Surety Bonds Alaska | Surety Bonds As Collateral

Series 63 - Unit 1 Registration of Persons

Series 63 - Unit 1 Registration of Persons

Terms in this set (...)

Uniform Securities Act (USA)
State Administrator
The USA was created to standardize the registration of securities in each state

Each State Administrator can implement regulations in its state

Think of the State Administrator as the SEC equivalent at the state level

All federal and state rules are designed to protect the public
Registration under the (USA)
Registration under the USA means registration at the STATE level

For example: A federally covered investment adviser (IA) is exempt from registration under the USA. This means, the IA is registered with the SEC and does NOT need to register with the state
What is a "Person"
Person - Just about any entity. Includes:
Natural persons: Human beings
Legal person: Govts, corps, partnerships, etc.

Person does NOT include:
Mentally incompetent individuals
Dead people
NISMIA (The National Securities Markets Improvement Act of 1996)
NISMIA separates federal laws from state laws

Federal rules take precedence of state rules

The rules of state govts cannot be more stringent than federal government rules

NISMIA defines federally covered securities and federally covered advisers

REMEMBER: Federally covered means NO state registration is required
Brokers & Dealers
Broker - Acts as an agent
Firm that executes trades for others
Charges a commission

Dealer - Acts as a principal
Firm that executes trades for its own account
Charges a mark-up

NOTE: A B/D executes trades for others and its own account
The following are not considered B/D

Agents (an agent is always a natural person employed by a B/D or issuer)

Banks or Trusts companies not engaged in B/D activities
States in which a B/D must register
B/D must register in each state that the B/D:
Has an office, or

In each state the B/D has public customers (B/Ds register with the state, NOT SEC)

TEST ALERT: B/Ds do NOT have a de minimus exemption (this means, a B/D must register in every state it has a public customer)

I/As do have a de minimis exemption
States in which a B/D does NOT need to register
A firm does not need to register as a B/D if:
It has NO place of business in that state, and
Its only customers in that state are:
>> Banks
>> Pension plans
>> Financial institutions
>> Insurance companies
>> Issuers
>> other B/Ds

Test Alert: A firm with a place of business in a state must register as a B/D even if it only has institutional customers in that state
B/D effecting transactions with EXISTING clients outside a state

Snowbird Rule
A B/D in Ohio has an EXISTING client living in Ohio. Client goes on vacation to Utah

The B/D can transact business for the client in Utah for a period of 30 days or less

If a client stays in Utah for more than 30 consecutive days, the B/D must register in Utah to transact business while the client is in Utah

Snowbird Rule allows a B/D to transact business with EXISTING clients outside states where they are registered for a period of no more than 30 days
Surety (or fidelity) bonds for B/Ds
Surety bond requirements. If B/D has:
Discretion -> Bond is required
No discretion -> Bond is NOT required

B/D does NOT need a surety bond if its net capital is higher than that required by the SEC

Administrator can accept cash or securities in lieu of a bond

Agents that may have discretion over a customers' accounts MAY need a surety bond

NOTE: IA's that have custody or discretion over customers accounts ALWAYS need a surety bond
Wrap fee account
Wrap fee account - an account in which a B/D manages customers account for a fee

A B/D that sets up a wrap fee accounts must also be registered as an IA

An agent that sets up a wrap fee account must also be registered as an IAR
When the Administrator can suspend, revoke, or deny a B/D's registration
The Administrator can suspend, revoke, or deny a B/Ds registration if the B/D or any of its key employees have been convicted of
Any felony (past 10 years)
A securities-related misdemeanor (past 5 years)
Any securities law violation (past 5 years)

Test Alert: Administrator cannot suspend or revoke a B/D if one of its agents fails to pay a fine
An agent is ALWAYS a natural person
An agent represents a B/D or issuer
An agent must register in every state:
>>Agent conducts business
>>Agent solicits business
>>Where an agent transacts business with an EXISTING client who spends more than 30 days outside a state where the agent is licensed (Snowbird Rule)
An individual representing:
If a person represents an ISSUER and,
Is paid a COMMISSION, the person must register as an agent.
Is paid a SALARY, the person may or not need to register as an agent.

A person representing a B/D must register as an agent REGARDLESS of the method of payment
Individuals EXEMPT from registering as agents
Individuals representing an ISSUER in the following are exempt from registering as agent (if NO commissions are paid)

Selling exempt securities
Engaging in exempt transactions
Selling bank securities
Transactions with underwriters
Clerical or administrative functions (no sales)
Selling commercial paper (9 month maturity)
>>Paid as salary ->Exempt
>>Paid a commission -> NOT EXEMPT
Individuals representing ISSUERS that ARE REQUIRED to register as agents
An individual representing an ISSUER in the following is NOT exempt from registering as an agent (i.e., must register as an agent)

Selling non-exempt securities
Engaging in non-exempt transactions
Engaging in transactions for commissions (or nominal compensation)

Not exempt means MUST REGISTER
Individuals EXEMPT from registering as agents if they represent the following ISSUERS
An individual representing the following issuers is exempt from registering as an agent:
US Govt and agencies
Municipal Govts
Corps: only if selling exempt securities (commercial paper or bankers acceptance)

>>Paid a salary -> EXEMPT
>>Paid a commission -> NOT EXEMPT
Officers, directors, and partners of a B/D
When a B/D registers with a state, its officers directors and partners:

Are automatically registered as agents
Do NOT need to take a test (but they must pay the state filing fee)

If a question asks "when is an agent exempt from registering as an agent", the answer is "NEVER" (An INDIVIDUAL may be exempt
Agents employed by more than one B/D (Dual registration)

Agents sharing commissions
Agents can represent two B/Ds if:
Both B/Ds are owned by the same holding company
Both B/Ds consent to the dual registration

Agents can share commission if
Both B/Ds are under common control
Both B/Ds consent, and
Agents are in the same state
Canadian broker/dealers
A canadian B/D with no place of business in a state may affect transactions with:

A canadian resident temporarily residing in a state who is a current customer of the B/D

A canadian resident residing in a state and whose transactions are in a self directed tax-advantaged retirement plan in Canada in which the person is the holder or contributor

No registration is required in a state if a B/D has no place of business and only deals with institutions
Registration of Canadian B/D and agents
For a Canadian B/D to register in a state, it must:

File consent to service of process

File an application in the form required by the jurisdiction where the B/D has its principal office in canada

Be in good standing in its jurisdiction

Be a member of an SRO or stock exchange in Canada

An agent must meet all the above requirements except being a member
Investment Advisers Act of 1940
An investment adviser is a firm that provides advice on securities for a fee

An individual employed by an IA is called an IAR

A B/D that charges a fee for advice must also register as an IA

An agent that provides advice for a fee must also register as an IAR

RR represents B/D
IAR represents IA
Firms that must register as IA
A firm must register as an IA if it is holding itself out to the public as being in business of providing advice through the use of:
Business Cards
Phone Directory
Business Sign

Investment Advisers include:
Pension plan consultants
Investment counselors
Financial Planners
Firms providing investment advisory services
Persons NOT required to register as IA

B/D that do NOT charge a separate fee

Lawyers, accountants, teachers, and engineers (LATE) whose advice is incidental to their regular business and do not charge a separate fee

A firm that ONLY advises people about US Government Securities

Publishers of newspapers and magazines of general and regular circulation
Investment adviser registration: State or Federal
If Firm manages $25Mil or less registers with State
If Firm manages $30 million or more register SEC
Between $25 and $30 million can choose State or SEC

Firms doing business in 30 states must register with SEC even if managing less than $25 million

Pension plan consultants managing at least $50 million must register as IAs with the SEC
Investment advisers exempt from registration under the USA
IAs registered with the SEC are federally covered and are exempt from registration under the USA (exempt from STATE registration). They include
IAs managing $30million or more
Pension plan consultants managing at least $50M
IAs doing business in 30 states or more

Federally covered IAs do not register with the state, but must give notice to the Administrator and pay state fees
Registration of LEGAL entities
Investment companies ALWAYS register with the SEC (regardless of assets)

Pension plan registration:
Less than $50M -> State registration
$50M or more -> SEC registration

IA's with NO office in state
De minimis exemption
An IA with no place of business in a state and whose ONLY clients in the state are the following does NOT need to register in that state:

Financial institutions (banks, ins companies)

Other Investment Advisers


Fewer than 6 (5 or less) public clients in 12 consecutive months (de minimus exemption)

De minimus exemption does NOT apply to B/D's
Who must register as an IAR
Employees of the IA that provide investment advice

Officers, directors, and partners of the IA

Anyone who controls or is controlled by the IA

Sports agents that provide advice for a fee

Officers, directors, and partners are automatically registered as IAR's when the IA registers (similar to officers, directors, and partners of a B/D are automatically registered as agents) In both cases, they must notify the Administrator and pay fees
Who is EXEMPT from registering as an IAR
Who does NOT register as an IAR? Anyone:

With clerical functions only
With ministerial (admin) functions only
Giving advice W/O any special compensation for the advice

De minimis exemption does not apply to the IAR, it only applies to the firm itself, the IA

IAR must register in every state he has a client (even if advising only one client in that state)
Functions of an IAR
Functions of an IAR include:
Providing investment advice
Soliciting investment advisory services
Managing customers accounts
Supervising individuals with the above functions

IAR is ALWAYS and individual
Individuals registered as IA or B/D
IA is a firm that provides investment advice for a fee
IAR represents the IA

B/D is a firm that transacts for others and for its own account
An agent (RR) represents a B/D

An individual can be registered as an IA or B/D if the individual is a sole proprietor
Issuer and Nonissuer
Any person who issues or proposes to issue a security

Any person other than an issuer

REMEMBER: A person could be a natural person or a legal person
Licensing process
All registrants (B/Ds, agents, issuers, IAs and IARs) must register with the State Administrator (unless exempt)

All registrations must be renewed by 12/31

Registations become effective NOON on the 30th day after an application has been filed

Agents (RRs) and IARs must pass an exam
Consent to service process
Consent to service process:

Must be submitted to each Administrator in the state in which the applicant intends to register

Appoints the state Administrator as the applicants attorney to process non-criminal complaints against the applicant

Must be submitted with INITIAL application

Does NOT need to be renewed each year
Registration of a SUCCESSOR investment advisory firm
The successor firm need NOT be in existence when the application for registration is filed

Filing fee is NOT required with the application

The successor firms registration will be effective for the UNEXPIRED portion of the year
Recordkeeping for B/Ds and IAs
Records must be kept for:
3 years for B/D
5 years for IA
Records must be readily accessible for 2 years

Administrator can inspect files at anytime
Corrections must be reported promptly
All regulations also apply to emails
Capital requirements for B/Ds and IAs
B/Ds must maintain minimum net capital

IAs must maintain minimum net worth

Easy way to remember: Letter C is between the letters B and D -> B/D must maintain net Capital

Note: RR and IARs
Do NOT have any financial requirements
May have their license revoked or suspended for bankruptcies, liens, etc.
Who notifies the Administrator when:
Agent Terminates
IAR Terminates
When an agent terminates Both agent and B/D notify the administrator

When an IAR terminates
If IA is federally covered -> IAR notifies the Administrator
If IA is registered with the state -> IA (the firm) notifies the Administrator