SECTION 4B REGISTRATION OF PERSONS – UNIFORM SECURITIES ACT

AGENT Under the Uniform Securities Act, note that an “agent” is defined as an individual who represents a broker/dealer or issuer in affecting or attempting to affect purchases or sales of securities. This means that agents must register with the state individually, not as corporations. In other words, agents may not avoid personal liability under the Act. That being said, most brokers/dealers and investment advisers register as corporations instead of as individuals. Remember, under the Act, the word ‘person’ is very broadly defined to include individuals, corporations, partnerships, etc. Under the Act, a clerical staff person or assistant who is authorized to solicit or accept orders for securities from customers would have to register as an agent. However, persons whose duties are solely administrative would not. Remember, agents may represent either a broker/dealer or an issuer of securities. If an agent represents a broker/dealer, they must register as an agent no matter what type of securities they sell even if the security is exempt from registration or being sold in an exempt transaction. Further, agents must register in every state where they solicit or sell securities. Of course, an agent cannot register in a state unless their broker/dealer firm is registered there first. Although some larger brokers/dealers are registered in every state, agents may only transact business in the states they are registered in. Agents may register in other states simply by filing an application, paying a registration fee, and providing a consent to service of process form. If you are registered only as an agent in California, you cannot transact business in Arizona without also registering in Arizona. No separate exam is required. The Series 63 exam is a uniform exam and is recognized in all states. Agents representing issuers of non-exempt securities or non-exempt transactions must also register under the Act. However, if an individual represents an issuer of exempt securities or an issuer selling securities in an exempt transaction, registration as an agent is not required as long as no commissions are paid. Remember, a non-exempt security must be registered with the Administrator. An exempt security is one that is exempt from registration under the Act. It is unlawful to sell unregistered non-exempt securities. Review Section III of this text for a complete list of securities that are exempt from registration under the Uniform Securities Act as well as exempt securities transactions. A security sold in an exempt transaction need not be registered. Exempt securities and exempt transactions are also exempt from the advertising filing requirements of the Act but not the anti-fraud rules. ©TesTeachers Publishing – www.testeachers.com

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This area can be very confusing, so let’s review. If you represent a broker/dealer firm in the sale of securities, you must always register as an agent regardless of what you sell. For example, an agent selling new securities in a private placement on behalf of a broker/dealer would have to register even though private placements are considered to be exempt transactions under the Act. It is the private placement that is exempt, not the agent. However, if an individual sold new stock in a private placement on behalf of the issuer of the stock, registration as an agent would not be necessary as long as no commissions were paid. To summarize, under the Uniform Securities Act, an agent would not include any of the following: 1. A person who represents an issuer selling securities in exempt transactions in which no commissions are paid (such as a private placement of the issuer’s own stock) 2. A person who represents an issuer selling exempt securities in which no commissions are paid (such as the placement of municipal bonds on behalf of the issuer) 3. A bank, savings institution, or trust company (such as selling securities on behalf of the bank’s trust department) 4. A clerical or administrative person without authority to solicit or accept orders 5. An officer of a broker/dealer who does not effect or supervise the purchase or sales of 5. securities (such as a person engaged in management only with no sales responsibilities) 6. An officer of the issuer selling the issuer’s stock to employees of the issuer in which no commissions are paid If an individual meets the definition of an agent under the Act, they must register in every state they transact business in. Failure to do so could lead to both civil (fines) and criminal (jail) penalties. It is unlawful for a broker/dealer or issuer to employ an agent unless the agent is registered. The registration of an agent is not effective during any period in which he or she is not associated with a particular broker/dealer or issuer. EXAMINATIONS Passing the Uniform Securities Agent State Law Examination and filing an application does not automatically constitute registration in a state. An applicant who has passed the exam does not have the right to transact business until he or she has been granted registration by the state administrator. No broker/dealer or issuer can lawfully employ an agent unless that agent is registered. An agent is not effectively registered unless he or she is employed by a broker/dealer or issuer. CHANGES IN EMPLOYMENT Whenever an agent begins or terminates employment with an employer, the agent as well as the employer must promptly notify the Administrator. When an agent transfers his or her employment from one broker/dealer or issuer to another, all three persons – the agent, the old employer, and the new employer – must notify the Administrator. BROKERS/DEALERS A “broker/dealer” means any person engaged in the business of affecting transactions in securities for the account of others or for his or her own account. Remember, the word ‘person’ is broadly defined to include individuals and most any business entity such as a partnership or corporation. Most

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Registration of Persons – Uniform Securities Act brokers/dealers are set up as corporations but a sole proprietor or partnership could also register as a broker/dealer. Although agents are not considered to be brokers/dealers (meaning agents must register separately), registration of a broker/dealer automatically constitutes registration of any agent who is also a partner, officer, or director of the broker/dealer firm. Issuers of securities and banks, savings institutions, or trust companies are also exempt from the definition of a broker/dealer under the Act and need not register. Further, firms with no place of business in this state (non-resident brokers/dealers) need not register in this state if they affect transactions exclusively with or through issuers, other brokers/dealers, banks, savings institutions, trust companies, insurance companies, investment companies, pension or profit sharing trusts, or other institutional buyers. So, if a securities firm has a place of business in this state, they must register here. However, if they have no office here and do business only with institutional investors, registration is not required. Further, even if the firm has no office here, if they do business with the public in this state, registration is required. Remember, an agent must register in every state he or she transacts business in; however, an agent cannot register in a state unless their broker/dealer is registered there first. An exception to registration under the Act applies if an existing customer of a non-resident broker/dealer is temporarily in this state (meaning he or she is not a resident here). For example, a broker/dealer properly registered in Colorado could transact business with a customer who is on vacation in California. Whenever a broker/dealer changes the character of its business organization, he or she may file an application with the Administrator for registration as a successor broker/dealer for the unexpired portion of the year without paying any filing fee. For example, in order to avoid any unnecessary interruptions of business, when a predecessor firm that was registered as a partnership elects to incorporate, they can file an application on behalf of the new corporate entity, which is known as the successor firm. FIRM REGISTRATION At the time a broker/dealer is registered, anyone who is then a partner, an officer, or a director of the broker/dealer is automatically registered as an agent if that person acts in the capacity of an agent and not otherwise. Silent partners are not considered agents because they do not act in the capacity of agents. Once the consent to service of process has been filed by the applicant (which is required to create jurisdiction in a state), any complaint presented to the Administrator has the same force and validity as if it had been served personally on the applicant. An application for registration must contain whatever information the Administrator requires concerning such matters as the applicant’s:   

Form and place of business organization Proposed method of doing business Qualifications and business history

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History of injunctions, conviction of any felony, or conviction of any misdemeanor involving any aspect of the securities business Financial condition and history

INVESTMENT ADVISERS It is unlawful for any person to transact business in this state as an investment adviser or investment adviser representative unless: 

He or she is registered under the Uniform Securities Act or has no place of business here and o

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His or her only clients are investment companies, other investment advisers, brokers/dealers, banks, trust companies, savings and loans institutions, insurance companies, employee benefits plans with assets of not less than $1,000,000, or government agencies, or During any period of 12 consecutive months, he or she does not direct communications in this state in any manner to more than five clients other than those specified above

In other words, if an investment adviser has a place of business in this state, he or she must register here. If he or she has no office here and the only clients are institutional clients as listed above or direct business communications are limited to no more than five public clients (also known as the ‘de minimus exemption’) in 12 consecutive months, registration is not necessary. It helps to think of an investment adviser as an advisory company rather than as an individual. Most advisory firms are registered with the Administrator as corporations although some are sole proprietorships or partnerships. Financial planners are included within the definition of an investment adviser. However, an “investment adviser representative” (IAR) means any partner, officer, director, or other individual employed by an investment adviser who make recommendations or otherwise render advice regarding securities, manage accounts or portfolios of clients, determine which advice should be given, solicit, offer, or sell investment advisory services, or supervise employees who perform any of the foregoing. Clerical and administrative personnel are not included in the definition of an “investment adviser representative. It is unlawful for any investment adviser to employ an investment adviser representative unless he or she is registered. Whenever an investment adviser representative begins or terminates employment with an investment adviser that is state registered, the investment adviser must promptly notify the Administrator. Whenever an investment adviser representative begins or terminates employment with an investment adviser that is federally registered, the investment adviser representative must promptly notify the Administrator. However, when an agent begins or terminates employment with a broker/dealer, both the agent and the broker/dealer must notify the Administrator. Although an IAR must register separately, registration of an investment adviser automatically constitutes registration of any IAR who is also a partner, officer, or director of the advisory firm. STATE VERSUS FEDERAL REGISTRATION OF INVESTMENT ADVISERS The National Securities Markets Improvement Act of 1996 (NSMIA) eliminates duplicate registration requirements for investment advisers. An adviser is either regulated by the SEC or by the state in which

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Registration of Persons – Uniform Securities Act he or she conducts business but not both. Most advisers continue to be regulated by the state. However, under NSMIA, advisers managing more than $30 million in assets and those managing investment companies (mutual funds) must register with the SEC instead of the state. An adviser who is not subject to federal registration must register with the state. For example, an adviser managing less than $25 million in assets must register with the state. An adviser managing between $25 million and $30 million of client funds can choose to register either with the state or with the SEC. Federally covered advisers are exempt from state registration but may still be required to pay state filing fees and file a consent to service of process form (notice filing). The state administrators are still responsible for overseeing the activities of all advisers doing business within their state and for enforcing the anti-fraud regulations. Remember, these dollar amounts are set to change under the Dodd-Frank Act. Under the Uniform Securities Act, it is illegal for anyone to transact business in a state as an investment adviser or an investment adviser representative unless they are registered with the state or exempt. NET CAPITAL REQUIREMENTS The Administrator may require a minimum amount of net capital (net worth) for brokers/dealers and investment advisory firms especially when the firm has custody of client funds or securities. Generally, the minimum net worth requirement is $35,000. If the firm cannot meet this requirement, the Administrator will require the firm to post a surety bond in an amount not less than $35,000. Appropriate deposits of cash or securities shall be accepted instead of a bond and no bond is required of firms whose net capital exceeds $35,000. EFFECTIVE DATE OF REGISTRATION Unless denied by the Administrator, registrations become effective 30 days after the registration application has been filed or sooner at the Administrator’s discretion. Every broker/dealer, investment adviser, investment adviser representative, and agent registration expires December 31st unless renewed. WITHDRAWALS FROM REGISTRATION Withdrawals are effective within 30 days or less at the Administrator’s discretion. Withdrawals may be delayed if administrative action is pending against a person in the firm. DENIAL, SUSPENSION, OR REVOCATION OF REGISTRATION All registrations required by the Uniform Securities Act fall under the jurisdiction of the state administrators. An Administrator may deny, suspend, or revoke any registration if he or she finds that the order is in the public interest and that the applicant, registrant, or issuer of a security is guilty of any of a specified list of offenses. Among these offenses are:      

Filing an incomplete, false, or misleading application for registration Willfully violating any provision of the Uniform Securities Act Being convicted of a misdemeanor involving any aspect of the securities business or being convicted of any felony within the past 10 years Being enjoined from engaging in the securities business by a court of law Being subject to an order of the Administrator denying, suspending, or revoking registration Engaging in dishonest or unethical securities practices

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Being or becoming insolvent Being not qualified on the basis of training, experience, or knowledge Being in a supervisory position and failing to supervise registered employees Failing to pay application filing fees

Experience is a consideration but lack of experience cannot be the sole factor for denying registration. According to the Uniform Securities Act, the Administrator must always provide notice of actions to deny, suspend, or revoke registration to the person or persons affected. The Administrator must also provide an opportunity for a hearing for the person or persons affected although the Administrator may issue a cease and desist order without a prior hearing if he or she suspects a person is about to violate the Act. The Uniform Securities Act authorizes an Administrator to proceed with legal action against an entire brokerage firm or investment advisory firm if any one of that firm’s officials has been disqualified. Such legal action must be in the public interest. However, disqualification of an agent may not be used automatically as a basis for taking legal action against the agent’s entire firm unless further findings show that the firm’s illegal actions were responsible for the agent’s disqualification. This ruling applies to brokerage firms and their agents as well as to investment advisory firms and their representatives. The Administrator may cancel the registration if he or she finds that the registrant has ceased to do business or cannot be located. SALES AND ADVERTISING MATERIAL The Administrator may require the filing of any informational materials or advertisements that are distributed to clients or prospective clients unless the security or transaction is exempted under the Act. It is unlawful for any person subject to the Act to file any material that is misleading or fraudulent. RECORDS AND RECORDKEEPING Every registered broker/dealer and investment adviser must make and keep any records, accounts, correspondence, or papers the Administrator prescribes including blotters, ledgers, and customer order tickets. Brokers/dealers must keep all records for three years and investment advisers must keep all records for five years unless the Administrator rules otherwise. FINANCIAL REPORTS Every registered broker/dealer and investment adviser must file all financial reports (including balance sheets, income statements, net capital reports, and any other types of reports) the Administrator prescribes. AMENDMENTS TO RECORDS If the information contained in any document filed with the Administrator is or becomes inaccurate or incomplete in any material respect, the registrant must file a ‘correcting amendment’ promptly.

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REGISTRATION OF PERSONS – UNIFORM SECURITIES ACT

KEY FACTS 

Anyone who solicits or receives an order for a security while representing a broker/dealer is considered an agent.

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Investment advisers are persons in the business of selling investment advice and must be registered. However, professionals such as lawyers, accountants, teachers, and engineers whose performance is incidental to the practice of their professions are not considered to be investment advisers.

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A person is not considered to be an agent when representing an issuer in such securities as U.S. government securities, Canadian government securities, or commercial paper maturing in 270 days or less. These are considered to be exempt securities (exempt from registration). Also, a person is not considered to be an agent when representing an issuer in exempt transactions (such as a private placement of securities).

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A broker/dealer, agent, or investment adviser may obtain an initial or renewal registration with the state by filing an application and a consent to service of process form. He or she must also pay the filing fee with the Administrator. The ‘consent to service of process’ form gives the state the irrevocable right to process legal complaints against the applicant. It also creates jurisdiction for the state over licensees.

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Both the broker/dealer and the agent must be registered in the state where business is to be transacted even if the securities or the transactions are exempt from registration. At the time the broker/dealer is registered, officers of the firm who act as agents will automatically be registered as agents of the firm.

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As a condition to registration, the state securities administrator may require that an agent, broker/dealer, or adviser post a surety bond of a minimum of $35,000. Cash or securities may be posted in lieu of the bond.

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The agent, former employer, and new employer all must notify the Administrator when an agent changes his or her place of securities employment.

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Brokers/dealers and agents must be registered in each state where offers or sales of securities occur.

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A broker/dealer does not include a firm that has no place of business in the state and whose activities are limited to professional clients (institutions, etc.). Also, if an adviser had no office in a state and limited his or her activity to no more than five clients in any consecutive 12 month period, he or she would not have to register in that state.

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An individual who represents the issuer in affecting transactions with existing employees of the issuer

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does not have to register as an agent if no commission is paid. 

It is unlawful for any broker/dealer or issuer to employ an agent unless the agent is registered.

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Every broker/dealer, adviser, and agent registration expires December 31st unless renewed.

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Brokers/dealers may also have to register as advisers if they charge a separate fee for their advice since such advice would not be considered incidental.

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If the registration of a broker/dealer is revoked or suspended, the registrations of all agents associated with that broker/dealer are also revoked or suspended. However, suspension or revocation of any agent will not affect the registration of the broker/dealer firm.

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If an adviser or broker/dealer has net capital (net worth) of $35,000 or more, the Administrator may waive the requirement for posting a surety bond.

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If the president of a corporation (or members of the Board) sell stock of that corporation to the public and earn a commission for doing so, he or she must register as ‘Agents of Issuer’ (the corporation issuing the stock).

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You cannot make any solicitations or sales unless you are registered as an agent.

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Passing the exam and submitting your application does not constitute registration. You cannot solicit business or sell securities until the Administrator has cleared your registration.

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Every broker/dealer shall keep proper records for at least three years. The Uniform Securities Act does not require agents to keep records (although most do).

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Every investment adviser shall keep proper records for at least five years.

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If an unregistered agent of a broker/dealer sells a security, both the agent and the broker/dealer have violated the law.

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Once your agent’s license is revoked, you are ineligible for any type of securities license.

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Persons representing issuers in the sale of exempt securities or exempt transactions need not register as agents.

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Persons representing brokers/dealers must always as agents even if all they sell is exempt securities and exempt transactions.

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Making a false statement on your application for licensing is not a criminal violation if you were unaware that it was false at the time.

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Your registration as a securities sales agent is effective when the state administrator says it is (there is no specific waiting period).

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If the state does not approve your registration, you may state that you are registered with the state as an agent and represent a broker/dealer, if true.

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Registration of Persons – Uniform Securities Act Key Facts 

If a corporation sells securities advice for a fee plus sells securities for a commission, they must register as both an investment adviser and a broker/dealer.

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Investment advisers do not have to register to give advice on fixed annuities.

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A person who has passed the securities exam may not transact business until the state administrator grants registration.

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An investment adviser must notify the Administrator when an investment adviser representative terminates employment.

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