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• Series 66: Uniform Combined State Law Examination
Qualifies an individual to be both an "agent" of a broker/dealer and an "investment advisor" representative in each state.
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Series 66 Text Book - Uniform Combined State Law Examination
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Sample Chapter:
Chapter Six
Registration of Broker Dealers,
Investment Advisers, and Agents
Introduction
In this section we will examine the state registration process for broker dealers,
investment advisers, and agents. An important part of this section will be to know when
registration is required and when an exemption is offered to the subject in question.
Registration of Broker Dealers
Prior to conducting business in any state, a broker dealer must be properly registered or
exempt from registration in that state. The first test when deciding if the broker dealer
must register is determining if the firm has an office in the state. If the firm maintains an
office within the state it must register with that state. An agent must register in their state
of residence even if their firm is located in another state.
Example:
An agent who lives in New Jersey and who commutes to their office in New York must
register in both New Jersey and New York.
Agents must also register in the states where they sell securities or offer to sell securities
as well as where they advertise. If the firm does not have an office in the state they may
or may not be required to register depending on whom they do business with. If a broker
dealer does not have an office in the state and engages in securities transactions with the
general public, then they must register. If a broker dealer with no office in the state
conducts business exclusively with any of the following, they are not required to register
in that state:
- Other broker dealers
- Issuers of securities
- Investment companies
- Insurance companies
- Banks
- Savings and loans
- Trust companies
- Pension plans with more than $1,000,000 in assets
- Other financial institutions
- Institutional buyers
- Existing customers with less than 30 days temporary residency in the state (on vacation or business trips)
Agent Registration
It is unlawful for a broker dealer to employ any agent who is not duly registered under
the Uniform Securities Act (USA). When determining if an agent must register, you must
first look at whom the agent works for. If the agent works for a broker dealer, the agent
must register. The only exception is for officers and directors of a broker dealer who have
no involvement with customers, securities transactions, or supervision. If the agent works
for an exempt issuer, the agent is exempt from registration no matter what security is
involved. Exempt issuers are:
- U.S. and municipal governments
- Canadian federal and municipal governments
- Foreign federal governments recognized by the United States
- Banks, savings and loans, and trust companies
An agent is also exempt from registering if they represent an issuer in the sale of an
exempt security such as:
- Banker’s acceptances or time drafts with less than 270 days to maturity sold in denominations of $50,000 or more
- Investment contracts relating to employee savings, stock purchases, pension plans, or other benefit plans as long as no commission is received for such sales
An agent may also qualify for the de minimus exemption if they meet the following
conditions:
- They are registered with the NASD
- They are registered with at least one other state
- They are not ineligible to register
- Their broker dealer is registered in the state
If the above conditions are met the agent may conduct business with clients who are in
the state in question for up to 30 days. If the client has moved to the state in question the
agent may conduct business with the client for up to 60 days while their registration is
pending in that state.
Registering Broker Dealers
A broker dealer wishing to become registered in a state must first file an application with
the state securities administrator. The broker dealer must also pay all filing fees and sign
consent to service of process. By signing the consent to service of process, the broker
dealer appoints the administrator as their attorney in fact and allows the administrator to
receive legal papers for the applicant. Any legal papers received by the administrator will
have the same force and effect as if they were served on the broker dealer.
All applications must also include:
- Type of organization (corporation, partnership)
- Address of business
- Description of business to be conducted
- Backgrounds and qualifications of officers and directors
- Disclosure of any legal actions
- Financial condition
The firm’s registration will become effective at noon, 30 days after the initial application
has been received or at noon, 30 days after the administrator has received the last piece of
required information. Registering a broker dealer in a state automatically requires that
any officers and directors who act in a sales capacity register as agents in that state.
Financial Requirements
A broker dealer must be able to meet the minimum capital requirements set forth by the
state securities administrator. If the broker dealer is unable to meet this capital
requirement, they must post a surety bond to ensure their solvency. Broker dealers that
meet the Securities Exchange Commission’s (SEC) minimum net capital requirements
are exempt from USA’s capital and surety bond requirements. The administrator may
also require that an officer or agent of the broker dealer take an exam that may be oral,
written, or both.
Registering Agents
Most states require that agents successfully complete the Series 66 exam before they my
conduct business within their state. In addition to successfully passing the Series 66, an
agent must also:
- Abide by and understand state securities laws and regulations
- Recognize that the state may require additional certification regarding the state’s securities laws
- Understand that they may not conduct business until they are properly registered
Test Focus!
- An agent does not become registered in a state simply by passing the exam.
- An agent becomes registered only when the state securities administrator notifies them that they have become registered.
- An agent may not be registered in any state without being employed by a broker dealer or issuer and no broker dealer or issuer shall employ an agent that is not duly registered.
Changes in an Agent’s Employment
When an agent changes firms, the agent, former employer, and new employer all must
notify the state securities administrator. This is done in most cases quite easily through
the central registration depository (CRD) system for all firm and agent information. An
agent’s termination becomes effective 30 days after notifying the state unless the
administrator is in the process of suspending or revoking the agent’s registration. The
administrator may still revoke an agent’s registration for up to one year after their
registration has been terminated.
Mergers and Acquisitions of Firms
If another broker dealer from out of state is acquiring a broker dealer in state, the
successor firm must file an application for registration within the state. The successor
firm’s registration will become effective upon completion of the transaction. The
registration fees for the successor firm will be waived.
Renewing Registrations
All state registrations expire on December 31 and all broker dealers, investment advisers,
and agents are required to file renewal application and pay a renewal fee.
Canadian Firms and Agents
A Canadian firm or agent may engage in securities transactions with financial institutions
and existing customers without registering under the USA as long as they do not maintain
an office within the state. A Canadian broker dealer or agent who is a member in good
standing with a Canadian securities regulator is allowed to register through a simplified
registration process. The state registration will become effective 30 days after the
application has been received with the consent to service process. The Canadian broker
dealer must advise the state of any disciplinary action.
Investment Adviser State Registration
It is unlawful for an investment adviser to conduct securities business without being duly
registered or exempt from registration. State registration exemptions are provided for
investment advisers who:
- Are federally registered
- Manage portfolios for investment companies
- Manage portfolios in excess of $25,000,000
- Have no office in the state and conduct business exclusively with financial institutions
- Have no office in the state and offer advice to no more than five clients in any 12-month period. This is known as the de minimus exemption
The National Securities Market Improvement Act of 1996
The National Securities Markets Improvement Act of 1996, also known as the
coordination act, eliminated regulatory duplication of effort and established registration
requirements for investment advisers. A federally covered investment adviser must
register with the SEC, and is any investment adviser:
- That manages at least $30,000,000
- Manages investment company portfolios
- Not registered under state laws
All federally registered investment advisers must pay state filing fees and notify the
administrator in the states in which they conduct business. An investment adviser is
required to register with the state if they manage less than $25,000,000. An investment
adviser who manages between $25,000,000 and $30,000,000 may choose to register
either with the state or with the SEC. If the investment adviser thinks that their asset base
will exceed $30,000,000, they should register with the SEC. Investment advisers who
register with the SEC must file form ADV part I. The SEC will normally grant the
adviser’s registration within 45 days of the adviser’s filing or begin a hearing process to
determine the adviser’s eligibility to become registered. Advisers will also have to file
form ADV part I with the SEC within 90 days of the adviser’s fiscal year end to continue
their federal level registration. If the adviser is no longer eligible to maintain a federal
level registration they must file form ADVW within 90 days and become registered at the
state level. If an investment adviser is based in a state that does not require the
registration of investment advisers they must register with the SEC.
Investment Adviser Representative
All investment adviser representatives who maintain an office within the state must
register within the state. An investment adviser representative is an individual who:
- Gives advice on the value of the securities
- Gives advice on the advisability of buying or selling securities
- Solicits new advisory clients
- Is an officer, director, partner, or supervisor of the investment adviser
An investment adviser may not employ any Representative who is not duly registered.
Clerical and administrative employees are not considered Representatives and do not
need to register. A Representative of an investment adviser has a much greater suitability
obligation than a Representative of a broker dealer.
State Investment Adviser Registration
An investment adviser must file the following with the state securities administrator
before they become registered:
- Application Form ADV
- Filing fees
- Consent to service of process
Capital Requirements
An investment adviser must maintain a minimal level of financial solvency. For advisers
with custody of customer’s cash and securities, the investment adviser must maintain
minimum net capital of $35,000. If the adviser is unable to meet this requirement, they
may post a surety bond. Deposits of cash and securities will alleviate the surety bond
requirement. An adviser is considered to have custody if they have their customers’ cash
and securities held at their firm or if they have full discretion over their customers’
accounts. Full discretion allows the adviser to withdraw cash and securities from the
customer’s account without consulting the customer. Advisers who have only limited
discretionary authority over customer’s accounts need to maintain a minimum of $10,000
in net capital. An adviser with limited discretionary authority may only buy and sell
securities for the customer’s benefit without consulting the customer. They may not
withdraw or deposit cash or securities without the customer’s consent. Investment adviser
representatives are not required to maintain a minimum level of liquidity.
Exams
The state securities administrator may require investment adviser representatives as well
as the officers and directors of the firm to take an exam, which may be oral, written, or
both. All registrations become effective at noon, 30 days after the application has been
filed. The administrator may require that an announcement of the investment adviser’s
intended registration be published in the newspaper.
Requirement Broker Dealer Investment Adviser Agents
Net capital Yes Yes No
Surety bond Yes Yes Yes
Exams Yes Yes Yes
Fees Yes Yes Yes
Advertising and Sales Literature
All advertising and sales literature for an investment adviser must be filed with the state
securities administrator. The administrator may require prior approval of:
- Form letters
- Prospectuses
- Pamphlets
The following records must be kept for a minimum of three years for both broker dealers
and investment advisers unless the state securities administrator requires a different
period of time:
- Advertising and sales literature
- Account statements
- Order tickets/order memorandum
All investment advisers must keep accurate records relating to the following:
- Cash receipts and disbursements
- Income and expense ledgers
- Order tickets, including customer’s name
- Adviser’s name, including executing broker and discretionary information
- Ledgers and confirmations for all customers for whom the adviser has custody
- Financial statements and trial balance
- All written recommendations to customers
- Copies of advertisements, circulars, and articles sent to more than 10 people
- Copies of calculations sent to more than 10 people
All books and records must be kept for five years readily accessible and for two years at
the adviser’s office. Records may be kept on a computer or microfiche as long as the data
may be viewed and printed.
Brochure Delivery
An investment adviser is required to provide all prospective clients with a brochure or
with Form ADV part II at least 48 hours prior to the signing of the contract or at least at
the time of the signing of the contract, if the client is given a five-day grace period to
withdraw without penalty. The brochure or Form ADV part II will state:
- How and when fees are charged
- The types of securities the adviser does business in
- How recommendations are made
- The type of clients the adviser has
- The qualifications of officers and directors
TAKE NOTE!
A balance sheet must be given to clients if the adviser has custody of client funds or
requires pre payment of advisory fees of more than $500 more than six months in
advance.
The Role of the Investment Adviser
An investment adviser charges a fee for his or her services for advising clients as to the
value of securities or for making recommendations as to which securities should be
purchased or sold. Unlike a broker dealer, the investment adviser has a contractual
relationship with his or her clients and must always adhere to the highest standards of
professional conduct.
Additional Compensation for an Investment Adviser
In addition to the fees charged by an investment adviser, an investment adviser may also:
- Receive commissions for executing a customer’s transaction through certain broker dealers
- Act as a principal in a customer’s transaction
The above sources of additional revenue must be disclosed to the client in writing prior to
the investment adviser executing such transactions.
Agency Cross Transactions
An agency cross transaction is one in which the investment adviser represents both the
purchasing and selling security holder and receives advisory fees and commissions from
both parties. If the investment adviser is going to execute an agency cross transaction,
they must get the advisory client’s authorization in writing. The authorization may be
pulled at any time verbally and the adviser may not have solicited both sides of the trade.
Advisers who execute agency cross transactions must send clients an annual report
detailing the number of agency cross transactions executed by the adviser and the amount
of commission received by the adviser.
Disclosures by an Investment Adviser
An investment adviser must disclose all of the following:
- Conflicts of interest
- Sources of recommendations
- Location of customer’s funds for advisers with custody
- Any legal actions taken against the adviser
- Material facts
- The use of third party research to make recommendations
An investment adviser may not:
- Borrow from a customer
- Commingle customer’s funds with the adviser’s funds
- Accept an order from a party not named on the account of the customer
- Churn customer accounts
- Make unsuitable recommendations
- Charge unreasonable fees
An investment adviser with custody of customer’s funds must:
- Segregate all customer funds and securities
- Give the customer a written notice of the location of the funds
- Establish a separate bank account for the customer’s funds
- Provide quarterly statements showing all transactions and account status
- Go through an annual surprise audit
TAKE NOTE!
The state securities administrator may or may not allow advisers to have custody of
clients’ funds. If custody is allowed, the adviser must notify the state that they have
custody and adhere to all requirements relating to custody of client funds.
Investment Adviser Contracts
All investment adviser contracts must be in writing and must contain disclosures of:
- Length
- Services to be provided
- Fees to be charged and how they are assessed
- The amount of any prepaid fees to be returned upon cancellation of the contract
- A statement prohibiting the investment adviser from assigning the contract without the customer’s consent
- A notification of any changes in the adviser’s management
- Limits on the adviser’s discretionary authority over the customer’s account, if any
TAKE NOTE!
If an investment adviser uses an outside solicitor to refer business, such as an accounting
firm, the client must get both the advisory’s brochure and the solicitor disclosure
document or solicitor’s brochure.
Additional Roles of Investment Advisers
As the business services offered by various professionals have expanded, so has the
definition of who must register as an investment adviser. Sports and entertainment
representatives now often advise their clients on how or with whom to invest their
earnings. As a result, the representative is considered an investment adviser, even if
investment advice is only a small part of the services they perform. Individuals who
advise pension funds on the merits of portfolio managers or who act as pension
consultants must also register as investment advisers.
Private Investment Companies/Hedge Funds
A private investment company or 3 C7 funds may charge performance-based compensation
to clients, provided that the clients have a minimum of $750,000 of assets under the
adviser’s management or have a net worth of $1,500,000. Corporations with $25 million
in assets and individuals with at least $5 million in investments may also participate.
Fulcrum Fees
Advisers who manage accounts for investment companies or accounts with a value
greater than $1 million, if those accounts are not for trusts or retirement plans, may
charge fulcrum fees. A fulcrum fee provides the adviser with additional compensation for
outperforming a broad-based index such as the S & P 500 and less compensation for
under performing the index. The amount of the additional compensation received for
outperforming the index must be equal to the amount of compensation that would be lost
for underperformance. The index used as the basis to determine the adviser’s
performance must contain similar securities and risks.
Wrap Accounts
A wrap account is an account that charges one fee for both the advice received as well as
the cost of the transaction. All clients who open wrap accounts must be given the wrap
account brochure that will provide all of the information that is found on Form ADV part
II.
Soft Dollars
Brokerage firms will oftentimes provide investment advisers with services to assist the
investment adviser in their business that go beyond execution and research. These
services are provided in exchange for commission business and are known as soft dollars.
The services received should normally be research related. However there are instances
when the services received are used for other purposes. Investment advisers must ensure
that the services received are for the benefit of the client and need to pay careful attention
to the disclosure requirements relating to soft dollars. The SEC has divided soft dollar
consideration into the following categories:
- Goods/Services
- Accounting Fees
- Association Membership Fees
- Cable Television
- Commission Rebates
- Computer Hardware
- Computer Software
- Conferences/Seminars
- Consulting Services
- Courier/Postage/Express Mail
- Custodial Fees
- Electronic Databases
- Employee Salary/Benefits
- Execution Assistance
- Industry Publications
- Legal Fees
- Management Fees
- Miscellaneous Expenses
- Office Equipment/Supplies
- On-line Quotation and News Services
- Portfolio Management Software
- Rent
- Research/Analysis Reports
- Telephone Expenses
- Travel Expenses
- Tuition/Training Costs
- Utilities Expenses
TAKE NOTE!
Not all of the above items are for the research benefit of clients.
NASD Securities and Futures Prep Series 66: Uniform Combined State Law Examination
Series 66:
The Uniform Combined State Law Examination
(Pub. 2007, 200+ pages)
Copyright © 2007
The Securities Institute of America, Inc.
All Rights Reserved.
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SERIES 66 EXAM INFORMATION:
The Uniform Combined State Law Examination was developed by NASAA The North American Securities Administrators Association. The examination is designed to qualify candidates as both securities agents and investment adviser representatives.
The exam covers topics that have been determined to be necessary to provide investment advice and effect securities transactions for clients. The examination consists of 100 multiple-choice questions and 10 pretest questions. Applicants are allowed 150 minutes to complete the examination. The examination is conducted as a closed-book test. Upon completion of the examination, the score for each section and the overall test score will immediately be made available to the candidate.
The examination is administered by the NASD. The fee for taking the examination is $110. To schedule a candidate for examination, a firm should file an electronic Form U-4 or an individual should file a Form U-10 and pay the fee.
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Securities and Futures Prep Series 66: Uniform Combined State Law Examination
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