Series 63

By Investopedia AAA

The Foundation - The Uniform Securities Act (USA) - Definition Part 1

Blue Sky Laws
Each state has its own securities regulations, which are drawn from a master template known as the BLUE SKY LAWS. The USA clarifies who has jurisdiction if a securities violation occurs, while also specifying the powers of each state's administrator.
State regulations are designed to protect investors against securities fraud by requiring sellers of new issues to register their offerings and provide financial details. This allows investors to base their judgments on data that, while not approved by the administrator, has been the subject of some official review.

Look Out!
The main objective of the Blue Sky Laws is to protect individual investors from fraudulent activity.

As you progress through this book, that there are many exemptions for institutions. Use this concept as a pattern to recall exemptions, because the exam frequently focuses on exemptions from registration.

What Is the USA?
The Uniform Securities Act (USA) is NOT an actual set of laws. It is documented guidance for EACH STATE to use as a template when forming securities-related legislation. The origin of the Uniform Securities Act came from the mass amount of securities-related fraud that occurred in the early 1900s. Stock promoters would often convince individual investors to purchase investments that had no reasonable basis. Furthermore, with the lack of any uniformity between states, it was very hard to prosecute the shysters - if they were ever caught. The creation of Blue Sky Laws - and the Uniform Securities Act, which would come about in the middle of the century - arose to prevent securities fraud and protect investors.

Look Out!
It is important to know that the USA is not actual legislation, but is "model" legislation. This means that it is merely a "template" that each state uses in drafting its own legislation.The main purpose of the USA is to REGULATE securities professionals and the sale of securities to protect the public against fraud.

Important USA Definitions to Know
We're going to look at some of the most important definitions directly taken directly (quoted) from the Uniform Securities Acts along with some of the "official comments" that accompany the law. Some of the quotations will come from the 2002 act, because they more closely reflect the current state of regulation in the securities industry, and they work quite well for the concepts we're going to examine. We are then going to add our explanatory notes. The actual quotes from the law and the official comments are italicized - our notes are not. All emphasis markings in quotations from the law are ours, and not in the original.

The USA is long and complex and there are numerous Statements of Policy, Memoranda of Understanding (MoU) and Model Rules that have been published by NASAA - in the library on their website - which contain information related to the USA. We are only going to be concerned with those that are necessary for passing the Series 63 examination. You don't have to be a securities attorney to understand what we're going to present - just read the material, know the basics and do all the practice questions.

  • Adminstrator - "Administrator" means the [insert title of administrative agency or official]."
    Various states use different titles, so the USA was written to accommodate each state's preference in the title of this official. The Series 63 exam will normally refer to this person as the "administrator."
  • AGENT - "Agent" means an individual, other than a broker-dealer, who represents a broker-dealer in effecting or attempting to effect purchases or sales of securities or represents an issuer in effecting or attempting to effect purchases or sales of the issuer's securities."
    This, of course, is the individual to whom we usually refer as a registered representative. This person generally works for a broker-dealer, although he or she can be a person representing an issuer.
  • BANK - "Bank" means:
    1. A banking institution organized under the laws of the United States;
    2. A member bank of the Federal Reserve System;
    3. Any other banking institution, whether incorporated or not, doing business under the laws of a State or of the United States, a substantial portion of the business of which consists of receiving deposits or exercising fiduciary powers similar to those permitted to be exercised by national banks under the authority of the Comptroller of the Currency."

This definition will be most useful for the Series 63 preparation when we're examining the exceptions to various requirements. Banks are excluded from several definitions and exempt from many registration requirements. We'll have to establish the difference between those two words for the exam later on in this text.

  • BROKER-DEALER - "Broker-dealer" means a person engaged in the business of effecting transactions in securities for the account of others or for the person's own account. The term does not include:
    1. An agent;
    2. An issuer;
    3. A bank or savings institution
    4. A person who has no place of business in the state if:
      1. He effects transactions in the state exclusively with or through
        1. the issuers of the securities involved on the transactions,
        2. other broker-dealers, or
        3. banks, savings institutions, trust companies, insurance companies, investment companies (as defined in the Investment Company Act of 1940), pension or profit sharing trusts, or other financial institutions or institutional buyers, whether acting for themselves or as trustees or,
      2. The person is licensed properly in the state in which the firm maintains a place of business (not in this state) and the only business the firm does in this state is with an existing customer of the firm who is not a resident of this state.

Remember that under the USA, the term "person" has a very broad meaning and that when acting as a broker, the securities firm is making transactions for the accounts of others. When acting as a dealer, the firm is transacting business for its own account and inventory.

Here's an easy way to remember - just do your ABCs:

Agent/Broker/Commission and Principal/Dealer/Markup

An agent makes trades on behalf of others for commissions and a principal trades for its own account and is compensated by a markup on the securities sold.

Exam Tips and Tricks

For the Series 63 exam, it is quite often just as important to know what is not included in definitions as what the definition is. This is where the questions often get tricky. This is the first instance in which we see that "a bank is not"we will see several other instances of this nature. Banks are very frequently exempted from the USA. Take note of the pattern.

The Uniform Securities Act (USA) - Definitions Part 2

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