In most states, individuals who want to become licensed to sell securities must pass the Series 63 or Series 66 examination, depending on the level of other registration the individual has. The Series 63 exam allows individuals to become securities agents and to solicit orders for any type of security in a particular state. If you want to learn more about the Series 63 exam, read on as we go over it in detail and provide tips to help you get the score you need to move on to a career as a securities agent (that's the term used by the Uniform Securities Act (USA) for a registered representative).
The Uniform Securities Act is at the heart of the Series 63 exam. The act is not a federal law, it's a set of state laws based on a model created by an organization of people who administer securities laws within the states.
The organization responsible for the Series 63 (as well as the Series 65 and 66 exams) is the North American Securities Administrators Association (NASAA), which states in its Series 63 Exam Overview that "candidates should educate themselves about the Uniform Securities Act, as well as Statements Of Policy and Model Rules adopted by NASAA."
NASAA, as the name indicates, is an organization of securities administrators. The term administrator is a generic title used to indicate the person who is responsible for enforcing the Uniform Securities Act in a state. In various states this person is called "commissioner," "director" or "secretary of state for securities".
NASAA, as an organization, actually predates the major federal securities laws such as the Securities Act of 1933 and the Securities and Exchange Act of 1934. NASAA was formed in Kansas in 1916 and made its first efforts at standardizing U.S. securities laws shortly thereafter. The organization's goals were to protect the public by drafting model laws, which could be adopted by the individual states to prevent fraud, and to register the persons involved in the securities business. In the early days of securities regulation, a Kansas Supreme Court justice was quoted as saying that people were coming into his state and selling schemes that had no more substance than "so many feet of blue sky". As a result, the Uniform Securities Act came to be known as the Blue Sky Laws.
NASAA still is focused closely on the protection of the general public against fraud in the securities business. The Uniform Securities Act is, however, far more oriented toward the protection of the average investor than the protection of institutions. This is a concept that a person preparing for the exam should keep in mind while studying.
The first version of the Uniform Securities Act that gained broad acceptance by the states was drafted by the Uniform Law Commissioners in 1956. This version of the law still forms the foundation for most of the state laws and for the Series 63 exam. It is a template of uniform securities laws that enables states to form laws that suit their individual needs, while maintaining uniformity with the laws of other states.
A revision of the 1956 law was written by NASAA in 1985 and revised again in 1988, but was adopted by only a handful of states. In 2002, the Uniform Law Commissioners finalized the draft of a new Uniform Securities Act to bring the state law model in line with major federal legislation that had been passed in recent years. To date, acceptance of the new law by the states is still not widespread. The documents, Adopted Statements Of Policy, Resolutions And Memoranda Of Understanding and Adopted Model Rules of NASAA have been published by NASAA to assist regulators in bringing state securities laws based on the 1956 act into harmony with federal securities laws.
Federal and State Securities Law
A couple of the more recent Federal laws that have had a dramatic impact on the USA are the National Securities Markets Improvement Act of 1996 (NSMIA) and the Gramm-Leach-Bliley Act of 1999 (GLBA).
In the NSMIA, Congress preempted significant parts of a state's power to duplicate federal regulation. For example, it prohibits a state from subjecting an offering of federal covered securities to merit review and other registration requirements by the states. A principal effort of the 2002 Uniform Act was "to achieve better coordination of federal and state securities regulation." NSMIA was the law that defined federal covered securities, which are exempt from virtually all the provisions of the state laws. Another example, quite applicable to the Series 63 exam, is the registration of investment advisors. Under NSMIA, an investment advisor (or a firm) registers either with the Securities and Exchange Commission (SEC) (as a federal covered advisor) or with the state under the USA. The assets the firm manages, along with other considerations, are factors that specify the exact registration requirements.
Although not as critical to an understanding of how the USA functions, the GLBA of 1999 changed the nature of registration for broker-dealers and in certain cases, allowed banks to register as broker-dealers. Thus far, banks have continued the practice of creating broker-dealer subsidiaries rather than registering as such themselves. Under the USA, banks still enjoy a wide range of exemptions.
Structure and Major Themes of the Series 63 Exam
Series 63 candidates should be aware of the following initial challenges:
- Although there are three versions of the Uniform Securities Act, as mentioned above, only one of them, the 1956 Uniform Securities Act is relevant to the Series 63 exam. The 2002 version of this act may be more relevant to today's world, but so far, it has only been adopted by a handful of states. It is now extremely difficult to obtain a copy of the 1956 law, but, along with the Policy Statements, Memoranda of Understanding and Model Rules of NASAA, this law is the source material for the exam. (To learn more about this issue, see the Uniform Securities Act.)
- NASAA's Adopted Model Rules and Adopted Statements Of Policy are available on NASAA's website.
The major theme of the USA, as well as NASAA's goal as an organization, is the protection of the public against securities fraud. This is reflected in the way the Series 63 exam is broken down:
- State Securities Acts and related rules and regulations: 60% (36 questions)
- Ethical practices and fiduciary obligations: 40% (24 questions)
Let's look a bit more closely at the situation. The USA and the Rules of NASAA, in their essential form, state the following:
- Agents: What most people call "registered representatives" will be referred to as "agents" for the Series 63 exam. They must be registered with the state.
- Broker-Dealers: Must be registered with the state.
- Investment Advisors: Must be registered with the state (unless they are federal covered" advisors - these are firms).
- Investment Advisory Representatives (IAR): Must be registered with the state - these are the people who work for investment advisors.
- Securities: Must be registered with the state (unless exempt).
- Fraud, misrepresentation, dishonesty, manipulative and deceptive business practices are prohibited.
- Administrator: The state administrator is vested with considerable power for enforcing the USA and the rules.
Also watch out for other terminology with which you may not be familiar - terms such as hypothecation, remuneration and indemnification are common on the exam. Make sure you familiarize yourself with any novel words you find while studying - you may see many of them again when you take your test.
If you see a question that begins, "The administrator may..." the answer is frequently "all of the above". On the other hand, if you encounter a question that begins with the phrase, "The administrator must..."the answer is a short list. Again, the administrator has tremendous power under the USA.
That Word "Exempt"
Many of the problems a candidate will face come in the form of exceptions, exclusions and exemptions. The following are a couple of hints on how to handle those terms.
Terminology is often a difficulty cited by those who have taken the Series 63. A word that frequently causes confusion is "exempt". Merriam-Webster Online says that exempt is "free or released from some liability or requirement to which others are subject". Applying that idea to securities, if a stock is exempt from registration, it does not have to be registered.
But what if the question refers to a "non-exempt security"? Following the logic above, a non-exempt security would be one to which the state's laws would apply. This means that a non-exempt security would have to be registered, right?
Well, yes, most of the time.
For example, if a non-exempt stock was traded in an exempt transaction, it would not be a violation of the USA. Confusing? Yes, but become accustomed to the use of the word in those contexts.
A note from the official comments that accompany the 2002 USA may help to clarify this point (emphasis is the writer's own):
- "A (n) … exempt security retains its exemption when initially issued and in subsequent trading."
- "A … transaction exemption must be established for each transaction."
In other words, if a stock - let's say a NYSE-listed stock that was approved for listing at its initial public offering (IPO) - is exempt from registration under the USA, it is exempt in both the primary market and in subsequent secondary market trading.
If a stock is a non-exempt stock, it should be registered unless the circumstances that bring it into the state make the transaction exempt.
It may be helpful also to consider the word "exclusion" in the context of the USA as compared to exemption.
For example, in defining the term "security", the USA states that it does not include "an interest in a contributory or noncontributory pension or welfare plan subject to the Employee Retirement Income Security Act of 1974".
In other words, a qualified pension plan is excluded from the definition of security. Certain stocks, such as those listed on exchanges are, by contrast, exempt from registration.
The most frequent exemptions are:
- U.S. Government and Municipal Securities: As issuers, these are exempt from virtually everything except the anti-fraud laws. For the most part, we also can add securities issued by foreign governments with which the U.S. maintains diplomatic relations. The exam questions you see might focus on Canadian securities. In the case of Canada (only) the municipal securities also are exempt from registration under the USA.
- Banks: The regulatory structure for federal and state banking is, in most cases, considered sufficient to ensure that the public is not being defrauded. In other words, an additional layer of regulatory oversight for banks usually is deemed unnecessary.
- Other Institutions: The USA primarily is structured to protect the investing public - not institutions - from fraud. The essential idea here is that institutions are (or should be) sophisticated investors that have the expertise available to investigate securities offerings and can afford to take risks that the normal investor should not. Transactions with institutions almost always are exempt transactions.
Also note that if an exemption is available it normally will be taken. No one wants to spend the time or money registering if it is not required absolutely.
Common Test-Taking Problems
There are other difficulties that come up repeatedly when people take the Series 63 exam:
- Candidates often run short on time. A candidate is given 60 multiple-choice questions to answer in 75 minutes. That is an average of a minute and 15 seconds for each question. If you spend too long on any single question, you'll be rushed for the remainder of the session. You probably will have five experimental questions also, which will not be identified. These will not count in your score, and you'll be given extra time to complete them.
- When you're practicing for your exam (extensive practice is crucial), be sure to familiarize yourself with any words you don't understand - they may also appear on your exam. Spending too much time trying to interpret the language on your test could lead to the time crunch described above.
- The questions typically have a difficult structure. Many of them have been reported to use a double-negative structure and are often long and complex. Read these questions carefully, but avoid spending too much time on any one question.
Overcoming the common problems faced by Series 63 candidates can be the key to succeeding on the exam.
Practice Makes Perfect
Read a good textbook on the Series 63 exam and then do as many questions as possible. The more familiar you become with a subject in the question/answer format, the more prepared you will be for the exam. Try this method: Read the question, answer it and then immediately check the answer and read the explanation. This reinforces the learning process.
Pay Close Attention to Definitions
Much of the exam is centered on registration and exemptions - study these diligently and strategically and you'll be ahead of the game. For example, the list of investment contracts that are considered securities is quite lengthy. Those that are not securities make up a much shorter list - focus on those.
Remember the Structure of the Exam
Pay close attention to the number of questions on each subject. Look again at the relative percentage of questions above and focus your attention on the areas that will present you with the largest number of questions.
Read the question, look at the answer choices and then back at the question. Eliminate incorrect responses as quickly as possible and then check the question again. Choose your answer carefully and stick to your choice - changing answers can be lethal to your chances of passing.
Get the Easy Questions Right
Don't rush into a trap by not noticing the structure of a question. Many of the questions on the exam seem more difficult than they really are, but there are actually more easy questions than there are difficult ones. Don't miss any of the easy ones! In other words, you must decide exactly what the question is saying before attempting to answer it.
Watch Your Time
As you approach your test date, do your practice exams and time yourself. Don't get caught short of time on the real thing. Practice will help you avoid this stressful scenario.
The Bottom Line
With adequate preparation and a little know-how, you can increase your chances of passing the Series 63 exam on the first try.
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