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.

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.

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.

Administrator – "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 -

• A banking institution organized under the laws of the United States;

• A member bank of the Federal Reserve System;

• 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:

• An agent;
• An issuer;
• A bank or savings institution

A person who has no place of business in the state if:

• He effects transactions in the state exclusively with or through

• The issuers of the securities involved on the transactions,

• Other broker-dealers, or 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, 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.

►USA Definition Part 2

INVESTMENT ADVISER – "Investment adviser" means a person that, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or the advisability of investing in, purchasing, or selling securities or that, for compensation and as a part of a regular business, issues or promulgates analyses or reports concerning securities. The term includes a financial planner or other person that, as an integral component of other financially related services, provides investment advice to others for compensation as part

of a business or that holds itself out as providing investment advice to others for compensation. The term does not include:

• An investment adviser representative;

• A lawyer, accountant, engineer, or teacher whose performance of investment advice is solely incidental to the practice of the person's profession;

• A broker-dealer or its agents whose performance of investment advice is solely incidental to the conduct of business as a broker-dealer and that does not receive special compensation for the investment advice;

• A publisher of a bona fide newspaper, news magazine, or business or financial publication of general and regular circulation;

• A federal covered investment adviser;

• A bank or savings institution

First, an "investment adviser" (IA), as the Law defines it, is generally a company or a firm that is "in the business of" providing investment advice for a fee. The "investment adviser representative" is an individual who works for an investment adviser. The USA permits a sole proprietor to register as an investment adviser, but for exam purposes,
think of an IA as a firm that hires others.

Notice that as long as any investment advice provided by Teachers, Engineers, Accountants and Lawyers (teal) is "solely incidental to the practice of the person's profession" that person is not defined as an investment adviser.

Broker-dealers are not defined as investment advisers as long as their advice is "solely incidental to the conduct of business as a broker-dealer and that does not receive special compensation for the investment advice." Here's another clue that a person is not an investment adviser: not receiving special compensation for the investment advice. The test sometimes uses the word, "remuneration," which simply means money paid for work or a service. But what about
broker-dealers that manage client accounts, take assets under management and charge "wrap fees"? Those B/Ds must
be registered as both B/Ds and investment advisers. Notice that banks are, again, not considered investment advisers. Subsidiaries of banks, however, may very frequently be registered as investment advisers.

►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":

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;

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.

► USA Definitions Part 4

GUARANTEED

"Guaranteed" means guaranteed as to payment of all principal and all interest."

This is much like a person co-signing for another person as security for a loan, except that in the USA, it most frequently refers to a parent corporation "guaranteeing" a subsidiary company's securities.

There are only three entities that may legitimately make guarantees:

• The U.S. government
• An insurance company
• A parent company, as indicated above

INSTITUTIONAL INVESTOR

"Institutional investor" means any of the following, whether acting for itself or for others in a fiduciary capacity:

• A depository institution or international banking institution;

• An insurance company;

• A separate account of an insurance company;

An investment company as defined in the Investment Company Act of 1940;

A broker-dealer registered under the Securities Exchange Act of 1934;

An employee pension, profit-sharing or benefit plan if the plan has total assets in excess of $10,000,000 ..."

In preparing for the Series 63 exam, you will note that "institutions" and "institutional investors" are quite frequently associated with exemptions, just like banks. Again, the USA does not place as much emphasis on protecting
institutions as it does on protecting individual investors.

INVESTMENT ADVISER REPRESENTATIVE

"Investment adviser representative" means an individual employed by or associated with an investment adviser or federal covered investment adviser and who makes any recommendations or otherwise gives investment advice regarding securities, manages accounts or portfolios of clients, determines which recommendation or advice regarding securities should be given, provides investment advice or holds herself or himself out as providing investment advice, receives compensation to solicit, offer, or negotiate for the sale of or for selling investment advice, or supervises employees who perform any of the foregoing. The term does not include an individual who:

• Performs only clerical or ministerial acts;

• Is an agent whose performance of investment advice is solely incidental to the individual acting as an agent and who does not receive special compensation for investment advisory services;

• Is employed by or associated with a federal covered investment adviser, unless the individual has a "place of business" in this state ..."

Notice that the law stipulates both what is and what is not an investment adviser representative. The IAR works for an investment adviser, just as an agent works for a B/D. The IAR was not defined in the 1956 USA. This definition comes
from the 2002 version of the law.

"If an investment adviser is registered with the SEC, the states may not require registration, licensing, or qualification
of the investment adviser or its supervised persons, except that states may license, register, or otherwise qualify investment adviser representatives who have a place of business located within that state."

This MoU refers to NSMIA and lays out the requirements for testing persons who are to be IARs. IARs are always registered with the state. The IA firms that they work for may or may not be registered, depending on their status as defined by NSMIA.

► USA Definitions Part 5

ISSUER

"Issuer" means a person that issues or proposes to issue a security..."

By this definition, if a business or other person has begun the process that will result in the sale of securities to the
public, it is already considered to be an "issuer" according to the law.

NONISSUER TRANSACTION

"Nonissuer transaction" ... means a transaction or distribution not directly or indirectly for the benefit of the issuer."

If the company gets the money from a transaction, it is an issuer transaction. If the company does not get the money from a transaction - it's a secondary market trade - this represents a nonissuer transaction.

OFFER TO PURCHASE

"Offer to purchase" includes an attempt or offer to obtain, or solicitation of an offer to sell, a security or interest in a security for value." Definitions such as this and the definition of "sale," later, are necessary because they tie in with
what is being sold or purchased - securities - and who is involved: registered persons.

SECURITY

"Security" means a note; stock; treasury stock; security future; bond; debenture; evidence of indebtedness; certificate
of interest or participation in a profit-sharing agreement; collateral trust certificate; preorganization certificate or
subscription; transferable share; investment contract; voting trust certificate; certificate of deposit for a security;
fractional undivided interest in oil, gas, or other mineral rights; put, call, straddle, option, or privilege on a security,
certificate of deposit, or group or index of securities, including an interest therein or based on the value thereof; put,
call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency; or, in
general, an interest or instrument commonly known as a "security"; or a certificate of interest or participation in,
temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of
the foregoing.

• Includes both a certificated and an uncertificated security;

• Does not include an insurance or endowment policy or annuity contract under which an insurance company
promises to pay a fixed [or variable] sum of money either in a lump sum or periodically for life or other specified period;

• Does not include an interest in a contributory or noncontributory pension or welfare plan subject to the Employee Retirement Income Security Act of 1974;

• Includes an investment in a common enterprise with the expectation of profits to be derived primarily from the
efforts of a person other than the investor and a "common enterprise" means an enterprise in which the fortunes of the investor are interwoven with those of either the person offering the investment, a third party, or other investors; and Includes as an "investment contract," among other contracts, an interest in a limited partnership and a limited liability company and an investment in a viatical settlement or similar agreement.

PERSON

"Person" means an individual; corporation; business trust; estate; trust; partnership; limited liability company;
association; joint venture; government; governmental subdivision, agency, or instrumentality; public corporation;
or any other legal or commercial entity. “This is a broad definition, as you can see. An individual is technically called "a natural person." But when you read that a "person" must be registered, you can see how far that term extends.

►The USA Definitions Part 6

SALE

"Sale" includes every contract of sale, contract to sell, or disposition of, a security or interest in a security for value, and "offer to sell" includes every attempt or offer to dispose of, or solicitation of an offer to purchase, a security or interest
in a security for value. Both terms include: A security given or delivered with, or as a bonus on account of, a purchase of securities or any other thing constituting part of the subject of the purchase and having been offered and sold for value;

A gift of assessable stock involving an offer and sale; and a sale or offer of a warrant or right to purchase or subscribe to another security of the same or another issuer and a sale or offer of a security that gives the holder a present or future right or privilege to convert the security into another security of the same or another issuer, including an offer of the other security.

Let's take this from the top: the law must define every term used. If you read that "an agent who offers securities for sale must be registered," you must be able to legally define "agent", "sell/sale/offer to sell" and "securities". If an investor, for example, buys a bond and with the bond, receives warrants ("constituting part of the purchase") from the company, the warrant is a part of the sale.

That term, "gift of assessable stock", is more than a little out of tune with the times. Assessable stock has not been
traded (or issued) in this country for more than 50 years! Assessable stock was issued at a discount from par value and the owner could be assessed by the company or its creditors for the difference between the purchase price and par. For example, if an investor in the early 1900s bought some assessable railroad stock with a par value of $50 per share but paid $5 per share, if the company needed money, it could assess the stockholders for up to $45 per share! Today, all
stock certificates state that they are "full-paid and non-assessable." The drafters of the USA may be quite familiar with securities laws, but they are evidently not so up to date on the securities themselves. Just know that a "gift of assessable stock" is considered a sale.

If an agent sells a client a warrant, a right, or an option on securities, as a transaction apart from the stock itself,
this is the same as selling the securities themselves. Now let's take a look at transactions/items that are not
considered to be a sale. First, we'll list some of these and then explore them one by one.

• A pledge of securities as collateral for a loan
• A stock dividend
• Securities received as a result of reorganization or merger

This is not a complete list, but it represents some of the major points of the law for the purposes of the exam.

A pledge of securities as collateral for a loan is the normal practice in an investor's margin account. The investor is borrowing money to buy stock, and using the stock as collateral. The act of pledging the stock as collateral is known as "hypothecation." This term, in the exam, may be associated with the term "lien," since the securities pledged are collateral for the loan. A stock dividend is not a sale because, at the time of the payment of such a dividend, there is no transfer of value. Getting a stock dividend is much like getting four $5 bills for a $20 dollar bill. When those people who own securities of company "A" receive stock from company "B" because of a merger or reorganization, the receipt of those securities by the stockholder doesn't represent a sale.

That word “Exempt”

One of the major terms that causes confusion for Series 63 candidates is the word, "exempt." Webster's defines exempt as "not subject to or bound by a rule, obligation, etc. applying to others." Applying that idea to securities, if a stock is exempt from registration, it does not have to be registered. So what is a "non-exempt security"? Following the logic above, a non-exempt security, would be one to which the state's laws would apply, which means that it would have to register, right? Well, yes, most of the time. If a non-exempt stock is 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 these contexts.

A note from the Official Comments that accompany the USA 2002 may help to clarify:

• 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, such as 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 (new) market and in subsequent secondary market trading.

If a stock is a non-exempt stock, then it should be registered unless the circumstances that bring it into the state make the transaction exempt. We'll look at this in detail under exempt transactions.It may also be helpful to consider the word "exclusion" in the context of the USA, as opposed to "exemption". For example, in defining the term "security", the USA definition stated that it did 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: These are exempt from everything except the anti-fraud laws. For the most part, we can also add securities issued by foreign governments with which the U.S. maintains diplomatic relations. The exam questions you see might focus on Canadian securities.

Banks: The regulatory structure for federal and state banking is, in most cases, considered sufficient to ensure that the public is not being defrauded.

Institutions: The USA is principally structured to protect the investing public from fraud, not institutions. The essential idea here is that institutions are (or should be) sophisticated investors that have the expertise available to investigate securities offerings, allowing them to take risks that the normal investor should not.

With the definitions out of the way, let's now take a look at the origin of the USA.

National Conference of Commissioners on Uniform State Laws (NCCUSL)

The Uniform Securities Act (USA) was drafted by the NCCCUL (along with other model laws), but it is the North American Securities Administration (NASAA) that is responsible for the Series 63 exam, our subject in this book. Formed in 1892, the NCCUSL describes itself as follows:

"The state uniform law commissioners come together as the National Conference for one purpose - to study and review the law of the states to determine which areas of law should be uniform."

State securities law varied widely from state to state in the early half of the 1900s, despite the passage of the Securities Act of 1933 and the Securities Exchange Act of 1934. To unify (streamline) state securities laws, the National Conference of Commissioners on Uniform State Laws (NCCUSL) drafted the USA in 1956. The NCCUSL was a national organization of legal professionals devoted to creating legal congruency from state to state. The USA provides criminal and civil penalties for violations, or for fraudulent acts to deceive investors and/or violations of the act. One thing to remember here, though: The USA is much more closely focused on the protection of the individual investor than institutions. Institutions are frequently one of the exemptions. Many questions refer to exemptions and/or exclusions rather than directly to registration.

With a brief overview of the USA origination out of the way, let's take a closer look at the main bullet points of the USA. Keep the following items in the back of your mind as you work through the study guide - they are what NASAA wants you to know!

Federal and State Securities Law and its Impact on the USA

We need to briefly look at a couple of the more recent federal laws that have had a dramatic impact on the USA: the National Securities Markets Improvement Act of 1996 (NSMIA) and the Gramm-Leach-Bliley Act of 1999 (GLBA).

NSMIA

In 1996, Congress preempted significant parts of a state's power to duplicate federal regulation. For example, NSMIA 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 reconcile, and to achieve better coordination of, federal and state securities regulation." NSMIA was the law that defined "federal covered securities", which we'll be looking at in detail.

GLBA

although not as critical to an understanding of how the USA works, the GLBA of 1999 changed the nature of registration for broker-dealers (B/Ds) and allowed, in certain cases, banks to register as B/Ds. Although, thus far, banks have continued the practice of creating broker-dealer subsidiaries rather than registering as such themselves.

► The Administrator

North American Securities Administrators Association (NASAA)

As the name indicates, NASAA 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. It was formed in Kansas in 1916 and made its first efforts at standardizing
the securities laws of the states 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 register the persons involved in the securities
business. A Kansas Supreme Court Justice, in the early days of securities regulation, 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." The
Uniform Securities Act has, as a result, been popularly known as the "Blue Sky" law.

NASAA is still closely focused on the protection of the general public against fraud in the securities business.
The Uniform Securities Act (USA), as a set of laws adopted by states, is far more oriented toward the protection of
the average investor than the protection of institutions. This is a concept that you should keep in mind as you study
for the exam. Transactions by and with institutions are frequently exempt from the provisions of the Act.

The first version of the Uniform Securities Act, which gained broad acceptance by the states, was drafted by the
Uniform Law Commissioners in 1956. This version of the law, as noted above, still forms the foundation for most of
the uniform laws and, most importantly for candidates, for the Series 63 exam. It is a template of uniform securities
laws that states use to form laws of their own that are suitable for the individual states' needs. The 1956 law still
firms the foundation for state regulation is an important concept for the Series 63. It also explains why some of the
dollar figures are so low by today's standards!

A revision of the Law was written in 1985 and revised again in 1988, but was enacted in only a handful of states. In 2002, the Uniform Law Commissioners finalized the draft of a new Uniform Securities Act to bring the state laws in line with Federal legislation that had been passed in recent years. To date, the acceptance of the new law by the states is not widespread. The Policy Statements, Memoranda of Understanding and Model Rules of NASAA have been published to assist in bringing state securities laws based on the 1956 Act into harmony with federal securities laws passed in recent years.