The Uniform Securities Act

Introduction to the Uniform Securities Act

The Uniform Securities Act (USA) is a model statute created by the National Conference of Commissioners on Uniform State Laws (now known as the Uniform Law Commission). It provides a framework that individual states can adopt, in whole or in part, to regulate the offer and sale of securities within their borders. The original USA was drafted in 1956, with significant revisions in 1985 and 2002. While each state may modify the act to suit its specific needs, the core principles remain consistent across jurisdictions.

The primary purpose of the USA is to protect investors from fraud while still facilitating legitimate securities transactions. State securities laws are often called "blue sky laws" because they aim to prevent speculative schemes that have "no more basis than so many feet of blue sky." The term dates back to the early 1900s when state legislators recognized the need to protect unsophisticated investors from promoters selling worthless investments.

Every state, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, and other U.S. territories have their own securities statutes and regulations. The North American Securities Administrators Association (NASAA) coordinates the regulation of securities at the state level and administers the Series 63 examination to ensure that securities agents understand these state-level regulations before conducting business.

The Role of NASAA

The North American Securities Administrators Association (NASAA) is the oldest international organization devoted to investor protection. Founded in 1919, NASAA's membership consists of the securities administrators in all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico. NASAA members are the frontline regulators who investigate complaints, license firms and professionals, and enforce state securities laws.

NASAA plays several important roles in the securities regulatory framework. First, it develops uniform legislation and model rules that states can adopt to promote consistency. Second, it coordinates multi-state enforcement actions against fraud. Third, it develops and administers the Series 63, Series 65, and Series 66 examinations. Fourth, it provides a platform for state regulators to share information and best practices.

Federal vs. State Regulation: The Dual Regulatory System

The United States operates under a dual system of securities regulation. At the federal level, the Securities and Exchange Commission (SEC) enforces laws such as the Securities Act of 1933 and the Securities Exchange Act of 1934. At the state level, individual state securities administrators enforce their own blue sky laws based on the USA.

The National Securities Markets Improvement Act of 1996 (NSMIA) was a landmark piece of legislation that clarified the boundary between federal and state jurisdiction. NSMIA established the concept of "federal covered securities" and "federal covered advisers," limiting the states' ability to regulate certain securities and persons that are already subject to federal oversight. This act was designed to reduce duplicative regulation and create a more efficient regulatory system.

Despite NSMIA, states retain significant regulatory authority. They continue to regulate securities that are not federal covered, maintain anti-fraud jurisdiction over all securities (even federal covered ones), require notice filings for certain federal covered securities, and register broker-dealers, agents, investment advisers, and investment adviser representatives who conduct business within their borders.

Key Definitions Under the USA

The Series 63 exam places heavy emphasis on the precise definitions contained in the Uniform Securities Act. Understanding these definitions is critical because they determine who must register, what must be registered, and when certain exemptions apply. Many exam questions hinge on knowing exactly what constitutes a "security," who qualifies as a "person," or what activities make someone an "agent."

Security

The USA defines a "security" very broadly. It includes any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting trust certificate, certificate of deposit for a security, certificate of interest or participation in an oil, gas, or mining title or lease or in payments out of production under such a title or lease, or any warrant or right to subscribe to or purchase any of the foregoing.

The definition also includes any of the following when offered as an investment: a variable or equity interest in a variable annuity, a variable or equity interest in a variable life insurance contract, a commodity investment contract, and any interest or instrument commonly known as a security.

Notably, the definition of security under the USA does NOT include:

• Insurance or endowment policies (fixed annuities, fixed life insurance)
• Interests in contributory or non-contributory pension or welfare plans subject to the Employee Retirement Income Security Act (ERISA)
• Commodity futures contracts regulated by the Commodity Futures Trading Commission (CFTC)
• Collectibles (wine, coins, stamps, art) unless marketed as investment contracts

Person

Under the USA, a "person" is defined very broadly. It includes an individual, a corporation, a partnership, an association, a joint-stock company, a trust (where the interests of the beneficiaries are evidenced by a security), an unincorporated organization, a government, or a political subdivision of a government. This broad definition is important because it determines who can be subject to the USA's registration requirements, prohibitions, and enforcement actions.

Sale and Offer to Sell

The terms "sale" and "sell" include every contract of sale, disposition of, or attempt to dispose of a security or interest in a security for value. This includes any security given or delivered with, or as a bonus on account of, a purchase of securities or any other thing. Any exchange of securities is also considered a sale.

An "offer" or "offer to sell" includes every attempt or offer to dispose of, or solicitation of an offer to buy, a security for value. This is also interpreted broadly. The mere circulation of an advertisement or sales literature about a security constitutes an offer.

However, certain activities do NOT constitute a sale or offer under the USA:

• A bona fide pledge or loan of securities
• Stock dividends (if nothing of value is given by stockholders)
• A stock split or reverse stock split
• An act incident to a judicially approved reorganization (e.g., bankruptcy)
• Securities issued under an employee stock purchase plan that is not contributory and in which the employer receives no investment discretion

Broker-Dealer

A "broker-dealer" is any person engaged in the business of effecting transactions in securities for the account of others (acting as a broker/agent) or for its own account (acting as a dealer/principal). This definition encompasses firms that buy and sell securities, whether for clients or for their own inventory.

The following are excluded from the definition of broker-dealer:

• Agents: Individual representatives of broker-dealers are not themselves broker-dealers
• Issuers: Companies selling their own securities are generally not broker-dealers (with limited exceptions)
• Banks, savings institutions, and trust companies: These are excluded so long as they are not acting beyond the scope of their banking business
• Persons with no place of business in the state who deal exclusively with existing clients who are temporarily in the state, or who deal only with other broker-dealers or institutional buyers

Agent

An "agent" is any individual (other than a broker-dealer) who represents a broker-dealer or an issuer in effecting or attempting to effect purchases or sales of securities. Think of agents as the individual salespeople or registered representatives who work for broker-dealer firms or, in some cases, issuers.

Important exclusions from the agent definition include:

• An individual who represents an issuer in effecting transactions in exempt securities (such as government bonds or bank securities)
• An individual who represents an issuer in exempt transactions (discussed in Chapter 2)
• An individual who represents an issuer in transactions with existing employees, partners, or directors of the issuer, provided no commission is paid for soliciting any person in the state

The distinction between who is and who is not an agent is critical for registration purposes. Agents must register in each state where they conduct business, subject to certain exemptions.

Investment Adviser

An "investment adviser" is any person who, for compensation, engages in the business of advising others (either directly or through publications or writings) about the value of securities or the advisability of investing in, purchasing, or selling securities. This also includes any person who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.

The three-pronged test for determining if someone is an investment adviser is often called the "ABC test":

1. A - Advice: The person provides advice or analyses about securities
2. B - Business: The person is in the business of providing such advice (it is a regular activity, not a one-time occurrence)
3. C - Compensation: The person receives compensation for the advice (the compensation does not need to be a separate advisory fee; it can be any economic benefit)

All three elements must be present for a person to be classified as an investment adviser under the USA.

Investment Adviser Representative (IAR)

An "investment adviser representative" (IAR) is any individual employed by or associated with an investment adviser or federal covered adviser who makes recommendations or otherwise renders investment advice regarding securities, manages accounts or portfolios of clients, determines which recommendation or advice regarding securities should be given, solicits, offers, or negotiates for the sale of or sells investment advisory services, or supervises employees who perform any of these functions.

IARs are the individuals who actually interact with clients on behalf of the investment advisory firm. Just as agents must register with the state, IARs must also register in the states where they conduct advisory business. This is true even if the investment advisory firm itself is a "federal covered adviser" registered with the SEC rather than with the state.

Federal Covered Securities

The concept of "federal covered securities" is central to understanding the boundary between state and federal jurisdiction. Under the National Securities Markets Improvement Act of 1996 (NSMIA), certain securities are deemed to be primarily regulated at the federal level, and states are preempted from requiring their registration. However, states retain their anti-fraud authority and may require a "notice filing" (essentially a copy of the federal registration along with a filing fee).

What Qualifies as a Federal Covered Security?

The following securities are classified as federal covered:

1. Securities listed on national exchanges: Any security listed, or authorized for listing, on the NYSE, Nasdaq, or other nationally recognized exchanges (known as "covered securities under Section 18(b)(1)" of the Securities Act of 1933). This is the largest category.
2. Securities issued by registered investment companies: Mutual fund shares, ETFs, and other securities issued by companies registered under the Investment Company Act of 1940.
3. Securities sold to "qualified purchasers": As defined by SEC rule. This generally includes institutional investors and high-net-worth individuals.
4. Securities offered under certain federal exemptions: Securities sold under Rule 506 of Regulation D (private placements), Section 4(a)(2) of the Securities Act, and crowdfunding offerings under Regulation Crowdfunding (Title III of the JOBS Act).
5. Securities issued by the U.S. government, federal agencies, or municipal securities (though these are often already exempt).

Notice Filing Requirements

Although states cannot require registration of federal covered securities, they can require a notice filing. This is essentially a notification to the state that a federal covered security is being sold within its borders. The notice filing typically consists of:

• A copy of the documents filed with the SEC (e.g., the federal registration statement or Form D)
• A consent to service of process (allowing the state to serve legal papers on the issuer)
• A filing fee as specified by state law

Notice filings are most commonly required for investment company securities (mutual funds) and Rule 506 private placements. The state Administrator can revoke the effectiveness of a notice filing if it was incomplete or fraudulent, but the Administrator cannot impose additional registration requirements beyond what is required federally.

Jurisdiction Over Persons and Securities

Understanding when a state has jurisdiction (legal authority) over a person or a securities transaction is essential for the Series 63. Jurisdiction determines whether the state can require registration, investigate activities, and take enforcement action.

When Does a State Have Jurisdiction?

A state generally has jurisdiction over a securities transaction if the offer to sell or the offer to buy is made within the state, or if the offer is accepted within the state. This is a broad standard that can encompass many situations. Under the USA:

• An offer to sell is made in the state where the offer originates (i.e., where the seller is located when making the offer).
• An offer to sell is also made in the state where the offer is directed (i.e., where the potential buyer is located when receiving the offer).
• An offer to buy is made in the state where the buyer is located when making the offer, AND in the state where the offer is directed to and received by the seller.
• A sale takes place in the state where the offer to sell is accepted, AND in the state where the offer to buy is accepted.

This means that multiple states can have jurisdiction over a single transaction. For example, if a broker-dealer agent in State A calls a client in State B to offer a security, both State A (where the offer originates) and State B (where the offer is directed and received) have jurisdiction over that offer.

Publication and Broadcast Exception

The USA includes an important exception for offers made through publications and broadcasts. An offer is NOT considered to be made in the state if the publisher or broadcaster has no office in the state, the publication or broadcast is not primarily intended for residents of the state, and the communication is bona fide (not designed to circumvent the law).

For example, if a nationally distributed financial newspaper includes an advertisement for a security offering, that advertisement is not considered an offer made in every state where the newspaper is delivered, provided the newspaper is not specifically targeted to that state's residents.

The Administrator's Jurisdiction Over Persons

The state securities Administrator has jurisdiction over any person who:

• Sells or offers to sell securities within the state
• Buys or offers to buy securities within the state
• Provides investment advice from within the state
• Conducts any activity that constitutes a violation of the USA within the state's borders

Importantly, the Administrator also has jurisdiction over persons who have no physical presence in the state if their conduct is directed into the state. A broker-dealer in California that makes cold calls to residents of Florida is subject to Florida's jurisdiction, even though the firm has no office in Florida.

Consent to Service of Process

Every person who registers with a state (or who files a notice filing) must file a consent to service of process. This is a legal document that appoints the state Administrator (or a designee) as the person's attorney-in-fact for purposes of receiving legal papers (such as lawsuits or administrative orders). This ensures that the state can serve process on any registered person, even if they are located out of state.

The consent to service of process has the same force and effect as if the person had been personally served within the state. It remains in effect even after the person's registration has expired or been withdrawn, so the state can still bring actions related to conduct that occurred while the person was registered.

The State Securities Administrator

Each state designates an official (or office) to administer and enforce its securities laws. Under the USA, this official is referred to as the "Administrator." The actual title varies by state: it may be the Secretary of State, Attorney General, Commissioner of Securities, Director of the Division of Securities, or another designated official. Regardless of title, the Administrator's powers and responsibilities are defined by the state's securities statute.

Powers of the Administrator

The Administrator has broad powers to protect investors and maintain the integrity of the securities markets within the state. These powers include:

• Rulemaking: The Administrator may make, amend, and rescind rules and forms necessary to carry out the purposes of the Act. These rules have the force of law.
• Investigations: The Administrator may conduct investigations within or outside the state as deemed necessary to determine whether a violation has occurred or is about to occur.
• Subpoena power: The Administrator may issue subpoenas to compel the production of documents and the testimony of witnesses in connection with investigations.
• Issuing orders: The Administrator may issue cease and desist orders, deny, suspend, revoke, or cancel registrations, and impose conditions on registrations.
• Cooperating with other regulators: The Administrator may cooperate with other state, federal, and international regulators to share information and coordinate enforcement efforts.

Limitations on the Administrator

Despite these broad powers, the Administrator is subject to important limitations:

• The Administrator cannot impose criminal penalties (imprisonment or criminal fines). Only a court of law can impose criminal sanctions. The Administrator must refer criminal matters to the appropriate prosecuting authority.
• The Administrator cannot issue injunctions. Only a court can issue an injunction. The Administrator can, however, petition a court to grant an injunction.
• The Administrator cannot require the registration of federal covered securities (per NSMIA), but can require notice filings.
• The Administrator's actions are subject to judicial review. Any person adversely affected by an Administrator's order has the right to appeal to a court.