a v e in a n y w a y
b e e n a p p ro v e d b y th e A d m in is tra to r.
U n d e r th e U n ifo rm S ta te S e c u ritie s A c t, a n a g e n t is p ro h ib ite d fro m e n g a g in g in th e
fo llo w in g a c tiv itie s s in c e th e y a re fra u d u le n t, d is h o n e s t o r u n e th ic a l:
1.
g u a ra n te e in g a c u s to m e r a g a in s t lo s s o n a p u rc h a s e .
2.
m is re p re s e n tin g a re tu rn o n a s e c u rity .
3.
e m p lo y in g a n y d e v ic e to d e fra u d .
4.
p e rfo rm in g a n y a c t w h ic h w o u ld o p e ra te a s a fra u d o n a n y p e rs o n .
5.
p a y in g c o m m is s io n s to a n in v e s tm e n t a d v is e r w ith o u t d is c lo s in g th is to th e c u s to m e r.
6.
b a c k d a tin g re c o rd s , s u c h a s c o n firm a tio n s o r o rd e r tic k e ts .
7.
m a k in g u n tru e s ta te m e n ts o f a m a te ria l fa c t o r fa ilin g to s ta te a m a te ria l fa c t.
8.
b o rro w in g m o n e y o r s e c u ritie s fro m a c u s to m e r.
9.
re c o m m e n d in g ta x s h e lte rs to p e rs o n s in lo w ta x b ra c k e ts .
10.
e n g a g in g in s e c u ritie s tra n s a c tio n s b a s e d u p o n in s id e in fo rm a tio n o r m a te ria l
n o n p u b lic in fo rm a tio n .
11.
s ta tin g th a t th e A d m in is tra to r h a s a p p ro v e d a n o ffe rin g , fo u n d a re g is tra tio n
s ta te m e n t to b e tru e a n d c o m p le te o r p a s s e d u p o n th e a c c u ra c y o r a d e q u a c y o f a
p ro s p e c tu s .
12.
s o lic itin g o rd e rs fo r u n re g is te re d n o n e x e m p t s e c u ritie s .
13.
te llin g a c u s to m e r th a t a s e c u rity re g is te re d w ith th e S E C o r a p a rtic u la r s ta te h a s
b e e n a p p ro v e d b y v irtu e o f s u c h re g is tra tio n s in c e th is is m is le a d in g .
14.
a tte m p tin g to o b ta in a w ritte n a g re e m e n t fro m a c u s to m e r th a t h e w ill n o t s u e th e
a g e n t o r b ro k e r/d e a le r e v e n th o u g h th e s a le o f s e c u ritie s is in v io la tio n o f s ta te la w .
A n y a g re e m e n t o f th is ty p e is n u ll a n d v o id .
15.
fa ilin g to b rin g w ritte n c o m p la in ts o f c u s to m e rs to th e a tte n tio n o f th e a g e n t's
e m p lo y in g b ro k e r/d e a le r.
16.
d e lib e ra te ly fa ilin g to fo llo w a c u s to m e r's in s tru c tio n s .
17.
s e llin g s p e c u la tiv e c o m m o n s to c k to c lie n ts w ith in c o m e o b je c tiv e s .
18.
im p ly in g th a t re g is tra tio n o f a s e c u rity m e a n s a p p ro v a l o f th e s e c u rity .
19.
b a c k d a tin g c o n firm a tio n s e v e n if th e y a re b a c k d a te d o n ly o n e d a y .
H e re 's a n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m :

Th e U n ifo rm S e c u ritie s A c t w o u ld c o n s id e r w h ic h o f th e fo llo w in g a c tio n s b y a n
a g e n t to b e fra u d u le n t, d is h o n e s t o r u n e th ic a l?
A.
Im p ly in g th a t s ta te a n d fe d e ra l re g is tra tio n o f th e s e c u rity h e is s e llin g m e a n s th a t th e
re g u la to ry b o d ie s h a v e a p p ro v e d o f th e is s u e
B.
G u a ra n te e in g a c u s to m e r a g a in s t lo s s in h is a c c o u n t
C .
L e a v in g o u t m a te ria l in fo rm a tio n h e d o e s n 't th in k th e c lie n t w o u ld u n d e rs ta n d
D .
A ll o f th e a b o v e .
D . Th e s e a re a ll p ro h ib ite d a c tiv itie s . Y o u c a n 't fa il to d is c lo s e c e rta in fa c ts u s in g th e
d e fe n s e th a t y o u r c lie n t is to o s tu p id to u n d e rs ta n d . R e m e m b e r, th e re g u la to ry
b o d ie s N E V E R a p p ro v e th e re g is tra tio n o f a n y s e c u rity .

H e re 's a n o th e r e x a m p le o f a q u e s tio n y o u m a y s e e o n th e e x a m :

Th e a n ti-fra u d p ro v is io n s o f th e U n ifo rm S e c u ritie s A c t a p p ly to
A.
banks.
B.
b ro k e r/d e a le rs .
C .
a c c o u n ta n ts p ro v id in g in v e s tm e n t a d v is e s tric tly in c id e n ta l to th e ir ta x p ra c tic e .
D .
a ll o f th e a b o v e .
D . Th e re is n o o n e , n o h o w , n o w a y w h o is e x e m p t fro m th e a n ti-fra u d p ro v is io n s o f
th e A c t.


S u ita b ility

F o r a n in v e s tm e n t to b e s u ita b le fo r a c u s to m e r, th e in v e s tm e n t m u s t m e e t th e
c u s to m e r's in v e s tm e n t o b je c tiv e s , fin a n c ia l s itu a tio n , a n d n e e d s .


In c e rta in in s ta n c e s , a n a g e n t
m a y m a k e a s u ita b le
re c o m m e n d a tio n to a
c u s to m e r. H o w e v e r,
th e c u s to m e r re q u e s ts
th a t a n o rd e r fo r a n o th e r
s e c u rity b e e x e c u te d . Th e
a g e n t fe e ls th a t th e s e c u rity
th e c u s to m e r w a n ts to
p u rc h a s e is n o t a s u ita b le
in v e s tm e n t. Th e a g e n t, in
th is c a s e , c a n e x e c u te th e
o rd e r, b u t it w o u ld b e w is e to
o b ta in a w ritte n s ta te m e n t fro m
th e c u s to m e r. Th e w ritte n s ta te m e n t s h o u ld m a k e c le a r th a t th e tra n s a c tio n w a s
u n s o lic ite d a n d n o t re c o m m e n d e d b y th e a g e n t.
A s s u m e a n a g e n t re c o m m e n d s a s u ita b le in v e s tm e n t to a c u s to m e r a n d th e
c u s to m e r d e c id e s to p u rc h a s e th e s e c u rity . Th re e d a y s a fte r th e p u rc h a s e , h is
s p o u s e c a lls a n d w a n ts to c a n c e l th e tra d e . In th is c a s e , th e tra n s a c tio n s h o u ld N O T
b e liq u id a te d b y th e firm a n d th e c u s to m e r w o u ld b e re s p o n s ib le fo r th e lo s s , if a n y .
Th e a g e n t a c te d p ro p e rly in th is tra n s a c tio n .


U n it 4 – A d m in is tr a tiv e P r o v is io n s

In tr o d u c tio n

Th e U n ifo rm S e c u ritie s A c t is a d m in is te re d b y a s p e c ifie d a d m in is tra tiv e a g e n c y . Th e
A d m in is tra to r a n d h is o ffic e rs a n d e m p lo y e e s a re p ro h ib ite d fro m u s in g fo r th e ir o w n
b e n e fit, a n y in fo rm a tio n o b ta in a b le fro m th e A d m in is tra to r w h ic h h a s n o t b e e n m a d e
p u b lic .

Th e A d m in is tra to r m a y m a k e p u b lic o r p riv a te
in v e s tig a tio n s w ith in o r o u ts id e th e s ta te if h e
b e lie v e s it n e c e s s a ry to d e te rm in in g w h e th e r
th e A c t h a s b e e n v io la te d o r to a id in e n fo rc in g
th e A c t. If h e s o d e s ire s , h e m a y re q u ire a p e rs o n to file a s ta te m e n t in w ritin g u n d e r
o a th a s to th e fa c ts a n d c irc u m s ta n c e s c o n c e rn in g a m a tte r u n d e r in v e s tig a tio n a n d
m a y p u b lis h in fo rm a tio n c o n c e rn in g a n y v io la tio n o f th e A c t o r ru le s o r o rd e rs u n d e r
th e A c t.

If a p e rs o n re fu s e s to o b e y a s u b p o e n a , th e a p p ro p ria te c o u rt, o n a p p lic a tio n o f th e
A d m in is tra to r, m a y o rd e r th e p e rs o n to a p p e a r b e fo re th e A d m in is tra to r a n d p ro d u c e
re q u e s te d e v id e n c e o r e ls e b e h e ld in c o n te m p t o f c o u rt.
If it a p p e a rs th a t a p e rs o n h a s e n g a g e d in o r is a b o u t to e n g a g e in a n a c t o r p ra c tic e
w h ic h v io la te s th e U n ifo rm S e c u ritie s A c t o r a n y ru le o r o rd e r u n d e r th e A c t, th e
A d m in is tra to r m a y b rin g a c tio n in th e a p p ro p ria te c o u rt to e n jo in th e a c t o r p ra c tic e
a n d e n fo rc e c o m p lia n c e w ith th e U n ifo rm S e c u ritie s A c t. A p e rm a n e n t o r te m p o ra ry
in ju n c tio n , re s tra in in g o rd e r, o r w rit o f m a n d a m u s m a y b e g ra n te d a n d a re c e iv e r o r
c o n s e rv a to r a p p o in te d fo r th e d e fe n d a n t o r th e d e fe n d a n t's a s s e ts . Th e
A d m in is tra to r m a y n o t b e re q u ire d b y th e c o u rt to p o s t a b o n d .

H e re 's a n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m :

A c c o rd in g to th e U n ifo rm S e c u ritie s A c t, w h e n a n A d m in is tra to r c o n d u c ts a n
in v e s tig a tio n
A.
h e m a y s e e k e v id e n c e a c ro s s s ta te lin e s .
B.
h e m a y o b ta in a n o rd e r fro m a c o u rt o f c o m p e te n t ju ris d ic tio n to h a v e a re c e iv e r
a p p o in te d o v e r th e d e fe n d a n t's a s s e ts .
C .
h e m a y a d m in is te r o a th s a n d s u b p o e n a w itn e s s e s .
D .
A ll o f th e a b o v e
D . A ll o f th e s e a re p o w e rs g ra n te d to th e A d m in is tra to r u n d e r th e U n ifo rm S e c u ritie s
A c t.


C r im in a l P e n a ltie s

A p e rs o n w h o w illfu lly v io la te s th e A c t o n c o n v ic tio n m a y b e fin e d n o t m o re th a n
$ 5 ,0 0 0 , o r im p ris o n e d n o t m o re th a n th r e e y e a rs , o r b o th . N o p e rs o n m a y b e
im p ris o n e d fo r a v io la tio n if h e p ro v e s h e h a d n o k n o w le d g e o f th e ru le o r o rd e r. N o
in d ic tm e n t m a y b e re tu rn e d u n d e r th is A c t m o re th a n fiv e y e a rs a fte r th e a lle g e d
v io la tio n . Th e A d m in is tra to r m a y re fe r e v id e n c e c o n c e rn in g w illfu l v io la tio n to th e
a tto rn e y g e n e ra l o r p ro p e r d is tric t a tto rn e y w h o m a y in s titu te a p p ro p ria te c rim in a l
p ro c e e d in g s .


C iv il L ia b ilitie s

A n y p e rs o n is s u b je c t to c iv il lia b ilitie s w h o o ffe rs o r s e lls a s e c u rity :
1.
in v io la tio n o f s p e c ifie d s e c tio n s o f th e A c t o r ru le o r o rd e r u n d e r s p e c ifie d s e c tio n s .
2.
b y m e a n s o f a n y u n tru e s ta te m e n t o f m a te ria l fa c t o r o m is s io n to s ta te s u c h a fa c t
n e c e s s a ry to m a k e s ta te m e n ts m a d e n o t m is le a d in g .
A p e rs o n s u b je c t to c iv il lia b ilitie s is lia b le to th e
p e rs o n b u y in g th e s e c u rity fro m h im . Th e b u y e r
m a y s u e e ith e r a t la w o r in e q u ity to re c o v e r th e
a m o u n t p a id , to g e th e r w ith in te re s t a t w h a te v e r
ra te is s tip u la te d b y th e A d m in is tra to r, c o s ts ,
a n d re a s o n a b le a tto rn e y 's fe e s , le s s th e a m o u n t
o f a n y in c o m e re c e iv e d o n th e s e c u rity . If h e n o lo n g e r o w n s th e s e c u rity , h e m a y
s u e fo r d a m a g e s . D a m a g e s a re th e a m o u n t th a t w o u ld b e re c o v e ra b le o n a te n d e r
le s s th e v a lu e o f th e s e c u rity w h e n th e b u y e r d is p o s e d o f it, a n d in te re s t a t th e a b o v e
s tip u la te d ra te p e r y e a r.

Th o s e p e rs o n s s u b je c t to c iv il lia b ilitie s in c lu d e n o t o n ly th e in d iv id u a l s e llin g th e
s e c u rity , b u t a ls o :
1.
e v e ry p e rs o n w h o d ire c tly o r in d ire c tly c o n tro ls a s e lle r w h o is lia b le .
2.
e v e ry p a rtn e r, o ffic e r, o r d ire c to r o f s u c h s e lle r o r p e rs o n p e rfo rm in g s im ila r fu n c tio n s .
3.
e v e ry e m p lo y e e o f s u c h s e lle r w h o m a te ria lly a id s in th e s a le .
4.
e v e ry b ro k e r/d e a le r o r a g e n t w h o m a te ria lly a id s in th e s a le .
Th e s e in d iv id u a ls a re lia b le jo in tly a n d s e v e ra lly u n le s s th e y c a n p ro v e th a t th e y d id
n o t k n o w a n d b y e x e rc is in g c a re c o u ld n o t h a v e k n o w n o f th e e x is te n c e o f th e fa c ts
o n w h ic h th e lia b ility is a lle g e d to e x is t.

A p e rs o n m a y n o t s u e u n d e r th e c iv il lia b ility s e c tio n o f th e A c t m o re th a n 3 y e a r s
a fte r th e c o n tra c t o f s a le o r g iv in g o f in v e s tm e n t a d v ic e o r 2 y e a r s a fte r d is c o v e ry o f
th e v io la tio n , w h ic h e v e r c o m e s firs t, a n d a p e rs o n m a y n o t s u e :
1.
if th e b u y e r re c e iv e d a w ritte n o ffe r, b e fo re th e s u it w h e n h e o w n e d th e s e c u rity , to
re fu n d th e c o n s id e ra tio n p lu s in te re s t a t th e s ta te s tip u la te d ra te le s s a n y in c o m e
re c e iv e d o n th e s e c u rity , a n d h e d id n o t a c c e p t th e o ffe r w ith in 3 0 d a y s o f its re c e ip t.
2.
if th e b u y e r re c e iv e d s u c h a n o ffe r w h e n h e d id n o t o w n th e s e c u rity , u n le s s h e
re je c te d th e o ffe r in w ritin g w ith in 3 0 d a y s o f its re c e ip t.


J u d ic ia l R e v ie w o f O r d e r s

A n y p e rs o n a g g rie v e d b y a fin a l o rd e r o f th e
A d m in is tra to r m a y o b ta in a re v ie w o f th e o rd e r in
th e a p p ro p ria te c o u rt b y filin g in c o u rt, w ith in 6 0 d a y s
a fte r th e e n try o f th e o rd e r, w ritte n p e titio n re q u e s tin g
th a t th e o rd e r b e m o d ifie d o r s e t a s id e . A c o p y o f
th is p e titio n is s e rv e d o n th e A d m in is tra to r w h o
th e n c e rtifie s a n d file s in c o u rt a c o p y o f th e
filin g a n d e v id e n c e o n w h ic h th e o rd e r w a s
e n te re d . A fte r th is , th e c o u rt h a s e x c lu s iv e
ju ris d ic tio n to a ffirm , m o d ify , e n fo rc e , o r s e t a s id e
th e o rd e r. If th e fin d in g s o f th e A d m in is tra to r a s to
th e fa c ts a re s u p p o rte d b y a c c e p ta b le e v id e n c e ,
th e y a re c o n c lu s iv e . Th e c o u rt m a y o rd e r
a d d itio n a l e v id e n c e to b e ta k e n a n d th e
A d m in is tra to r m a y m o d ify h is fin d in g s a n d
o rd e r o n th e b a s is o f s u c h a d d itio n a l e v id e n c e
a n d file th e n e w e v id e n c e a n d m o d ifie d o r n e w
fin d in g s w ith th e c o u rt. U n le s s th e c o u rt s o o rd e rs , th e c o m m e n c e m e n t o f a p p e a l
p ro c e e d in g s d o e s n o t o p e ra te a s a s ta y o f th e A d m in is tra to r's o rd e r.


S c o p e o f th e Ac t

Th e S c o p e o f th e A c t s e c tio n o f th e U n ifo rm S ta te S e c u ritie s C o d e d e fin e s w h a t "in
th is s ta te " m e a n s c o n c e rn in g o ffe rs a n d a c c e p ta n c e s o f o ffe rs to b u y o r s e ll
s e c u ritie s . Th e U n ifo rm S e c u ritie s A c t a p p lie s to a n o ffe r to b u y o r s e ll a n d
a c c e p ta n c e s o f o ffe rs to b u y o r s e ll, p ro v id e d :

1.
th e y o rig in a te fro m a s ta te .
2.
th e y a re d ire c te d to a n y o n e in a s ta te .
3.
th e y a re a c c e p te d in a s ta te .
Th e e n tire tra n s a c tio n w ill b e s u b je c t to th e A c t if a n y p a rt o f a n o ffe r is c o n s id e re d
"in th is s ta te ." A s s u m e a c u s to m e r w h o liv e s in G e o rg ia re c e iv e s a s o lic itin g
te le p h o n e c a ll fro m a n a g e n t in F lo rid a . Th e s ta tu te s o f G e o rg ia w o u ld a p p ly
b e c a u s e th e s o lic ita tio n w a s re c e iv e d in G e o rg ia . H o w e v e r, if th e a g e n t in F lo rid a
w a s o p e ra tin g fra u d u le n tly , th e S ta te o f F lo rid a c o u ld in s titu te a c tio n a g a in s t h im o n
th e th e o ry th a t a s ta te s h o u ld n o t b e u s e d a s a b a s e o f o p e ra tio n s fo r d e fra u d in g
p e rs o n s in o th e r s ta te s .

U n d e r th e U n ifo rm A c t, a n a d v e rtis e m e n t in a re g u la r n e w s p a p e r o r p e rio d ic a l is n o t
a n o ffe r in a n y o th e r th a n th e s ta te o f p u b lic a tio n . A p e rs o n c o u ld p la c e a n
a d v e rtis e m e n t in th e N e w Y o rk Tim e s a n d h a v e it fre e ly c irc u la te d in o th e r s ta te s
w ith o u t b e in g c o n s id e re d o ffe rs in th e o th e r s ta te s .

R a d io a n d te le v is io n p ro g ra m s a re c o n s id e re d to b e o ffe rs o n ly in th e s ta te fro m
w h ic h th e y o rig in a te . In o th e r w o rd s , th e y a re tre a te d in th e s a m e m a n n e r a s a
n e w s p a p e r o r p e rio d ic a l.

U n d e r th e U n ifo rm S e c u ritie s A c t, a n o ffe r to b u y o r s e ll is n o t m a d e in a s ta te w h e n :
1.
th e p u b lis h e r c irc u la te s a n a d in a n y b o n a fid e n e w s p a p e r o r o th e r p u b lic a tio n o f
g e n e ra l, re g u la r, a n d p a id c irc u la tio n e ith e r n o t p u b lis h e d in th e s ta te , o r w h ic h h a s
m o re th a n tw o -th ird s o f its c irc u la tio n o u ts id e th e s ta te .
2.
th e o ffe r is b ro a d c a s t o n a ra d io o r te le v is io n p ro g ra m o rig in a tin g o u ts id e th e s ta te
b u t re c e iv e d in th e s ta te .

A n e x a m p le o f a q u e s tio n y o u m ig h t s e e o n th e e x a m w o u ld b e :

A n in v e s tm e n t a d v is e r h a s its p rin c ip a l p la c e o f b u s in e s s in M o n ta n a , b u t is
re g is te re d in 2 0 o th e r s ta te s . If th e a d v is e r p la c e d a n a d in U S A To d a y , a n e w s p a p e r
c irc u la te d in a ll 5 0 s ta te s , it w o u ld b e c o n s id e re d
A.
a n o ffe r in M o n ta n a .
B.
a n o ffe r in a ll o f th e s ta te s in w h ic h th e a d v is e r is re g is te re d .
C .
a n o ffe r in e v e ry s ta te .
D .
th a t n o o ffe r is m a d e , s in c e th e p a p e r is n o t p u b lis h e d in M o n ta n a a n d h a s m o re
th a n tw o -th ird s o f its c irc u la tio n o u ts id e o f th a t s ta te .
D . Th is a n s w e r m e re ly re s ta te s th e R u le .


Ag e n c y C r o s s T r a n s a c tio n s

Th e la w d e fin e s a n a g e n c y c ro s s tra n s a c tio n fo r a n a d v is o ry c lie n t a s a tra n s a c tio n
in w h ic h a p e rs o n a c ts a s a n in v e s tm e n t a d v is e r in re la tio n to a tra n s a c tio n in w h ic h
th e in v e s tm e n t a d v is e r, o r a n y p e rs o n c o n tro llin g , c o n tro lle d b y , o r u n d e r c o m m o n
c o n tro l w ith th a t in v e s tm e n t a d v is e r, in c lu d in g a n in v e s tm e n t a d v is e r re p re s e n ta tiv e ,
a c ts a s a b ro k e r/d e a le r fo r b o th th e a d v is o ry c lie n t a n d a n o th e r p e rs o n o n th e o th e r
s id e o f th e tra n s a c tio n . W h e n a c tin g in th is c a p a c ity , th is p e rs o n is re q u ire d to b e
re g is te re d a s a b ro k e r/d e a le r in th is s ta te u n le s s e x c lu d e d fro m th e d e fin itio n .

A n in v e s tm e n t a d v is e r e ffe c tin g a n a g e n c y c ro s s tra n s a c tio n fo r a n a d v is o ry c lie n t
w ill b e in c o m p lia n c e w ith th e A c t if th e fo llo w in g c o n d itio n s a re m e t:
1.
th e a d v is o ry c lie n t e x e c u te s a w ritte n c o n s e n t a u th o riz in g th e a d v is e r to e ffe c t
a g e n c y c ro s s tra n s a c tio n s fo r th a t c lie n t.
2.
b e fo re o b ta in in g th is w ritte n c o n s e n t fro m th e c lie n t, th e in v e s tm e n t a d v is e r m u s t
m a k e fu ll w ritte n d is c lo s u re to th e c lie n t th a t, w ith re s p e c t to a g e n c y c ro s s
tra n s a c tio n s , th e a d v is e r w ill a c t a s b ro k e r/d e a le r fo r, re c e iv e c o m m is s io n s fro m a n d
h a v e a p o te n tia lly c o n flic tin g d iv is io n o f lo y a ltie s a n d re s p o n s ib ilitie s re g a rd in g b o th
p a rtie s to th e tra n s a c tio n s .
3.
a t o r b e fo re th e c o m p le tio n o f e a c h a g e n c y c ro s s tra n s a c tio n , th e a d v is e r s e n d s th e
c lie n t a w ritte n c o n firm a tio n in c lu d in g
a.
a s ta te m e n t o f th e n a tu re o f th e tra n s a c tio n .
b.
th e d a te th e tra n s a c tio n to o k p la c e .
c.
a n o ffe r to fu rn is h , u p o n re q u e s t, th e tim e w h e n th e tra n s a c tio n to o k p la c e a n d
d.
th e s o u rc e a n d a m o u n t o f a n y o th e r re n u m e ra tio n th e a d v is e r re c e iv e d o r w ill re c e iv e .
4.
a t le a s t a n n u a lly , a n d w ith o r a s p a rt o f a n y w ritte n s ta te m e n t o r s u m m a ry o f th e
a c c o u n t fro m th e a d v is e r, e a c h c lie n t is s e n t a w ritte n d is c lo s u re s ta te m e n t
id e n tify in g
a.
th e to ta l n u m b e r o f a g e n c y c ro s s tra n s a c tio n s d u rin g th e p e rio d fo r th e c lie n t s in c e
th e d a te o f th e la s t s ta te m e n t o r s u m m a ry a n d
b.
th e to ta l a m o u n t o f a ll c o m m is s io n s o r o th e r re m u n e ra tio n th e a d v is e r re c e iv e d o r
w ill re c e iv e in c o n n e c tio n w ith a g e n c y c ro s s tra n s a c tio n s fo r th e c lie n t d u rin g th e
p e rio d .
5.
e a c h w ritte n d is c lo s u re a n d c o n firm a tio n re q u ire d b y th is ru le m u s t in c lu d e a
c o n s p ic u o u s s ta te m e n t th a t th e c lie n t m a y re v o k e th e w ritte n c o n s e n t p re v io u s ly
g iv e n a t a n y tim e b y p ro v id in g w ritte n n o tic e to th e a d v is e r.
6.
n o a g e n c y c ro s s tra n s a c tio n m a y b e e ffe c te d in w h ic h th e s a m e in v e s tm e n t a d v is e r
re c o m m e n d e d th e tra n s a c tio n to b o th a n y s e lle r a n d a n y p u rc h a s e r.

N o th in g in th e ru le s h o u ld b e c o n s tru e d to re lie v e a n in v e s tm e n t a d v is e r o r a d v is e r
re p re s e n ta tiv e fro m a c tin g in th e b e s t in te re s ts o f th e c lie n t, in c lu d in g fu lfillin g h is
d u ty w ith re s p e c t to th e b e s t p ric e a n d e x e c u tio n fo r th e p a rtic u la r tra n s a c tio n fo r th e
c lie n t n o r s h a ll it re lie v e a n y in v e s tm e n t a d v is e r re p re s e n ta tiv e o f a n y o th e r
d is c lo s u re o b lig a tio n s re q u ire d u n d e r th e A c t.


F e d e r a l S e c u r itie s Ac ts

Y o u k n o w b y n o w th a t s ta te s e c u ritie s la w s a re s o m e tim e s re fe rre d to a s "b lu e s k y
la w s ." Th e y te n d to fo c u s o n o n e o r m o re o f th re e a re a s : re g is tra tio n o f p e rs o n s ,
re g is tra tio n o f s e c u ritie s , a n d fra u d u le n t b u s in e s s p ra c tic e s (th e U n ifo rm S e c u ritie s
A c t c o v e rs a ll th re e ).

In s tu d y in g fo r th e S e rie s 6 3 e x a m , y o u s h o u ld a ls o a c q u ire a b a s ic u n d e rs ta n d in g o f
th e fe d e ra l s e c u ritie s la w s a n d th e s c o p e o f th o s e la w s in c o m p a ris o n to s ta te
s e c u ritie s la w s . F e d e ra l s e c u ritie s a re k n o w n b y th e ir title s . Th e s c o p e o f s e v e ra l
m a jo r fe d e ra l a c ts is s u m m a riz e d o n th is s c re e n . P u t y o u r m o u s e o v e r e a c h A c t to
s e e a d e s c rip tio n o f it.


Se c u r itie s A c t O f 1 9 3 3

Se c u r itie s E x c h a n g e A c t O f 1 9 3 4

P u b lic U tility H o ld in g C o m p a n y A c t O f 1 9 3 5

M a lo n e y A c t O f 1 9 3 8

T r u s t In d e n tu r e A c t O f 1 9 3 9

In v e s tm e n t C o m p a n y A c t O f 1 9 4 0

In v e s tm e n t A d v is e r s A c t O f 1 9 4 0

Se c u r itie s In v e s to r P r o te c tio n A c t O f 1 9 7 0

A d m in is tr a tio n O f F e d e r a l Se c u r itie s L a w s

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