Consent to Service of Process

We'll start off the section with a brief explanation of consent to service of process as it applies to broker-dealers, agents, investment advisers and investment adviser representatives.

Usually, all persons must sign a consent to service of process, which means that legal papers, such as subpoenas, meant to be served to a registered person, may be served to an Administrator, and will have the same legal force as if served to the individual or company in person. In essence, the Administrator has legally been given power of attorney to receive NON-CRIMINAL grievances on behalf of a registered person by the consent to service of process.

The legal term is that the Administrator has, by the consent to service of process, been appointed as "attorney in fact" to receive legal documents for the registrant.

Broker-Dealer Definition and Exclusions

A broker-dealer is ANY person OR entity that acts in the BUSINESS of securities transactions either for its own account (dealer), or for others (broker). If the person/entity enacting securities transactions has a physical address (office, or any established place of business) where he/she conducts business, the person/entity is a broker-dealer. If the person in question only trades principal accounts (the person's own account), it is still a broker-dealer.

Remember: Agent/Broker/Commission and Principal/Dealer/Markup. An agent makes trades on behalf of others and a principal trades for its own account and is compensated by a markup.

From the Uniform Securities Act, drafted by the NCCUSL:

"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.

From the Uniform Securities Act, drafted by the NCCUSL:

Agent/Broker/Commission and Principal/Dealer/Markup. An agent makes trades on behalf of others and a principal trades for its own account and is compensated by a markup.

Broker-Dealer: Summary of Exclusions

A broker-dealers or person with no physical address (the law says "no place of business") in the state, doing business
with another broker-dealer or financial institution that DOES have a physical address, is generally excluded from registration. This is often considered an "institutional exemption." Recognize this as a pattern that repeats in the
Uniform Securities Act.

Persons that have three or fewer customers (not including issuers and "bona fide" exempt such as institutions and pre-existing customers) are often exempt.

1. Is the legal person/entity effecting securities transactions (excluding financial institutions, pensions and trusts) in an agency or principal capacity? If yes, the entity/person MUST register.

2. Does the person/entity have a physical address in the state in which it is effecting transactions? If yes, the entity/person MUST register with the Administrator.

3. Is the person/entity located out of state, with no address within the state where the transactions are effected? Is the person/entity conducting business solely with issuers, broker-dealers, federally regulated financial institutions, and/or pre-existing customers who are vacationing in the state? If yes, the entity/person in question DOES NOT have to register with the Administrator.

Registrations of Persons - Broker Dealer: Initial Registration

Initial registration for a broker-dealer is very simple. If a person or an entity falls under the definition of a broker-dealer, he/she/it MUST register as a broker-dealer. To register, the prospective broker-dealer must file an application with the state.

The initial application includes:

Name of business
Address of business
Type of business to be conducted
Qualifications of partners, directors and officers, including work history and financial solubility
Any/all negative history including:
Securities related misdemeanor convictions

Administrative orders
Any felony convictions, including those NOT related to the securities markets.
Initial Financial Requirements - Surety Bonds
At any time, the Administrator holds the power to demand that any/all broker-dealers meet minimum financial requirements or post surety bonds.

Specifically, the USA states:

"A licensed broker-dealer who is not registered under the Securities Exchange Act of 1934 must maintain minimum net capital and a prescribed ratio between net capital and aggregate indebtedness, which may vary with type or class of broker-dealer;"

"The Administrator by rule may require a fidelity bond from a broker-dealer who is not registered under the Securities Exchange Act of 1934."

In other words, if a broker-dealer or investment adviser is not meeting the imposed requirements, the Administrator should be notified immediately.

Broker Dealer: Fees

The Administrator, usually on an annual basis, requires filing fees. If an application is rejected for any reason, the Administrator retains the right to keep part of the fee.

Fees are transferable, applications are not. A broker-dealer with several subsidiaries that purchases a new subsidiary can use the previous company's remaining filing fee for the year, but must file a new application.

►Broker-Dealer: Membership Maintenance

Broker-Dealer: Testing

Administrators can reserve the right to require applicants to take an examination, which either oral or written.

Broker-Dealer: Update

If at any time a broker-dealer has any material change in vital information (i.e. address), it is to notify the Administrator immediately. Records of a broker-dealer must be kept for a minimum of three years.

Financial reports must be filed with the Administrator annually, and in some cases, quarterly.

Usually, all advertising and promotional material must be filed with the Administrator, unless it is exempt on either a security or transaction basis.

Broker-Dealer: Renewal

The only requirement for renewal is for broker-dealers to pay annual fees, as long as there are no proceedings pending (including denial, suspension, revocation, or cancellation).

Broker-Dealer: Termination

Registration terminates annually on December 31 each year. However, if an Administrator deems it necessary, he or she can suspend or revoke registration at any time.

Non-disciplinary registration can be terminated at any time, regardless of whether there is/was an infraction of the Uniform Securities Act.

Withdrawal: At any time, a person may withdraw registration (if there are no violation-related proceedings in progress), by submitting such directly to the Administrator. Withdrawal is effective 30 days after the receipt of the withdrawal request.

Cancellation: Upon death, mental incompetence, or non-activity, an Administrator can cancel registration at any time. It is extremely important to note that cancellation is NOT the same as suspension, revocation or abjuration (denial).

1. Application
2. Consent to service of process

In addition to these two items, a broker-dealer can be required to take an examination, pay a filing fee, maintain a minimum (liquid) net capital specified by the Administrator, and potentially post a surety bond as well! Note: The Administrator may not establish requirements that are in excess of, or more burdensome than, those already
established by the SEC.

►Agents: Definition

Agent Definition

"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 who we usually call a registered representative. This person generally works for a broker-dealer.

An agent is a salesperson who represents a broker-dealer or issuer, either selling or attempting to sell securities to the investing public. Any time that an agent is acting on the behalf of another, he or she is generally known as acting on the behalf of principals. Agents are also known as registered representatives, but can also be referred to as sales representatives. A brokerage firm cannot be an "agent" because an agent can only be a natural person.

►Agents: Registration

Registration requirement:

It is unlawful for an individual to transact business in this State as an agent unless the individual is registered under this [Act] as an agent or is exempt from registration as an agent..."

The law then lists those persons who are exempt from registration in the state. These basically parallel the exemptions
of the broker-dealers. Let's look at them:

The broker-dealer with which the agent is associated has no place of business in the state and the agent only conducts business with existing customers:

Who are not residents of the state, and are in the state for 30 days or less, Who have moved to another state after establishing an account with the agent in his or her state of registration. The agent must apply for registration in the customer's new state of residence within 10 days of any securities transactions or of the discovery that the client has moved to the other state. There is a 60-day grace period allowed by law for transactions to continue so long as the agent has made application within the 10-day period. To apply for registration, the agent's B/D must be registered in the new state. We will deal with this extensively in practice questions.

The broker-dealer itself is exempt from registration in the state because of the Canadian and other foreign broker-dealer exemption and the agent's only transactions are with existing customers as described above.

The agent represents issuers of exempt securities. Let's repeat the list of these exempt securities:

Securities issued by governments. This includes the U.S. government; state and local governments and foreign governments with which the U.S maintains diplomatic relations.

Securities issued by banks. Remember that banks virtually always qualify as exemptions.

Securities issued by insurance companies authorized to do business in the state

Securities issued by railroads and public utilities that are regulated by the U.S. government, the state or a Canadian government regulatory body

Securities that are considered federal covered securities as described in the definition above

Securities of nonprofit organizations, such as churches

Investment grade commercial paper. Sometimes the exam will refer to these as promissory notes, which have maturities of no more than 270 days and a minimum face amount of $50,000. The term "investment grade" refers to the top 4 grades, in terms of safety, as determined by such organizations as Moody's and Standard & Poor's.

Now, let's look again at what was just said: If an agent represents an issuer of exempt securities, then he or she is exempt from registration with the state. Earlier, we defined the securities of certain issuers, such as New York Stock Exchange (NYSE) stocks, as federal covered securities. If an agent represents one of those companies, he or she doesn't have to register with the state. This does not mean that the person isn't registered at all. The agent is likely to be registered with the SEC, just not with the state.

Also, an individual is not considered an agent if he or she does not make transactions in securities with public customers. Again, this law is designed to protect the investing public. The following are instances in which the person may be dealing in securities, but would be exempt from registration as an agent under the Uniform Securities Act.

An individual, such as an officer of a company, selling stock of his or her company (the issuer) and receiving no compensation for the transaction.

A representative of a B/D making transactions for federal covered investment advisers. Such IAs are considered "sophisticated investors."

An individual selling stock of his or her own company to employees of that company and receiving no compensation for the transactions. An example of this would be the clerk who handles employee stock option purchase plans. That person is paid for clerical duties, not for stock transactions.

A person whose duties are strictly clerical (or ministerial as the law says) in nature and who has no authority to accept orders

An individual who represents an issuer in transactions with an underwriter

An officer or director of a broker-dealer who is not involved in effecting securities transactions or the supervision of persons who make such transactions

There is a definite thread in the USA that exempts persons who are not compensated for transactions. Use this idea as another tool to help sort out exemptions

Agents: Limitations and Terminations

The USA has a specific section that deals with the registration of agents with more than one broker-dealer. Here's what the 2002 USA says:

"An individual may not act as an agent for more than one broker-dealer or one issuer at a time, unless the broker-dealer or the issuer for which the agent acts is affiliated by direct or indirect common control or is authorized by rule or order under this [Act]." As a practical matter, dual registration of an agent is a possibility only if directly authorized by the Administrator.

What if a broker-dealer chooses to have persons affiliated with the firm who should be registered, but does not have them registered? The Administrator has the power to suspend or revoke the company's registration. The firm would also be subject to criminal and civil penalties.

Agent: Termination of Registration

if an agent terminates his or her affiliation with a broker-dealer, that person is no longer considered an agent until he or she becomes affiliated with another broker-dealer.

When the agent begins or terminates an affiliation with a broker-dealer, the firm and the agent must both notify the Administrator.

When a person who was an agent of broker-dealer "A" chooses to leave that firm and goes to broker-dealer "B," the
agent must file a new application for registration with the Administrator within 30 days of termination with the original B/D. As long as there have been no new disciplinary issues found in the files within the past 12 months, the agent's registration is effective upon filing, and paying the appropriate fee, of course. Both the "old" B/D and the "new" B/D are also required to notify the Administrator.

Example: If broker Shenanigans calls one of his best customers while she is on her Lear jet over Mississippi and effects a transaction to sell some of her stock, does he have to be registered in that state?

Answer: No, because Shenanigan's client was simply visiting (or in this case, flying over) the state.

An agent can effect transactions in a state if his or her registration is pending (but not approved) for 60 days ONLY WITH EXISTING CUSTOMERS, assuming the following:

He or she is registered in another state.

The broker-dealer the agent represents is registered in the state.

There must not be an injunction restricting the agent from registration in another state.

Example: John decides one day that he has had it with New York, where he is a registered agent. Consequently, he throws all his stuff in a suitcase and relocates to sunny California, where he gets a job with the broker-dealer Flashy Cali, Inc. He begins effecting transactions with existing customers who have also recently moved to the state - with the consent of his new firm, of course. He operates for the first 56 days, until the Administrator informs him that his registration is active. Because John began effecting transactions before actual registration approval by the
Administrator, has he committed any fraudulent activity?

Answer: No, assuming his registration was never revoked in another state and his new firm Flashy Cali, Inc. is registered
in California, John is in the clear. John can ONLY conduct transactions with existing customers who have moved into the state while in the 60-day window, he cannot solicit new business until his registration is active. Thus, because Flashi Cali, Inc. is registered in California, he has not had his registration revoked in another state and he has effected transactions for less than 60 days, he has not violated the USA.

If you receive direct compensation from a commission, you must register as an agent.

If you represent a broker-dealer that charges commissions, or an underwriting fee, you must register as an agent.

If you do not charge a commission and are effecting exempt transactions and/or in exempt securities, you DO NOT need to register as an agent.

Usually, unless you are representing a government-oriented entity, you need to register. For example, if you represent a firm that does not charge a commission for the sale of a municipal or federal security, but DOES receive an underwriting fee, you have to register.

►Additional information the USA covers regarding agents:

Limitations of affiliations

The USA "limits agents to a single employment or affiliation unless a rule or order of the Administrator authorizes multiple affiliations." In short, an agent can only represent one firm unless he or she gains approval by the Administrator, as noted above.

An agent has no specific minimum financial requirements to register, although the Administrator reserves the right to require the agent or broker-dealer to post a bond.

If the agent becomes insolvent (i.e. bankrupt), registration may be terminated if it is deemed, by the Administrator, to be "in the public interest."

Multiple agents may split commissions as long as the same parent broker-dealer employs them. What's more, transactions from a state can only benefit more than one agent if the agents are both registered in that particular state.

Agents: Initial Registration

Initial registration for an agent is very simple. If a person or an entity falls under the definition of an agent he/she/it
MUST register as an agent via the broker-dealer. He or she must also sign a consent to service of process.

In addition, the USA mentions that both the agent and broker-dealer are to notify the Administrator of new or terminated employment.

Agents: Update

If at any time an agent has any material change in vital information (i.e., name or address), he/she and the broker-dealer are required to notify the Administrator.

Agents: Renewal

An agent's broker-dealer usually pays annual renewal fees.

Agents: Termination

If an agent's affiliation with a broker-dealer is terminated at any time, either by the agent or the broker-dealer, both the agent and the broker-dealer are to notify the Administrator.

An agent's registration is only active as long has he or she is affiliated with a broker-dealer.

Investment Adviser: Definition

Refer to and review the definition and exclusions above.

An investment adviser is a firm that:

For compensation, engages in the business of advising others as to the value of securities, or as to the advisability of investing in, purchasing, or selling securities

Who, for compensation and as a part of a business, issues or promulgates analyses or reports security-specific information advising either buying or selling.

Additional Information

If a broker-dealer both effects transactions and offers investment advice for special compensation, it must register as an investment adviser as well. As noted earlier, broker-dealers that have "wrap accounts" must register as both broker-dealers and as investment advisers.

De Minimis: The NSMIA provides a de Minimis exemption for investment advisers that have no place of business in the state and direct business communications to "no more than five non-institutional clients" in a year.

In a Memorandum of Understanding dated April 1997, NASAA addresses the requirements of NSMIA regarding investment advisers and investment adviser representatives. The following is from the document:

"If an investment adviser does not qualify for SEC registration, its registration is governed by state laws. State
registration authority is limited, however, by a national de Minimis standard that prohibits the laws of any state requiring registration, licensing, or qualification as an investment adviser if the adviser does not have a place of business located in the state and during the prior 12 months had five or fewer clients that reside in the state. In addition, the NSMIA requires a state to enforce only those books and records, minimum net capital, or bonding requirements of the state in which the investment adviser maintains its principal place of business."

The USA also states that an investment adviser is prohibited "from employing an individual who is prohibited from
such employment or association by the Administrator." Violation of this provision does not always result in strict liability, as employees can often mislead employers. To be liable, the investment adviser must have known or should have known of the Administrator's order suspending or barring employment for the employee.

An investment adviser may conduct business with institutional clients in different states than its registration without registering in the additional states if:

The investment adviser has no physical address in the state(s), but is registered in another state.

The client the investment adviser is providing advice for is an institutional client, such as a bank, another investment adviser, a benefit plan with assets greater than $1 million and/or the government.

Investment Adviser: Initial Registration and Requirements

Initial registration for an investment adviser is similar to a broker-dealer. If a person or an entity falls under the definition of an investment adviser he/she/it MUST register with the Administrator.

SEC versus the state:

If an investment adviser manages less than $25 million, his or her registration is under the USA, at the state level.

Those managing more than $30 million are required to register with the SEC. If an investment adviser registers with the SEC, he or she must give notice to the state adviser and pay filing fees.

An investment adviser with assets of $25 million to $30 million may register with the SEC or with the state - the choice is left up to the firm. In addition, there are several categories of investment advisers who are required to register with the SEC instead of states. They include:

Nationally Recognized Statistical Rating Organizations (NRSROs)

Consultants who advise pension plans with assets over $50 million

Any adviser that believes it may be required to register with the SEC within 120 days of initial state registration

Investment advisers managing the portfolios of registered investment companies such as mutual funds

Investment Adviser: Financial Requirements

At any time, the Administrator holds the power to demand that investment advisers meet certain minimum financial requirements. Since the Series 63 exam is based on NASAA amendments as well as the 1956 USA, it is helpful to look at the Model Rule for IAs:

NASAA Minimum Financial Requirements for Investment Advisers
Model Rule 202(d)-1
Adopted April 3, 2000, Amended April 18, 2004

Rule 202(d)-1. Minimum Financial Requirements for Investment Advisers

An investment adviser registered or required to be registered under the act who has custody of client funds or securities shall maintain at all times a minimum net worth of $35,000 except:

Advisers having custody solely due to direct fee deduction and complying with the terms described under Rule 102(e) (1)-1(a) 6 and related books and records, as described in Rule 203(a) (2), shall not be required to comply with the net worth or bonding requirements of this rule.

Advisers having custody solely due to advising pooled investment vehicles and complying with the terms described under Rule 102(e)(1)-1(a)7 or Rule 102(e)(1)-1(b)(3) and related books and records, as described in Rule 203(a)(2), shall
not be required to comply with the net worth or bonding requirements of this rule.

Essentially, Administrators have the ability to require investment advisers to carry bonds or insurance if the aforementioned persons/entities have discretionary authorization or hold client funds. In short, if the Administrator feels that a situation is risky to the client, he/she may require bonds to protect clients against potentially excessive losses. If you need to recognize a dollar figure on the exam, go with the $35,000.

Investment Adviser: Update

If at any time a broker-dealer has any material change in vital information (i.e. address), it is to notify the Administrator immediately.

Investment Adviser: Renewal

Investment advisers must pay annual dues, and are additionally subject to periodic examination by the Administrator. In addition, investment advisers must file annual financial statements.

Offers advice regarding specific security-related information,Receives compensation for securities-related advice, or Is considered to be in the business of securities-related advice,

The entity IS an investment Adviser and must be registered as such, unless exempt.

Exclusions: Investment adviser representative (IAR). These are the individuals who work for an investment adviser (IA).

Individuals whose advice is incidental to their professional businesses. Think TEAL: teachers, engineers, accountants and lawyers Bona fide publications not issuing client-specific advice

Broker-dealers providing advice as part of their normal business that DO NOT receive compensation for such. Note that often the exam will use the word, "remuneration," rather than compensation.

Banks, savings institutions, or trusts. Notice, once again, how banks and bank-related entities are excluded.

Investment Adviser Representative (IAR): Definition

The NASAA Memorandum of Understanding mentioned above addresses the subject of investment adviser representative (IAR) by the following:

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. Additionally, the states retain the authority to investigate and bring enforcement actions in the case of fraud or deceit, and as otherwise permitted by the NSMIA, by SEC registered investment advisers and their associated persons.

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 a federal covered investment adviser representative (however, if a federal-covered investment adviser has a place of business in a state where a representative conducts business, the representative may be required to register with the state Administrator.) Do NOT confuse a federal covered investment adviser with an investment adviser required to file
on a state level.

Example: If John calls Excellent Money Managers, Inc. to speak with someone about his portfolio and ends up talking to Kathy Kash, is he talking to the investment adviser representative, or the investment adviser?

Answer: John is talking to the investment adviser representative (Kathy Kash), an employee of the investment adviser, Excellent Money Managers, Inc.

Example: Big Bubba Bob is an investment adviser representative of Kamikaze Portfolio Managers, a federal covered investment adviser (meaning it is registered with the SEC); he has clients in California, New York, Colorado and Alaska. The company's offices are located in Georgia. In what states does he have to register with the Administrator(s) to work
as an investment adviser representative?

Answer: None, except Georgia if that's where he does business. However, because Kamikaze Portfolio Managers is a federal covered investment adviser (registered with the SEC) he does not have to register in the state where his firm has no physical address.

Investment Advisers: Ongoing Requirements

Investment advisers must create and maintain all records (including books, marketing and correspondence) for a minimum of five years.

Record-Keeping:

The following is a quote from a NASAA Model Rule adopted in 2003:

Every investment adviser subject to subsection (a) of this rule shall preserve the following records in the manner prescribed:

1. All books and records required to be made under the provisions of paragraph (a) to (c)(1), inclusive, of this Rule
(except for books and records required to be made under the provisions of paragraphs (a)(11) and (a)(16) of this Rule), shall be maintained and preserved in an easily accessible place for a period of not less than five years from the end of
the fiscal year during which the last entry was made on record, the first two years in the principal office of the
investment adviser.

Investment Advisers: Books and Records

The books, records and financial reporting requirements of broker-dealers are governed by the SEC and the self-regulatory organizations (SRO), such as the exchanges and FINRA.

Federal law: the Securities and Exchange Act of 1934 prohibits states from imposing requirements on broker-dealers
that are more extensive or burdensome. The Section of the '34 Act that spells this out is Section 15(h), which,
in part, says:

"No law, rule, regulation, or order, or other administrative action of any state or political subdivision thereof shall establish capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements for brokers, dealers, municipal securities dealers, government securities brokers, or government securities dealers that differ from, or are in addition to, the requirements in those areas established under this title."

The Official Comments that accompany the 2002 USA echo the Federal Law:

"... Under the National Securities Markets Improvement Act of 1996, States may not impose such requirements on covered broker-dealers and investment advisers greater than those specified in "... Under the National Securities
Markets Improvement Act of 1996, States may not impose such requirements on covered broker-dealers and investment advisers greater than those specified in

If, on the Series 63 exam, you see a reference to Section 15(h) just remember that the states cannot impose requirements on broker-dealers that are more difficult or extensive than those already mandated by the SEC.

The records of a broker-dealer's business must be maintained, by SEC Rule, for three years. The records that a broker-dealer maintains for its customer accounts must generally be maintained for six years.

Those investment advisers that are covered by the USA (not federal covered) are required to maintain records for five years by the Model Rules of NASAA that we mentioned earlier. The general requirement is:

"...All books and records required to be made under the provisions of... this rule ... shall be maintained and preserved in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the last
entry was made on record, the first two years in the principal office of the investment adviser."

The SEC's specific requirements for a broker-dealers minimum net capital depend on the nature of the firm's business and are beyond the scope of the Series 63. Just be aware that the financial stability requirements for broker-dealers are governed by SEC rules and that under federal law the The SEC's specific requirements for a broker-dealers minimum net capital depend on the nature of the firm's business and are beyond the scope of the Series 63. Just be aware that the financial stability requirements for broker-dealers are governed by SEC rules and that under federal law the states
cannot impose more stringent requirements. Here again, Section 15(h) applies.

Sarbanes-Oxley Act (SOA)

In July 2002, the Sarbanes-Oxley Act (SOA) introduced major changes to the regulation of corporate governance and financial practice. The act is named after its main architects, Senator Paul Sarbanes and Representative Michael Oxley.

The act really only affects corporate financial reporting, but will (in time) trickle through to the USA, and no doubt
trigger some changes as well. Though the SOA really only affected the USA in one way, you will still find a link to the act in the resources section of the study guide, should you want to read about it.

How did the SOA affect the USA? The federal statute of limitations for criminal charges was changed from two years to five years.