The Uniform Securities Act Overview

Purpose and History of the Uniform Securities Act

The Uniform Securities Act (USA) serves as the model legislation for state securities regulation in the United States. Originally drafted by the National Conference of Commissioners on Uniform State Laws (now the Uniform Law Commission) in 1956, the USA was designed to bring consistency and uniformity to the patchwork of state securities laws that had developed since the early 1900s. These state laws are commonly referred to as "blue sky laws", a term that originated from a Kansas Supreme Court case describing speculative investments that had "no more basis than so many feet of blue sky."

The USA has been revised several times, most notably in 1985 and 2002. The 2002 revision modernized the Act to account for the National Securities Markets Improvement Act of 1996 (NSMIA), which significantly redrew the lines between federal and state securities jurisdiction. Most states have adopted some version of the USA, though each state has the authority to modify or supplement the model act. This means that while the fundamental principles are consistent, specific requirements may vary from state to state.

The primary purposes of the Uniform Securities Act include protecting investors from fraud and unfair practices, requiring registration of securities, broker-dealers, agents, investment advisers, and investment adviser representatives, establishing standards of conduct for industry participants, and granting enforcement powers to state securities administrators. The Series 66 exam tests candidates on the model act as written, not on any individual state's specific variations.

The Role of NASAA

The North American Securities Administrators Association (NASAA) is the organization of state and provincial securities regulators in the United States, Canada, and Mexico. NASAA plays a critical role in the securities industry in several ways. It develops and administers the Series 63, Series 65, and Series 66 examinations. It coordinates enforcement efforts among state regulators. It develops model rules and policy statements that guide state securities regulation. It also provides investor education and advocates for investor protection at the state level.

NASAA does not itself have enforcement authority over individual registrants. That authority rests with each state's securities Administrator. However, NASAA's model rules and examination content shape the regulatory framework that state administrators apply. For the Series 66 exam, NASAA is the body that writes the exam questions and determines the content outline.

The Regulatory Framework: Federal and State

The U.S. securities regulatory system operates on two levels: federal and state. At the federal level, the Securities and Exchange Commission (SEC) enforces the major federal securities laws, including the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and the Investment Company Act of 1940. At the state level, each state's securities Administrator enforces the state's blue sky law (typically based on the USA).

These two levels of regulation are complementary, not duplicative. The National Securities Markets Improvement Act of 1996 (NSMIA) was specifically enacted to reduce duplication by establishing clearer boundaries between federal and state regulatory authority. As a general principle, larger entities and nationally traded securities fall under primarily federal regulation, while smaller firms and localized securities activities are subject to state oversight. However, anti-fraud provisions apply at both levels, meaning that both federal and state regulators can pursue fraud cases regardless of the size of the entity involved.

Key Definitions Under the USA

The Uniform Securities Act provides specific definitions for key terms that determine who must register, what must be registered, and how state securities law applies. These definitions are tested extensively on the Series 66 exam, and understanding the nuances of each is critical.

Security

The USA defines a security very broadly. Under the Act, a security includes any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in a profit-sharing agreement, collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting trust certificate, certificate of deposit for a security, variable annuity, variable life insurance, limited partnership interest, or any instrument commonly known as a security.

The definition also includes any option or warrant to purchase any of the items listed above, as well as interests in oil, gas, or mining titles or leases. The key principle is that the definition is intentionally broad to capture any arrangement where a person invests money in a common enterprise and expects profits primarily from the efforts of others (the Howey Test from the landmark Supreme Court case SEC v. W.J. Howey Co., 1946).

Importantly, several items are explicitly not considered securities under the USA:

• Fixed annuities (variable annuities ARE securities)
• Whole life insurance policies (variable life IS a security)
• Term life insurance
• Endowment policies
• Collectibles (art, stamps, coins)
• Commodities and futures contracts (regulated by the CFTC, not the SEC)
• Precious metals (gold, silver bullion)
• Real estate (direct ownership, but REITs are securities)
• Currency
• Bank certificates of deposit (CDs issued by banks are not securities; CDs issued for securities purposes may be)

Person

Under the USA, a person is defined very broadly to include an individual, a corporation, a partnership, an association, a joint-stock company, a trust (including a trust where the interest of beneficiaries is evidenced by a security), an unincorporated organization, a government, or a political subdivision of a government. This broad definition ensures that virtually any legal entity can be subject to the Act's provisions.

Issuer

An issuer is any person who issues or proposes to issue a security. For certificates of deposit, the issuer is the person performing the function of the depositor or manager. For voting trust certificates or collateral trust certificates, the issuer is the person forming the trust. With respect to an interest in an unincorporated investment fund, the issuer is the person maintaining that fund. The issuer is typically the entity raising capital by selling securities to investors.

Offer and Sale

The USA defines offer to include every attempt or offer to dispose of, or solicitation of an offer to buy, a security for value. An offer occurs whenever someone makes a communication that could condition the market or stimulate investor interest in a security. This includes advertisements, investment seminars, cold calls, and even mass mailings that reference investment opportunities.

A sale includes every contract to sell or dispose of a security or interest in a security for value. The key element in both definitions is the concept of "for value," meaning something of economic worth must be exchanged. A bona fide gift of securities is generally not considered a sale (though if the gift was given to circumvent registration requirements, it may be treated as one).

Guaranteed Securities

A guaranteed security is one whose payment of principal or interest (or dividends) is guaranteed by a third party. Under the USA, if Company A issues a bond that is guaranteed by Company B, then Company B is also considered an issuer with respect to that guaranteed security. This means both the original issuer and the guarantor may have registration obligations. This concept is particularly relevant in the context of parent companies guaranteeing subsidiary debt.

Federal vs. State Jurisdiction

Understanding the division of regulatory authority between the federal government and the states is one of the most critical topics on the Series 66 exam. The relationship has evolved significantly over time, particularly after the passage of the National Securities Markets Improvement Act of 1996 (NSMIA).

The National Securities Markets Improvement Act of 1996 (NSMIA)

Before NSMIA, both the federal government and the states regulated essentially the same entities and securities, leading to duplicative registration requirements and compliance costs. NSMIA addressed this inefficiency by preempting state registration requirements in certain areas while preserving state anti-fraud authority.

NSMIA established two key categories that limit state authority:

• Federal Covered Securities: Certain securities that are exempt from state registration requirements (though states may require notice filing and fee payment)
• Federal Covered Advisers: Investment advisers that register with the SEC rather than the states (though states may require notice filing)

Federal Covered Securities

Federal covered securities are securities for which federal law preempts state registration requirements. The states cannot require these securities to be registered at the state level, although states may require notice filings and the collection of fees. Federal covered securities include:

• Securities listed on the NYSE, Nasdaq, or other national exchanges (including options and warrants on listed securities)
• Securities issued by registered investment companies (mutual funds, closed-end funds, UITs)
• Securities sold to "qualified purchasers" as defined by the SEC
• Securities issued pursuant to certain exempt transactions under federal law (such as Regulation D, Rule 506 offerings)
• Securities exempt under Section 18 of the Securities Act of 1933

State Jurisdiction and the Administrator

Under the USA, the state securities Administrator is the official or agency designated by each state to administer and enforce the state's securities law. The title varies by state (Secretary of State, Commissioner of Securities, Director of the Division of Securities, or Attorney General), but the functions are the same. The Administrator has broad authority over securities activities within the state, including the power to register, deny, suspend, or revoke the registration of securities and persons; issue cease and desist orders; investigate violations; impose administrative penalties; and refer cases for criminal prosecution.

A fundamental principle is that state law applies based on where the offer is received or directed, not where the person making the offer is located. This means that if a broker-dealer in New York makes a cold call to a resident of California, California's securities law applies to that transaction. Conversely, if the offer originates in California but is directed to a New York resident, New York's securities law governs.

Persons Covered Under the USA

The USA identifies four categories of persons who must register with the state securities Administrator before conducting securities business in the state: broker-dealers, agents, investment advisers, and investment adviser representatives. Each of these has a specific definition under the Act, along with important exclusions and exemptions that determine who must actually register.

Broker-Dealer

A broker-dealer (BD) is any person engaged in the business of effecting transactions in securities for the account of others (broker function) or for its own account (dealer function). The definition captures firms that buy and sell securities for clients on a commission basis, as well as firms that maintain an inventory of securities and trade from their own account for profit.

Several categories of persons are excluded from the definition of broker-dealer and therefore do not need to register as such:

• Agents: An individual representative of a broker-dealer is not separately defined as a broker-dealer
• Issuers: A company selling its own securities is not a broker-dealer (but may need to register the securities)
• Banks, savings institutions, and trust companies: These are excluded when acting in their traditional banking capacity
• Persons with no place of business in the state who deal only with other broker-dealers, institutional investors, or existing clients who are not residents of the state

Agent

An agent is any individual (always a natural person, never a firm) who represents a broker-dealer or an issuer in effecting or attempting to effect purchases or sales of securities. Agents are the people who actually conduct securities transactions on behalf of their firms. Under the USA, agents must register in each state where they conduct business.

Certain individuals are excluded from the definition of agent:

• Individuals representing issuers in transactions involving exempt securities (such as U.S. government bonds or municipal securities)
• Individuals representing issuers in exempt transactions (such as private placements to institutional buyers)
• Individuals representing issuers in transactions with existing employees, partners, or directors (if no commission or remuneration is paid specifically for soliciting)
• Clerical and administrative personnel of a broker-dealer who do not effect transactions

Investment Adviser

An investment adviser (IA) is any person who, for compensation, engages in the business of advising others regarding the value of securities or the advisability of investing in, purchasing, or selling securities. The definition also covers persons who, as part of a regular business, issue or promulgate analyses or reports concerning securities. All three elements must be present: (1) providing advice about securities, (2) for compensation, and (3) as a regular business activity.

Several categories of persons are excluded from the definition of investment adviser under the USA, often referred to as the "LATE" exclusions:

• Lawyers, accountants, engineers, and teachers whose advice is incidental to their profession
• Any broker-dealer whose advisory services are incidental to its brokerage business and who receives no special compensation for advice
• The publisher of any bona fide newspaper, news magazine, or financial publication of general and regular circulation
• Exclusions for banks, savings institutions, trust companies, and federal covered advisers

Investment Adviser Representative

An investment adviser representative (IAR) is any individual employed by or associated with an investment adviser who makes recommendations or renders advice regarding securities, manages client accounts, solicits advisory clients, or supervises those who do any of these activities. Like agents, IARs are always natural persons (individuals), never firms.

Clerical and administrative staff of an investment adviser who do not perform advisory functions are not considered IARs and do not need to register. The key distinction is whether the individual exercises discretion, provides personalized advice, or manages accounts.

Jurisdiction Over Persons and Consent to Service of Process

The USA establishes jurisdiction over persons who engage in securities activities affecting residents of the state, even if those persons are physically located outside the state. This broad jurisdictional reach ensures that out-of-state actors cannot defraud or harm a state's residents with impunity.

Consent to Service of Process

Every person who registers in a state, or who files a notice filing, must file a consent to service of process. This is a legal document in which the registrant agrees that lawsuits and legal proceedings may be served upon the state securities Administrator (or a designee) as if they had been served directly upon the registrant. This ensures that the state can exercise jurisdiction over the registrant even if the registrant is located in another state.

The consent to service of process has a perpetual effect. It remains in force even after the registrant is no longer registered in the state. This means that if a former broker-dealer or agent committed violations while registered, the state can still bring actions against them years later (subject to applicable statutes of limitations).

When Does State Jurisdiction Apply?

The USA applies to any offer to sell or buy made in the state, any offer to sell or buy accepted in the state, and any sale completed in the state. The Act applies both to offers originating from within the state and offers directed into the state from outside. This broad jurisdictional reach means that virtually any securities activity touching a state's residents is subject to that state's law.

However, there are limits. An offer is not deemed to be made in a state if the offer is not specifically directed to a resident and is published in a bona fide publication of general circulation that is not primarily directed to residents of that state. Similarly, radio or television broadcasts originating outside the state are not considered offers in the state unless the broadcast is specifically directed to the state's residents.

De Minimis Exemptions and Transacting Business

The USA provides certain limited circumstances under which persons may engage in a small amount of business in a state without registering. These de minimis provisions typically apply to broker-dealers and investment advisers who have no place of business in the state and are dealing only with institutional clients or a limited number of non-institutional clients during a specified period. The specific parameters vary by category of registrant and will be discussed in detail in subsequent chapters.

The concept of "place of business" is important in determining registration obligations. Under the USA, a place of business includes any office at which the person regularly provides investment advisory services, solicits or meets with clients, or otherwise engages in securities activities. A hotel room used temporarily during a business trip would generally not constitute a place of business, but regularly renting space in a state to meet with clients would.