NASAA Series 63 flashcards

Initial registrations for broker-dealers, agents, investment advisers, and investment adviser representatives under the Uniform Securities Act typically expire on December 31st of the year in which they become effective.

• Applies to initial registrations
• Expiration date is December 31st
• Year of expiration is the same year registration became effective

Memory trick: All registrations end the year with a bang, on December 31st.

An ethical and regulatory violation where an agent or investment adviser does not execute a client's explicit and lawful instructions regarding their account or investments.

• Applies to non-discretionary accounts.
• Even if intended to benefit the client, deviation is a violation.
• Instructions must be clear and lawful.

Memory trick: Hear the client, obey the instruction, no personal detours.

After a registration has been revoked, the ability for a firm or individual to reapply is solely at the discretion of the Administrator, with no specified statutory waiting period.

• Revocation is a permanent disciplinary action.
• Administrator considers all facts, including corrective actions and public interest.
• No automatic right to reapply or fixed waiting period.

Memory trick: Revocation means you need the Administrator's 'grace' to even ask again.

An agent's registration is required in any state where they effect or attempt to effect transactions, regardless of whether the order is unsolicited or from an existing client, if the client is in that state at the time of the transaction.

• Agent registration follows the client's location during the transaction.
• Unsolicited orders do not exempt an agent from registration.
• No de minimis for agents (unlike IAs).

Memory trick: Agent's Reach, Client's State

The act of an agent executing securities transactions for a client outside the regular course or scope of their employment with their broker-dealer, without the firm's knowledge and approval.

• Prohibited practice.
• Firm loses supervisory control, increasing risk for client and firm.
• Applies even if no compensation is received by the agent.

Memory trick: Don't sell outside the firm's walls, or you'll be on the outside looking in.

An unethical practice where an investment adviser allocates profitable trades from a block order to their own or favored accounts, while allocating less profitable or losing trades to other clients.

• Violates fiduciary duty of fair dealing.
• Exploits information asymmetry and discretion.
• Prohibited by securities regulations.

Memory trick: Picking the best cherries for yourself, leaving the bruised ones for others.

For investment advisers, an 'advertisement' includes any written communication disseminated to clients or prospective clients that offers or promotes advisory services, even if it doesn't recommend specific securities.

• Includes articles, brochures, websites.
• Intent to solicit is key.
• Does not require specific security recommendations.
• Subject to all IA advertising rules (e.g., no testimonials, no guarantees).

Memory trick: An IA advertisement is any message that shouts 'come advise with me!', even a whispered link.

When discussing SIPC coverage, firms must clearly state that SIPC protects against broker-dealer failure, not against market losses or declines in the value of securities.

• SIPC is not FDIC.
• Protects securities and cash up to limits.
• Does NOT cover market risk.

Memory trick: SIPC protects against broker failure, not market swings; clarify the 'not'.

Investment advisers must disclose all material conflicts of interest to clients, particularly when the adviser or its principals have a personal stake in securities being recommended.

• Disclosure must occur before or at the time of the recommendation.
• The purpose is to allow clients to make informed decisions.
• This applies to both human and automated advice platforms.

Memory trick: Show Your Hand Before You Advise.

Investment advisers must actively supervise and review all communications on their social media platforms, including third-party content, to ensure compliance with advertising and anti-fraud regulations.

• Treats interactive content as firm's communication.
• Required to monitor and retain records.
• Addresses testimonials and misleading posts.

Memory trick: Social media for IAs: Monitor all posts, archive everything, disclose clearly.

A disclaimer cannot override the actual content or nature of a communication. If a communication provides specific investment recommendations, it is considered investment advice, even if a disclaimer states otherwise.

• Content overrides disclaimer.
• Specific recommendations are advice.
• Contradictory statements are misleading.
• Regulatory bodies look at substance, not just form.

Memory trick: Substance over form: what's inside the box matters more than the label.

Investment advisers are prohibited from making claims in advertising that are false, misleading, or that guarantee performance or eliminate risk. All claims must be fair, balanced, and have a reasonable basis.

• Cannot guarantee optimal returns.
• Cannot claim 'zero downside risk'.
• Must avoid all misleading statements.
• Applies to automated platforms as well.

Memory trick: Integrity in IA ads means no tricks, just facts, like a clear ledger.

Key pieces of information that must be communicated to clients/prospects to ensure transparency and prevent misleading statements.

• Past performance disclaimers.
• Disclosure of all fees and charges.
• Disclosure of conflicts of interest (e.g., compensation).

Memory trick: Disclose all risks, fees, and past performance disclaimers, but never private IDs.

Investment advisers and agents must disclose any material conflicts of interest that could reasonably be expected to impair their objectivity or influence their recommendations.

• Includes personal holdings in recommended securities.
• Ensures client can assess advice impartiality.
• Mandatory for ethical conduct.

Memory trick: When interests clash, disclose, so clients can truly choose.

Investment advisers (IAs) are generally prohibited from using client testimonials in their advertisements because they can be selective, misleading, and not representative of all client experiences.

• Prohibited for IAs (federal and state).
• Seen as inherently misleading.
• Creates an unbalanced view.
• Social media reviews fall under this prohibition.

Memory trick: IA ads have strict rules, like a judge's gavel on what's allowed.

Under the Uniform Securities Act, it is unlawful to state or imply that registration of a security or a person (e.g., agent, IA) with a regulatory authority constitutes an endorsement or approval by that authority.

• Registration is not approval.
• Cannot imply state endorsement.
• Misleading to suggest regulatory approval.
• This is a prohibited representation, not a required disclosure.

Memory trick: Required disclosures are the 'yes' list, prohibited are the 'no' list, like traffic signs.

Broker-dealers and investment advisers are responsible for supervising all communications by their agents and IARs that relate to the securities business, including personal social media, blogs, and other electronic correspondence.

• BDs must supervise all agent communications.
• Includes personal blogs/social media if investment-related.
• Content must be reviewed and approved.
• Ensures compliance and investor protection.

Memory trick: Firms supervise like a hawk, ensuring all communications are safe and sound.

It is unlawful to represent an investment as 'risk-free' or to guarantee returns, as all investments carry some level of risk.

• Misleading to investors.
• Violates anti-fraud provisions.
• Even government-backed securities have risks (e.g., purchasing power risk).

Memory trick: Ads must be truthful, never promise 'risk-free' or 'guaranteed' gains.

It is a prohibited practice to misrepresent the nature or extent of SIPC coverage. Specifically, firms cannot claim that SIPC protects against market losses or guarantees investment performance.

• SIPC protects against BD failure, not market loss.
• Misrepresenting SIPC is prohibited.
• Must clearly state what SIPC does and does not cover.
• Creates false sense of security.

Memory trick: SIPC: a shield for BD failure, not a helmet for market falls.

Advertisements for securities must not make unqualified claims about tax benefits that may not apply to all investors or in all circumstances. Specific disclosures or qualifications are required.

• Tax benefits can vary by investor.
• AMT can affect 'tax-free' status.
• Out-of-state muni bonds can be state/local taxable.
• Claims must be qualified if not universally true.

Memory trick: Truthful ads avoid false promises, like a mirror shows what's really there.

Agents and investment advisers are prohibited from guaranteeing specific returns or protection against loss for any investment product.

• All investments carry risk.
• Guarantees are misleading and unethical.
• Applies to principal and rate of return.

Memory trick: Never promise a locked future return, as markets always sway.

The client brochure (Form ADV Part 2) provides detailed information about an investment adviser's business practices, fees, conflicts of interest, and personnel, enabling clients to make informed decisions.

• Includes Part 2A (firm brochure) and Part 2B (brochure supplement).
• Mandatory initial and annual delivery to clients.
• Covers fees, services, disciplinary history, investment strategies.

Memory trick: ADV Part 2: Disclose firm's fees, staff, strategies, and any past woes, but keep personal finances close.

The Uniform Securities Act prohibits agents and firms from making statements that imply an investment has no risk or is 'risk-free,' as all investments carry some level of risk.

• No investment is truly risk-free.
• Claims like 'guaranteed,' 'safe,' or 'risk-free' are prohibited if they misrepresent the actual risk.
• Disclosures do not cure an inherently false or misleading statement.

Memory trick: No 'Sure Thing' Says the Securities Act.

Any written communication distributed to more than a limited number of persons that offers or promotes investment advisory services or securities.

• Broader definition than 'correspondence'.
• Subject to specific content and filing rules.
• Includes newsletters, circulars, publicly available websites.

Memory trick: Correspond with one, Advertise to many, Educate all, but never misrepresent.

When using hypothetical performance illustrations in marketing materials, investment advisers must prominently disclose that the results are hypothetical, do not represent actual performance, and are not indicative of future results.

• Required for all hypothetical illustrations.
• Must state 'hypothetical' clearly.
• Must state 'not actual performance'.
• Must state 'past performance not indicative of future results'.

Memory trick: IA marketing needs disclosures, like a road needs clear signs.

Under the Uniform Securities Act, agents and investment advisers cannot guarantee specific returns, promise to make a profit, or guarantee against loss for any investment product.

• No specific return guarantees.
• No guarantees against loss.
• Must disclose investment risks.
• Past performance not indicative of future results.

Memory trick: Ethical communication builds trust, like a strong handshake.

The Uniform Securities Act generally prohibits state-registered investment advisers from using testimonials in their advertisements, including on social media, due to their potential to be misleading or biased.

• Applies to state-registered IAs; federal rules (SEC) have recently changed.
• Prohibition covers all forms of advertising, including social media.
• Rationale: testimonials can be biased, non-representative, and misleading.

Memory trick: No Praises, Just Facts for IAs.

Investment professionals must clearly and fully disclose all fees, commissions, and charges to clients. Vague or undisclosed fees are prohibited, as they prevent clients from understanding the true cost of services.

• All fees must be itemized.
• Purpose of fees must be clear.
• No vague 'miscellaneous' charges.
• Required for full and fair disclosure.

Memory trick: Fee transparency means no hidden costs, like clear glass showing every penny.

An Investment Adviser Representative (IAR) often has a short grace period (e.g., 10 days) to register in a new state if they establish a place of business or begin soliciting clients there.

• Applies when an IAR moves or changes their primary state of business.
• Triggered by establishing a place of business or actively soliciting clients.
• Purpose is to allow for administrative processing while maintaining continuity.

Memory trick: An IAR moving into a new state needs to register, but gets a small grace period to settle in before the 'clock' stops ticking.

Investment advisers must file amendments to Form ADV to update information that has become inaccurate or changed since the last filing.

• Required for material changes (e.g., organizational structure, disciplinary actions, assets under management).
• Filed within 30 days of the change, or annually.
• Ensures the Administrator and public have current, accurate information.

Memory trick: When an IA's 'ADV' details shift, an 'AMENDMENT' is the swift fix.

An adviser whose only clients are employee benefit plans, and who manages at least $50 million in assets for such plans, is generally considered a federal covered adviser.

• Specific threshold for ERISA plans ($50M AUM) differs from general AUM thresholds.
• Registration is with the SEC, not state Administrators.
• Exempt from state registration requirements (NSMIA preemption).

Memory trick: Federal Covered Advisers are like 'VIPs' of the SEC, with special tickets for big AUM or unique clients.

Advisers solely to private funds are generally exempt from SEC registration if their AUM is less than $150 million, but they may still be subject to state registration depending on their AUM and state rules.

• Below $150M AUM for private funds: SEC exempt.
• Below $100M AUM (general threshold): State registration.
• Above $150M AUM for private funds: SEC registration required.

Memory trick: Private funds have their own AUM 'gate' for SEC, but if it's too small, the state still 'watches' them.

The withdrawal of an investment adviser's state registration typically becomes effective 60 days after filing Form ADV-W, unless the Administrator shortens the period.

• Initiated by filing Form ADV-W.
• Allows Administrator time to review outstanding issues (e.g., client complaints).
• The Administrator can accelerate the effective date.

Memory trick: When an IA 'W-ithdraws', they start a '60-day WAIT' for it to officially end.

When discussing historical investment performance, a prominent disclosure stating that past results do not guarantee future returns and that risks/losses are possible is required.

• Applies to all advertisements, presentations, and promotional materials.
• Aims to prevent misleading investors.
• Prohibits performance guarantees or 'risk-free' claims.

Memory trick: History's Lessons, Future's Warnings.

For broker-dealers subject to federal net capital requirements, state Administrators cannot impose higher net capital requirements than those mandated by federal law, due to federal preemption.

• Applies specifically to net capital requirements.
• Federal law (SEC rules) takes precedence.
• States cannot impose more stringent requirements.

Memory trick: Federal law is the 'Capital King' – its rules rule over state minimums.

A state-registered investment adviser is exempt from registration in a state if it has no place of business in that state AND has fewer than six clients who are residents of that state during the preceding 12-month period.

• Applies to state-registered IAs only.
• Must have no place of business in the new state.
• Must have fewer than 6 clients in the new state.
• Exemption applies to both individuals and institutions.

Memory trick: Six clients or a physical spot, that's where you must be caught!

An Investment Adviser Representative (IAR) must register in any state where they maintain a principal place of business. If they move their principal place of business to a new state, they must register in the new state and withdraw their registration from the previous state.

• IAR registration is state-specific.
• Tied to the IAR's principal place of business.
• Employing IA firm typically makes the filings.
• Prompt updating is required for interstate moves.

Memory trick: Where your desk sits, that's where your license fits!

Broker-dealers must promptly file an amendment to their registration (e.g., Form BD) with the Administrator of every state in which they are registered to report any material changes, such as a change in principal office address.

• Applies to 'material' changes.
• Must be filed promptly.
• Required in all states of registration.
• Typically done via an amended Form BD.

Memory trick: A 'Material Change' needs an 'Amended Form' sent to 'Every State'.

Under the Uniform Securities Act, an 'agent' is any individual who represents a broker-dealer or issuer in effecting or attempting to effect purchases or sales of securities.

• Registration is required for individuals meeting this definition unless an exclusion or exemption applies.
• Clerical or administrative personnel are generally excluded.
• Compensation structure (e.g., commissions) can be a factor but is not the sole determinant.

Memory trick: An Agent Acts for Transactions.

Commingling is the unethical and illegal practice of mixing client funds or securities with those of the adviser or other clients.

• Prohibited practice under securities regulations.
• Can lead to loss of client identity and improper accounting.
• Creates potential conflicts of interest and makes auditing difficult.

Memory trick: Don't mix client cash, keep it clean and separate.

Under the Uniform Securities Act, an advertisement generally includes any written communication offering investment advisory services or promoting the IA's/IAR's services to more than one person.

• Includes articles, newsletters, websites, and social media posts.
• Must comply with disclosure and anti-fraud provisions.
• Does not require specific security recommendations to be an advertisement.

Memory trick: An Advisor's Written Word is Always Watched.

A person aggrieved by a final order of the Administrator has a limited timeframe to petition a court for review of that order.

• Applies to final orders, not summary orders.
• Petition must be filed within 60 days.
• Aims to challenge the lawfulness of the order.

Memory trick: Final orders get a two-month appeal window before the court closes its doors.

An individual representing an issuer in the sale of its securities must register as an agent unless an exclusion applies, such as selling only exempt securities or engaging in exempt transactions.

• Individuals representing issuers are generally defined as agents.
• Exclusions exist for sales of exempt securities or in exempt transactions.
• Public offerings of non-exempt securities typically require agent registration.

Memory trick: An individual acting for an issuer selling securities is an agent, unless a specific exemption 'shields' them.

Broker-dealers have a legal obligation under the Uniform Securities Act to establish and maintain a system of supervision to ensure their agents comply with securities regulations, including suitability rules.

• BDs are responsible for agent conduct.
• Requires a robust supervisory system.
• Failure to supervise can lead to BD liability for agent violations.

Memory trick: A broker-dealer must 'Supervise with Care' to prevent agents from straying.

Any hypothetical illustration or projection of investment performance must prominently disclose that it does not represent actual results, is purely illustrative, and does not guarantee future performance.

• Applies to all communications with prospects and clients.
• Aims to prevent unrealistic expectations and misleading claims.
• Must clearly distinguish hypothetical from actual performance.

Memory trick: Imagine Outcomes, But Disclose the 'What If'.

Even after issuing a temporary summary order (e.g., to postpone or suspend registration), the Administrator must still provide the registrant with prompt notice, an opportunity for a hearing, and written findings of fact and conclusions of law before a final order can be made.

• Summary orders are temporary/interim actions.
• Due process still required after a summary order.
• Ensures registrant's rights are protected.
• Final order requires hearing and written justification.

Memory trick: A 'Summary Order' still demands 'Due Process' – Notice, Hear, and Write the final decree.

Before issuing a final order to deny, suspend, or revoke a registration, the Administrator must provide notice, an opportunity for a hearing, and written findings of fact and conclusions of law.

• Applies to all disciplinary actions.
• Ensures fairness and legal compliance.
• Includes notice, hearing, and written justification.

Memory trick: For 'Disciplinary Action', the Administrator must 'Notice, Hear, and Write'.

Under the Uniform Securities Act, registration for broker-dealers, agents, investment advisers, and IARs typically becomes effective automatically at noon on the 30th day after the filing of the application or the last amendment, unless the Administrator acts sooner.

• Automatic effectiveness is the default.
• 30-day waiting period.
• Administrator can accelerate or delay effectiveness.

Memory trick: Thirty days at noon, your registration takes flight, unless the Administrator sheds a different light.

Under the Uniform Securities Act, broker-dealers are typically required to maintain most records for three years, with the first two years in an easily accessible location.

• Standard is three years.
• First two years must be readily accessible.
• State Administrator can specify a different period.

Memory trick: Three years you keep the books, with two years close by for a quick look.

The ethical and legal obligation of financial professionals to protect the privacy of client information and not disclose it to unauthorized third parties.

• Protect all non-public client data.
• Only share information on a 'need-to-know' basis.
• Discuss client matters in private, secure settings.

Memory trick: Keep client secrets locked down, like a vault.

An agent generally cannot be registered with more than one broker-dealer simultaneously unless both firms authorize it and the state Administrator approves the arrangement.

• General prohibition against dual registration.
• Exception requires authorization from both BDs.
• Exception also requires Administrator approval.
• Ensures supervision and manages conflicts.

Memory trick: Two firms and the Administrator must all agree for an agent to be a 'dual player'.

Under the Uniform Securities Act, a broker-dealer that meets the minimum net capital requirements of its home state or federal law is generally exempt from state-mandated surety bond requirements.

• Surety bonds are generally required for BDs.
• Net capital serves as an alternative to a bond.
• Federal or home state net capital minimums apply for the exemption.

Memory trick: The 'Bond' protects, but 'Net Capital' can be its strong shield alternative.

A broker-dealer ceasing to conduct business in a state must file a notice of withdrawal of registration with that state's Administrator to formally terminate its registration.

• Required when ceasing operations in a state.
• Involves filing a notice of withdrawal.
• Administrator's approval is typically required for effectiveness.

Memory trick: When a BD exits a state, they must file a 'Withdrawal Notice' to close the door.

An agent must be registered in the state where a client resides to effect transactions, even if the order is unsolicited. A limited temporary exemption may exist if the client moves and the agent promptly pursues registration in the new state.

• Agent registration is tied to the client's residence for effecting transactions.
• Unsolicited orders do not exempt an agent from registration in a new state.
• A temporary exemption may allow transactions for a client moving to a new state if the agent is actively pursuing registration there.

Memory trick: A client's new state is the 'Agent's New Zone' – registration must follow, unsolicited or not.