NASAA Series 63 flashcards

Under the Uniform Securities Act, no indictment or information may be filed more than five years after the alleged violation.

• Five-year limit applies to criminal prosecutions
• Separate from the civil liability statute of limitations
• Time runs from the date of the violation, not discovery

Memory trick: Five years to prosecute, or the case evaporates.

An agent generally may be registered with only one broker-dealer at a time unless the firms are affiliated or the Administrator's rules provide an exception.

• Prevents conflicts of interest and supervisory gaps
• Affiliated BD structures are a recognized exception
• Distinct from an agent registering in multiple states, which is permitted

Memory trick: One Agent, One Firm (Unless Family)

Bona fide sales by executors, administrators, guardians, sheriffs, marshals, or trustees in bankruptcy are exempt transactions under the USA.

• Covers estate, guardianship, and court-ordered sales
• Fiduciary status, not commission, is key
• Antifraud rules still apply

Memory trick: Fiduciaries handling others' assets get a free pass.

Employees of an investment adviser whose duties are solely clerical or ministerial (no advice, no client contact, no discretion) are excluded from the IAR definition.

• Applies to back-office, administrative staff
• No recommendations or discretionary authority means no IAR status
• Firm-level registration does not extend IAR status to every employee

Memory trick: Paper pushers don't need papers (registration).

Accepting and receiving payment under a bona fide rescission offer bars the buyer from bringing further legal action for that same violation.

• Offer must be made in good faith and calculated correctly.
• Bars future suits only for the specific violation covered.
• Encourages issuers to self-correct registration/fraud violations proactively.

Memory trick: 'Accept the check, close the book — no second bite once rescission's took.'

A performance fee structure that rises and falls symmetrically with a fund's performance relative to a benchmark, permitted for registered investment companies without regard to the qualified client standard.

• Fee must be symmetrical (rewards gains, penalizes losses equally)
• Applies specifically to registered investment company clients
• Distinct exception from the general qualified client performance-fee rule

Memory trick: Symmetrical swing lets the fulcrum fee sing

A transaction exemption that applies when a customer, without solicitation, requests execution of an order for an unregistered nonissuer transaction.

• Exempts the transaction, not the security
• Agent and broker-dealer must still be properly registered
• Does not apply if the agent recommended or solicited the trade

Memory trick: Client calls first = unsolicited exemption applies

Sales between broker-dealers are exempt transactions because the parties are professionals not needing registration protections.

• Applies whether acting as principal or agent
• One of several institutional/professional exemptions
• Does not exempt fraud liability

Memory trick: Pros trading with pros need no protection.

Securities issued by the U.S., Canada, or their political subdivisions/agencies are exempt securities under the USA.

• Applies to Canada and Canadian provinces, not just the U.S.
• No registration required for exempt securities
• Exemption is from registration, not from antifraud provisions

Memory trick: North America's governments get a free pass.

A supervised person of a federal covered adviser must register as an IAR in a state if they maintain a place of business there and have more than five retail clients who are natural persons resident in that state.

• Threshold is 'more than five' retail natural-person clients in 12 months
• Requires a place of business in the state to trigger registration
• Institutional clients do not count toward the five-client threshold

Memory trick: Five's the line — cross it, sign

An agent may transact business with up to five retail clients in a state during any 12-month period without registering there, if the broker-dealer is registered or exempt in that state.

• Limit is five retail clients per 12-month period
• Institutional clients typically don't count toward the limit
• Broker-dealer must itself be properly registered or excluded

Memory trick: Five friends, twelve months, no fuss.

Banks, savings institutions, and trust companies are excluded from the investment adviser definition when performing customary fiduciary and trust functions.

• Exclusion applies to depository institutions, not their holding companies
• Covers trust and fiduciary account management
• No fee-based or client-count exception negates this exclusion

Memory trick: Banks bank on their own exclusion.

If a person refuses to comply with an Administrator's subpoena, the Administrator must seek court assistance, and the court may hold the person in contempt.

• Administrators cannot enforce subpoenas unilaterally
• Courts have contempt power over noncompliant witnesses
• This process applies to both in-state and out-of-state witnesses

Memory trick: No badge without the judge — courts back the subpoena.

A valid rescission offer must return the purchase price plus interest at the legal rate, reduced by any income the buyer already received.

• Formula: Purchase price + interest − income received.
• Interest calculated at the state's legal rate, simple interest.
• Acceptance of a bona fide offer generally bars further legal action on that transaction.

Memory trick: 'Add the interest, subtract the dividends — that's the rescission math trick.'

A person compensated for soliciting or referring clients to an investment adviser is generally considered an investment adviser representative under the USA, even without giving advice directly.

• Solicitation for compensation triggers IAR status
• No minimum dollar threshold exemption exists
• Must meet state's IAR registration and disclosure requirements

Memory trick: Paid to bring in clients? You're an IAR too.

An exemption for infrequent, non-recurring sales of securities by a person other than the issuer, such as a single sale by a shareholder.

• Applies to nonissuer (secondary market) sales
• Must be isolated, not part of a series of transactions
• Commonly used by individual shareholders selling personal holdings

Memory trick: One-and-done sale by a shareholder is isolated and exempt

Broker-dealers must generally retain required books and records for five years, keeping the first two years' records in an easily accessible location.

• Five-year retention is the general standard
• First two years must be readily accessible on-site or similar
• Mirrors SEC recordkeeping rules for consistency across regulators

Memory trick: Five years total, two years handy.

Short-term promissory notes maturing in 9 months or less, rated in one of the top three categories, and sold in denominations of $50,000 or more, are exempt securities.

• Maturity of 9 months or less
• Top three rating categories required
• Minimum denomination of $50,000

Memory trick: Nine months, top-three rated, fifty-thousand minimum = exempt paper

A broker-dealer with no place of business in a state is excluded from that state's BD definition if its only in-state clients are other broker-dealers, the issuer, or certain institutional investors.

• Exclusion requires no physical office in the state
• Clients must be limited to BDs, issuers, or institutions
• Different from the agent de minimis exemption, which allows some retail clients

Memory trick: No office, only institutions, no need to register.

Absent denial or a stop order, a broker-dealer or agent registration becomes effective automatically at noon on the 30th day after a complete application is filed.

• 30-day default period runs from filing of complete application
• Administrator may shorten this by rule or order
• Applies similarly to agents, investment advisers, and IARs

Memory trick: Thirty days, noon, no news is good news.

States may require notice filings and fees for federal covered securities like registered investment company shares, but cannot require full registration.

• NSMIA preempts state registration of federal covered securities
• States retain notice filing and fee authority
• Applies to mutual funds and NMS-listed securities

Memory trick: Feds cover it, states just collect a small toll.

Broker-dealers must establish and enforce reasonable supervisory systems to detect and prevent agent misconduct; failure to do so is a violation even absent proof of actual knowledge.

• A post-registration, ongoing obligation
• Reviewed items include order tickets, trade blotters, correspondence
• Failure to supervise can trigger BD discipline separate from agent's violation

Memory trick: No System, No Excuse

NASAA's model rule requires advisers with custody to maintain a minimum net worth (commonly $35,000); if net worth is deficient, the adviser must obtain a surety bond covering the shortfall.

• $35,000 minimum net worth typical for custody
• $10,000 minimum net worth typical for discretion without custody
• Bond amount equals the deficiency, not the full requirement

Memory trick: Bond the gap, not the whole map.

An adviser is not deemed to have custody when it receives a check made payable to a third party (e.g., custodian) and forwards it within three business days.

• Applies only to checks payable to third parties, not the adviser
• Must be forwarded within 3 business days to avoid custody
• Distinguished from checks payable directly to the adviser, which do trigger custody

Memory trick: Forward fast — three days, no custody blast

A broker-dealer whose net capital falls below the state's required minimum must promptly notify the Administrator, as maintaining minimum net capital is a continuing condition of registration.

• Net capital rules are a post-registration/financial responsibility requirement
• Deficiency triggers a prompt notice obligation, not automatic cessation
• Failure to notify can itself be grounds for disciplinary action

Memory trick: Capital drops, phone the Administrator, don't wait.

Civil liability actions under the Uniform Securities Act are heard in court as ordinary civil suits, preserving the parties' right to a jury trial, distinct from Administrator administrative hearings which have no jury.

• Civil suits differ from Administrator's administrative proceedings
• Jury trial rights are preserved as in other civil litigation
• Administrator's remedies (cease-and-desist, revocation) are separate from private civil actions

Memory trick: Court brings a jury; the Administrator does not.

The Administrator may summarily suspend a registration to protect the public, but must provide prompt notice and a hearing opportunity thereafter.

• Balances urgent public protection with due process rights.
• Hearing occurs after the order, not before, in emergency situations.
• Failure to request a hearing may allow the suspension to stand.

Memory trick: 'Suspend now, explain later — but always offer the hearing ladder.'

An investment adviser may not assign a client's advisory contract to another party without the client's prior consent.

• Assignment includes transfers via merger or change of control
• Consent must be obtained before, not after, the assignment
• Violation is an unethical business practice under the USA

Memory trick: No assignment without permission first

A transaction exemption for issuer sales made to a limited number of purchasers, generally no more than 10 noninstitutional offerees in 12 months, without advertising.

• No more than 10 noninstitutional offerees in 12 months
• No general advertising or solicitation
• No commissions paid on sales to noninstitutional purchasers

Memory trick: Ten or fewer, keep it quiet, no commission on the quiet ones

Lawyers, Accountants, Teachers, and Engineers are excluded from the IA definition if investment advice is solely incidental to their profession and no special compensation is charged.

• Advice must be incidental, not the primary service
• No extra fee for the advice itself
• If advice becomes a distinct paid service, exclusion is lost

Memory trick: LATE professionals give advice, but only as a side dish, not the main course

The Administrator may investigate suspected violations on its own initiative, without a prior complaint, court order, or SEC coordination, whenever the public interest warrants it.

• Investigations may be proactive, not just reactive to complaints.
• No court pre-approval needed to begin an investigation.
• Broad discretion supports early detection of fraud.

Memory trick: 'No complaint needed — the Administrator can sniff out trouble alone.'

An Administrator may allow a broker-dealer or investment adviser to satisfy financial responsibility requirements via a surety bond instead of meeting minimum net capital or net worth thresholds.

• Bond amount is set by the Administrator's rule or order
• Provides flexibility for smaller firms
• Does not eliminate other financial reporting obligations

Memory trick: Bond Backs Up the Balance Sheet

A method of state securities registration used when an issuer files simultaneously at the federal (SEC) and state level.

• Requires a concurrent SEC registration statement
• Becomes effective at the same time as the federal registration
• Must have been on file with the Administrator for a specified waiting period with no stop order

Memory trick: Coordination = Co-filing with the SEC at the same time

Offers of preorganization subscriptions are exempt if limited to no more than 10 offerees in the state, no commission is paid, and no payment is accepted from subscribers before incorporation.

• Maximum of 10 offerees in the state
• No commissions to solicitors
• No payment accepted prior to incorporation

Memory trick: Ten friends, no fees, no cash yet — exempt start-up.

States cannot impose registration or additional recordkeeping requirements on federal covered advisers; their authority is limited to notice filings, fees, and antifraud enforcement.

• Federal covered advisers register with the SEC, not the states
• States may require notice filing and collect fees
• Antifraud authority remains with the states regardless of federal covered status

Memory trick: Notice, fees, fraud — that's all a state affords

States cannot require full registration of federal covered advisers but may require notice filings and fees, and retain antifraud jurisdiction.

• NSMIA preempts state registration of federal covered advisers
• Notice filing = copy of Form ADV plus a fee
• States keep antifraud enforcement authority

Memory trick: Notify, don't register.

A registrant's withdrawal from registration (via Form ADV-W or similar) becomes effective 30 days after filing, unless the Administrator institutes a proceeding during that period.

• 30-day waiting period is standard under the USA
• Administrator retains jurisdiction to act during that window
• Applies similarly to agents, broker-dealers, and investment advisers

Memory trick: Thirty days to walk out the door.

An individual's status as an 'agent' under the USA depends on whether they perform agent-like functions (selling/soliciting securities), not merely their title (partner, officer, director).

• Title alone (officer/director/partner) does not create agent status
• Selling, soliciting, or effecting transactions triggers agent status
• Purely administrative/management roles typically fall outside the definition

Memory trick: It's What You Do, Not What You're Called

Transactions incident to a bona fide pledge or loan, including sale of pledged securities upon default, are exempt transactions under the USA.

• Covers original pledge and subsequent default sale
• Applies regardless of whether shares are restricted or control shares
• Does not remove antifraud protections

Memory trick: Collateral changing hands on a loan default needs no new registration.

An advisory program in which a single fee covers both investment advisory services and brokerage execution costs.

• Requires special disclosure (e.g., wrap fee brochure)
• Fee is typically asset-based rather than per-transaction
• Distinct from performance-based or solicitor fee structures

Memory trick: Wrap it up — one fee covers it all

A family office that advises only family clients, is wholly owned/controlled by the family, and does not hold itself out publicly as an adviser is excluded from the investment adviser definition.

• No AUM threshold applies
• Must not hold out to the public as an adviser
• Client base limited strictly to family members/trusts/entities

Memory trick: Family business stays out of the business (of registration).

An adviser with custody of client funds/securities must place them with a qualified custodian, who must send account statements directly to clients at least quarterly.

• Qualified custodians include banks and broker-dealers
• Statements must come directly from custodian, not the adviser
• Self-holding assets without a custodian violates the rule

Memory trick: Let the bank hold it, let the bank tell them.

A simplified state registration method for issuers that meet minimum operating history and financial soundness requirements.

• Available to seasoned issuers with continuous operations
• Becomes effective automatically after a short waiting period absent objection
• Reduces the administrative burden compared to qualification

Memory trick: Filing is for the financially fit and long-standing firm

Securities listed on national exchanges (NYSE, Nasdaq) are federal covered securities under NSMIA, preempting state registration requirements.

• Applies to NYSE, Nasdaq, and other national exchange listings
• States cannot require registration, only notice filing/fee
• Antifraud enforcement remains with the states

Memory trick: Big Board listing means the feds already cleared it.

A registration method available to any issuer, used most often when there is no simultaneous federal registration.

• Becomes effective when the Administrator so orders
• Available to any issuer regardless of federal filing status
• Requires filing a registration statement containing specified information

Memory trick: Qualification = Quiet, no SEC filing needed

The Administrator enforces the USA through administrative sanctions (fines to the state, license actions, cease-and-desist orders), while only courts can award damages or rescission directly to injured investors.

• Administrator's fines go to the state treasury, not the investor.
• Investor compensation requires a private civil lawsuit in court.
• Administrative and judicial remedies serve different purposes and are pursued separately.

Memory trick: 'Administrator polices the industry; the courtroom pays the investor.'

When an investment adviser undergoes a change in legal structure creating a new entity, that successor must file a new registration application, regardless of continuity in management or clients.

• Applies to changes such as partnership-to-corporation conversions
• Successor entity is treated as a new registrant
• Continuity of business operations does not exempt the filing requirement

Memory trick: New structure, new paperwork — no shortcuts

Broker-dealers and other controlling persons may be jointly and severally liable for violations committed by their agents unless they prove a reasonable-care due-diligence defense.

• Liability extends beyond the individual wrongdoer to supervisors/employers.
• Due-diligence defense requires proof of lack of knowledge despite reasonable supervision.
• Encourages firms to maintain robust supervisory procedures.

Memory trick: 'The firm shares the chain unless it proves it broke no link.'

Under registration by coordination, the registration statement must be on file with the Administrator for at least 10 days before it can become effective, absent Administrator waiver.

• 10-day minimum waiting period
• Becomes effective simultaneously with SEC registration
• Administrator may shorten the period

Memory trick: Ten days to coordinate before going live

Under the USA, a private right of action must be brought within the earlier of 3 years after the sale/contract or 2 years after discovery of the violation.

• Whichever period expires FIRST controls.
• Applies to actions for rescission or damages under Section 410.
• Encourages prompt investor action once a violation is or should be discovered.

Memory trick: '3 from sale, 2 from discovery — whichever comes sooner wins the race.'

Administrators may issue interpretive opinions or no-action letters providing guidance on how the law applies to specific situations, though these lack the force of formally adopted rules or statutes.

• Not binding on courts
• Useful for compliance guidance and good-faith reliance
• Distinct from formal rulemaking, which requires notice-and-comment procedures

Memory trick: An opinion guides, but only a rule truly binds.

An individual who represents an issuer solely in exempt transactions and receives no commission or compensation related to the sale is excluded from the definition of 'agent' under the USA.

• Requires both an exempt transaction and no sales-based compensation
• Common example: officer of issuer selling stock in a private placement without commission
• Losing either condition (compensation or exempt status) removes the exclusion

Memory trick: No commission, exempt transaction, no agent registration.

Certain securities are exempt from state registration requirements, including those issued by governments, banks, and municipalities.

• U.S. and Canadian government/municipal securities are exempt
• Bank and savings institution securities are exempt
• Exemption applies to the security itself, not necessarily the transaction

Memory trick: Government bonds get a free pass from registration

The Uniform Securities Act voids any agreement, condition, or stipulation requiring a person to waive compliance with the Act.

• Protects investors from contractual waivers of statutory rights
• Applies regardless of investor sophistication
• Any such waiver clause is unenforceable as a matter of law

Memory trick: You can't sign away your shield.

Under the USA, criminal penalties apply only to willful violations of the Act, meaning the person knew (or should have known) of the wrongful conduct.

• Willfulness does not require intent to violate the law, just intent to do the act.
• No investor loss required to prove criminal violation.
• Maximum penalties often include fines and imprisonment, set by state statute.

Memory trick: 'No willful mind, no criminal find.'

Employees of a broker-dealer or issuer who perform only clerical, ministerial, or administrative duties are excluded from the definition of 'agent' and need not register.

• Applies to secretaries, receptionists, back-office staff
• Exclusion is lost if the person begins selling or soliciting securities
• Based on function performed, not job title or compensation

Memory trick: Clerks click keyboards, not sell stocks.

When a broker-dealer's agent exercises ongoing discretionary trading authority, the activity is no longer 'solely incidental' to brokerage, requiring IA/IAR registration.

• Discretion = making investment decisions without prior client approval
• Removes BD incidental advice exclusion
• Applies even absent a separate advisory fee

Memory trick: Take control, lose the exclusion.

Offers of rights, warrants, or convertible securities to a corporation's existing security holders are exempt transactions if no commission is paid.

• Must be offered pro rata to current holders
• No commission paid for soliciting exercise
• Distinct from a public offering exemption

Memory trick: Loyal shareholders get first dibs, fee-free.

A required registration filing appointing the state Administrator as the registrant's agent for receiving legal papers in proceedings under the Act.

• Required for BDs, agents, IAs, and IA reps
• Filed once and remains in effect perpetually for actions arising while registered
• Facilitates state jurisdiction over out-of-state registrants

Memory trick: Consent Connects You to the Court

Both the broker-dealer and the agent must promptly notify the Administrator when the agent's employment or association with that broker-dealer ends.

• Dual notification duty applies to both firm and individual
• 'Promptly' generally means without unreasonable delay
• New firm's registration filing does not substitute for termination notice

Memory trick: Two parties, one goodbye, both must say it.