Section 06
In-Depth Study Material
Deep-dive into every testable topic. This is the core study material organized by the four major exam sections.
I. Registration of Securities (~15% of Exam)
What to Know
This section tests your understanding of how securities are registered at the state level under the Uniform Securities Act.
Registration Methods
- Registration by Coordination -- Used when securities are also being registered federally (SEC). The state registration becomes effective simultaneously with the federal registration.
- Registration by Qualification -- Used for intrastate offerings (securities sold only within one state). The most thorough process -- the Administrator has the most authority here.
- Registration by Filing (Notification) -- Simplified process for established issuers with a track record (e.g., companies that have been filing with the SEC for 3+ years).
Exempt Securities (Do NOT require state registration)
- U.S. Government securities -- Treasury bills, notes, bonds, STRIPS
- Municipal securities -- Issued by any U.S., Canadian, or provincial government
- Foreign government securities -- If the U.S. has diplomatic relations with that country
- Bank and savings institution securities
- Insurance company securities (but NOT variable annuities -- those are securities)
- Public utility securities -- Regulated by a government authority
- Federal covered securities -- NYSE/NASDAQ-listed securities, investment company securities (mutual funds)
- Non-profit organization securities -- Religious, educational, charitable, fraternal organizations
- Commercial paper -- With $50,000+ denomination, maturity 9 months or less, top 3 rating
Exempt Transactions (Do NOT require registration)
- Isolated non-issuer transactions -- Infrequent trades not made by the issuer
- Unsolicited orders -- Customer-initiated transactions (agent must document)
- Transactions with institutional investors -- Banks, insurance companies, pension funds, etc.
- Private placements -- Sold to max 10 non-institutional buyers in 12 months, no commissions paid, buyer is purchasing for investment (not resale)
- Transactions with existing shareholders -- No commission paid
- Bankruptcy and fiduciary transactions -- Executor, administrator, guardian, trustee sales
- Underwriter transactions -- Between issuers and underwriters
II. Registration of Persons (~30% of Exam)
What to Know
This is the second-largest section. Know who must register, who is excluded, and the specific rules for each category of person.
Broker-Dealers
- Definition: Any person engaged in the business of effecting securities transactions for the account of others or for their own account
- Must register in any state where they have a place of business or deal with retail customers
- Excluded from definition: Agents (individuals), issuers, banks, savings institutions, trust companies
- Registration: Initial application, consent to service of process, surety bond (if required by Administrator), financial statements
- Effective date: Noon of the 30th day after filing, unless earlier by Administrator
- Renewal: December 31 each year
Agents
- Definition: Any individual (not a firm) who represents a broker-dealer or issuer in effecting or attempting to effect securities transactions
- Excluded: Individuals representing an issuer in exempt transactions, individuals representing an issuer in transactions with employees (no commission), clerical/administrative staff
- Agent cannot be registered with more than one BD at a time (unless the BDs are affiliates)
- Agent registration follows the BD -- if BD registration is revoked/withdrawn, agent registration is also terminated
Investment Advisers (IAs)
- Definition: Any person who, for compensation, engages in the business of advising others about securities
- Three-prong test (ALL three must be met): Provides advice about securities, is in the business of providing advice, receives compensation
- Excluded (LATE B): Lawyers, Accountants, Teachers, Engineers, Bankers/Broker-dealers -- if advice is incidental and no special compensation is charged
- Federal covered IAs ($100M+ AUM) register with the SEC but must still file notice in each state
- State-registered IAs (under $100M AUM) register with the state Administrator
Investment Adviser Representatives (IARs)
- Individuals who represent an IA -- must register in the state where they have a place of business
- Solicit, manage accounts, or provide advice on behalf of the IA
- Clerical/administrative staff are excluded
III. Fraudulent and Prohibited Practices / Ethical Practices (~45% of Exam)
THE BIG ONE -- 45% of the exam
Nearly half the exam is about fraud, ethics, and business conduct. Know these rules cold. This is where your exam is won or lost.
Fraudulent Practices (Universal Prohibitions)
- Fraud applies to everyone -- broker-dealers, agents, investment advisers, IARs. No exemptions exist for fraud.
- Employing any device, scheme, or artifice to defraud
- Making untrue statements of material fact or omitting material facts
- Engaging in any act that operates as a fraud or deceit
- Fraud provisions apply to ALL securities -- exempt or not, registered or not
Prohibited Practices for Broker-Dealers and Agents
- Churning -- Excessive trading to generate commissions
- Unauthorized trading -- Effecting transactions without customer authorization
- Unsuitable recommendations -- Recommending without reasonable grounds for believing it is suitable
- Selling away -- Executing private securities transactions outside of the firm
- Sharing in customer accounts -- Agents cannot share in profits/losses unless: written consent of both customer and BD, and shares proportional to contribution (unless family member)
- Guaranteeing against loss -- Never guaranteed
- Borrowing from / lending to customers -- Generally prohibited
- Commingling funds -- Cannot mix customer funds with firm funds
- Front-running -- Trading ahead of a customer order
- Market manipulation -- Wash trades, matched orders, painting the tape
Investment Adviser Ethical Obligations
- Fiduciary duty -- IAs have the highest standard of care; must act in the best interest of clients
- Brochure rule -- Must deliver Form ADV Part 2A (brochure) to clients at or before entering into an advisory contract; annual offer to deliver updated brochure
- Disclosure of conflicts of interest -- Must disclose material conflicts, compensation arrangements, disciplinary history
- Custody rules -- If an IA has custody of client assets, must follow strict rules: qualified custodian, annual surprise audit, quarterly statements
- Performance-based fees -- Generally prohibited unless client meets net worth/AUM thresholds (qualified clients)
- Advisory contracts -- Must be in writing, cannot assign without client consent, no unreasonable fees
- Solicitor rules -- Must disclose any compensation paid to solicitors who refer clients
Communication Standards
- All communications must be fair, balanced, and not misleading
- Cannot predict future prices or guarantee results
- Must present both risks and potential rewards
- Testimonials have strict rules and disclosure requirements
- Cannot use inside information (insider trading)
IV. Administration and Enforcement (~10% of Exam)
What to Know
The Administrator's powers and enforcement mechanisms. Small section but easy points if you know the rules.
Powers of the State Administrator
- Can: Deny, suspend, revoke, or cancel registrations
- Can: Issue cease and desist orders
- Can: Issue subpoenas (even across state lines)
- Can: Make, amend, and rescind rules and orders
- Can: Conduct investigations and examine records
- Cannot: Make arrests or impose jail time (that requires a court/criminal proceedings)
- Cannot: Issue an injunction (must go to court for that)
Enforcement Actions
- Prior notice and opportunity for hearing is required before denial, suspension, or revocation -- EXCEPT in summary (emergency) actions
- Statute of limitations: Civil cases must be brought within specific timeframes (generally 2-3 years from discovery, 5 years from the act)
- Criminal penalties: Up to 3 years in prison and/or $5,000 fine per violation under the USA
- Grounds for denial: Felony conviction (within last 10 years), securities-related misdemeanor, willful violation of securities laws, currently subject to an order
- Consent to service of process: Required from all applicants -- allows the Administrator to receive legal documents on behalf of the registrant
Section 08
Key Concepts to Memorize
The most critical definitions, rules, and distinctions that appear on the test. Know these cold before sitting for the exam.
Critical Definitions
Security
Any note, stock, bond, debenture, evidence of indebtedness, investment contract, or any instrument commonly known as a "security." The Howey Test defines an investment contract as: an investment of money, in a common enterprise, with the expectation of profits, derived solely from the efforts of others. Key: Variable annuities and variable life insurance ARE securities. Fixed annuities and whole life insurance are NOT.
Person
Under the USA, "person" includes individuals, corporations, partnerships, associations, trusts, estates, unincorporated organizations, governments, and political subdivisions. It is the broadest possible definition.
Offer vs. Sale
Offer: Any attempt to dispose of a security for value. Includes advertisements, solicitations, and any attempt to solicit an offer to buy. Sale: Every contract of sale, disposition, or exchange of a security for value. A gift of assessable stock IS a sale. A stock dividend is NOT a sale (no new consideration).
Broker-Dealer vs. Agent
Broker-Dealer: A firm (entity) that effects securities transactions for others or itself. Agent: An individual (natural person) representing a broker-dealer or issuer in securities transactions. Key: A BD is a company; an agent is a person working for that company.
Investment Adviser 3-Prong Test
A person is an IA if ALL three conditions are met: (1) provides advice or analysis about securities, (2) is in the business of providing such advice, (3) receives compensation for it. Remove any one prong and they are NOT an investment adviser under the USA.
Exemption vs. Exclusion
Exemption: The law applies but specifically excuses the entity/transaction from certain requirements (like registration). Exclusion: The entity/transaction was never meant to be covered by the law in the first place -- it falls outside the law's scope entirely. Both result in not needing to register, but the legal reasoning is different.
Rules You Must Know
Private Placement Exemption (State Level)
Offers directed at no more than 10 non-institutional buyers in a state during any 12-month period. The seller must reasonably believe the purchase is for investment (not resale). No commission/remuneration is paid to a person other than a registered BD or agent. No general solicitation or advertising.
Registration Effective Dates
Persons (BDs, agents, IAs, IARs): Effective at noon on the 30th day after filing, unless the Administrator accelerates or denies it. Securities by Coordination: Effective simultaneously with federal (SEC) registration. Securities by Qualification: Effective when the Administrator orders it (no automatic date). All registrations expire December 31 each year.
The LATE B Exclusions (Investment Adviser)
These professionals are excluded from the IA definition IF their advice is incidental to their profession and they charge no special compensation for it: Lawyers, Accountants, Teachers, Engineers, Bankers/Broker-dealers. If they hold themselves out as providing investment advice or charge separately for it, the exclusion is lost.
Fiduciary Duty (IAs)
Investment advisers owe a fiduciary duty to clients -- the highest standard of care in securities law. They must: put client interests first, disclose all material conflicts, seek best execution, not engage in self-dealing without disclosure and consent. Broker-dealers owe a suitability obligation (lower standard, but Reg BI has raised it under federal law).
Administrator Powers Summary
CAN: Deny, suspend, revoke, cancel registrations; issue cease and desist orders; subpoena witnesses and documents (even across state lines); require surety bonds; make rules and orders. CANNOT: Make arrests, impose prison sentences, issue injunctions (must go to court), conduct pre-registration inspections of BDs (can for IAs). Summary action: The Administrator can issue a summary suspension without prior notice if public interest requires it -- but must follow up with a hearing promptly.
Criminal Penalties
Willful violations of the Uniform Securities Act: up to 3 years in prison and/or a $5,000 fine per violation. No person can be imprisoned for violating a rule or order unless they had actual knowledge of the rule or order. The statute of limitations for criminal prosecution is 5 years from the act.
Civil Liabilities
A buyer of securities sold in violation of the USA can sue for: the purchase price plus interest (minus any income received), or damages if they no longer own the security. The seller can avoid liability by proving the buyer knew about the misrepresentation. Statute of limitations: 2 years from discovery or 3 years from the sale, whichever comes first.
Number-Based Rules (Memorize These)
| Rule |
Number |
Context |
| Passing score | 43/60 (72%) | Minimum correct answers needed |
| Registration effective | Noon, 30th day | Unless accelerated or denied by Administrator |
| Registration expiration | December 31 | All registrations expire annually |
| Private placement limit | 10 non-institutional buyers | Per state, per 12-month period |
| Retake wait (1st-2nd fail) | 30 days | After 1st or 2nd failed attempt |
| Retake wait (3rd+ fail) | 180 days | After 3rd and subsequent failures |
| Criminal prison max | 3 years | Per willful violation of the USA |
| Criminal fine max | $5,000 | Per violation |
| Civil SOL (from discovery) | 2 years | From discovery of the violation |
| Civil SOL (from sale) | 3 years | From the date of the transaction |
| Criminal SOL | 5 years | From the date of the act |
| Federal covered IA threshold | $100M AUM | Must register with SEC, not the state |
| Commercial paper exemption | $50,000+ denomination | Must mature in 9 months or less, top 3 rating |
| Felony look-back period | 10 years | Felony conviction is grounds for denial for 10 years |
| Scheduling window | 120 days | Window to schedule after registration |
Memory Tricks
Laws with Years = Federal
Securities Act of 1933, Securities Exchange Act of 1934, Investment Advisers Act of 1940, Investment Company Act of 1940 -- all federal laws (they have years in their names). The Uniform Securities Act (no year) is the state-level model law.
Bigger Numbers at Federal Level
Federal penalties and fines are larger than state-level ones. Federal criminal penalties can reach $5 million and 20 years. State penalties under the USA are typically $5,000 and 3 years. This pattern helps when questions compare state vs. federal enforcement.
Registration is the Default
Unless specifically exempted, everything and everyone must register. When in doubt on the exam, registration is likely required.
Federal Covered = State Cannot Touch
NYSE/NASDAQ-listed and investment company securities are "federal covered." States cannot require registration (preempted by NSMIA 1996). States CAN still require notice filings and fees, and CAN enforce anti-fraud provisions.
Section 09
Common Trick Questions
NASAA is known for tricky wording and subtle traps. Here are the patterns to watch for and how to avoid falling for them.
The #1 Rule
Read every question twice before looking at the answer choices. NASAA loves to insert one word that completely changes the meaning. Words like "EXCEPT," "NOT," "ALWAYS," "NEVER," "ONLY," and "UNLESS" are the most common traps.
Trap #1: The Double Negative
"All of the following are NOT required to register as an agent EXCEPT..."
This is asking: which one DOES have to register? The double negative cancels out. Rephrase it: "Which of the following IS required to register?" Break down negative questions by restating them in the positive.
Trap #2: Exempt vs. Excluded
"A bank that provides investment advice to its trust clients is excluded from the definition of investment adviser because..."
Banks are excluded from the IA definition (they fall outside the scope), not exempt. If the question uses "exempt" when it should say "excluded" (or vice versa), it may be wrong. Know the distinction: excluded = never was an IA; exempt = is an IA but does not have to register.
Trap #3: "The Administrator CAN..."
"The Administrator can do all of the following EXCEPT: A) Issue a cease and desist order, B) Revoke a registration, C) Issue an injunction, D) Subpoena witnesses"
Answer: C. The Administrator CANNOT issue an injunction -- only a court can. This is one of the most commonly tested distinctions. Also remember: the Administrator cannot arrest anyone or impose jail time.
Trap #4: State vs. Federal Jurisdiction
"A security listed on the NYSE must be registered with the state before being sold."
False. NYSE-listed securities are "federal covered securities" and are exempt from state registration. However, they are still subject to state anti-fraud provisions. The exam loves testing whether you know that federal covered securities skip state registration but NOT anti-fraud rules.
Trap #5: "For Compensation"
"An accountant who provides securities advice to a client while preparing their taxes is an investment adviser."
Only if the accountant charges separate compensation for the advice. If the advice is incidental to their accounting practice and they do not charge a separate fee for it, they are excluded (LATE B). The question will often omit whether special compensation is charged -- if it is not mentioned, assume it is incidental.
Trap #6: Unsolicited Transaction
"An agent receives an unsolicited order from a client to purchase an unregistered, non-exempt security. The agent should..."
Execute the order. Unsolicited transactions are exempt from registration. The key word is "unsolicited" -- the customer initiated it. However, the agent must mark the order ticket as unsolicited.
Trap #7: Two Similar Answers
When you see two answer choices that are very similar with only one word different...
One of those two is almost always the correct answer. NASAA designs questions where two choices look nearly identical -- focus on the exact word that differs between them. Eliminate the two clearly wrong answers first, then carefully compare the remaining two.
Trap #8: "All Securities" for Fraud
"Anti-fraud provisions apply only to securities that are required to be registered."
False. Anti-fraud provisions apply to ALL securities -- registered, unregistered, exempt, or non-exempt. There are NO exemptions from the anti-fraud provisions. If a question ever suggests fraud rules do not apply to exempt securities, that answer is wrong.
Trap #9: Agent Registration -- Multiple BDs
"An agent may be registered with two broker-dealers simultaneously if..."
Only if both broker-dealers are affiliates of each other (e.g., subsidiaries of the same parent company) AND the agent has given written acknowledgment. Otherwise, an agent can only represent ONE broker-dealer at a time.
Trap #10: Summary Suspension
"The Administrator must always provide notice and an opportunity for hearing before suspending a registration."
False -- the word "always" is the trap. In a summary (emergency) proceeding, the Administrator CAN suspend a registration without prior notice if the public interest requires it. However, a hearing must be provided promptly after the summary action. Watch for absolutes like "always" and "never" -- they are usually wrong.
General Test-Taking Strategies
- Pace yourself: You have about 69 seconds per question. Flag tough ones and come back.
- Eliminate first: Cross out the two obviously wrong answers, then compare the remaining two carefully.
- Watch for absolutes: "Always," "never," "only," "all," "none" are usually incorrect. The law has exceptions to almost everything.
- Default to protection: When in doubt, choose the answer that best protects the investor/public.
- Read every word: A single word like "not," "except," or "unless" completely changes the question.
- State vs. federal: Always ask -- is this about state law (USA/Administrator) or federal law (SEC)? The Series 63 is about state law.
- Fraud is universal: If a question implies fraud rules have exceptions, that answer is wrong.