The Foundation - The Uniform Securities Act (USA) - Definitions Part 3

  • FEDERAL COVERED INVESTMENT ADVISER - "Federal covered investment adviser" means a person registered under the Investment Advisers Act of 1940."

This term (along with the next term) came into being when the NSMIA Law of 1996 was implemented. This law split the registration of investment advisers into: 1) those firms registered with the federal government (with the SEC) -these are the Federal Covered Investment Advisers and 2) those registered with the states under the USA. The quote above came from the 2002 USA, but a Memorandum of Understanding by NASAA in 1997 amplifies the definition. Notice that broker-dealers are still required to register with both the SEC and the state while the IA is only required to register with one. We will take a closer look at this issue later on.

  • FEDERAL COVERED SECURITY - "Federal covered security" means a security that is, or upon completion of a transaction will be, a covered security under Section 18(b) of the Securities Act of 1933 ..."

    You may notice that this isn't a very helpful definition (from the 2002 USA) for folks who aren't lawyers or securities law professionals. Much more useful are the official comments that are a part of that law's documentation.

    "The National Securities Markets Improvement Act of 1996, as subsequently amended, partially preempted state law in the securities offering and reporting areas ...

    Section 18(b) of the Securities Act of 1933 applies to four types of "covered securities":

 

  1. Securities listed or authorized for listing on the New York Stock Exchange (NYSE), the American Stock Exchange (Amex); the National Market System of the Nasdaq stock market;
     
  2. Securities issued by an investment company registered with the SEC (or one that has filed a registration statement under the Investment Company Act of 1940)."

Adding to this list, the Official Comments accompanying the USA of 2002 state that:

Under Rule 146 the SEC has designated as federal covered securities under Section 18(b)(1) Tier I of the Pacific Exchange; Tier I of the Philadelphia Stock Exchange; and The Chicago Board Options Exchange on condition that the relevant listing standards continue to be substantially similar to those of the New York, American, or Nasdaq stock markets ..."

So what does all of this really mean? (You don't have to know that rule number, or what Tier I represents, by the way). The basic concept is that if the issuer of a security - the corporation - has achieved a level of financial strength and stability that is sufficient for it to be listed on one of the exchanges or the Nasdaq National Market (NNM) system, there is no need to have it examined by and registered again with the state. This is one of the major securities market simplification thrusts of NSMIA - the elimination of repetitive registration.

  • FRAUD - "Fraud," "deceit," and "defraud" are not limited to common law deceit."
    This is a statement that runs unchanged in all versions of the USA. Webster's New World Dictionary says that "common law" means "the law of a country or state based on custom, usage and the decisions and opinions of law courts." In practical terms, common law means that persons cannot lie, cheat, or steal in the securities business. The Statements of Policy and Model Rules of NASAA are quite a bit more specific, as you will see. In this book, any instances in which we define a term, other than ones defined in the USA, the definition comes from Webster's New World Dictionary unless otherwise indicated. About 35% of the Series 63 exam focuses on fraudulent and other prohibited practices.
The Uniform Securities Act (USA) - Definitions Part 4


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