Laws & Regulations

You know what a stock is. You can explain a covered call to your barber. None of that helps in the first room, because the Series 65 does not open with markets. It opens with a clipboard. Sixty percent of the people who fail lose it in the rulebook, not the math.

The Uniform Securities Act watches four kinds of people. Two are firms, two are humans. Swap them and you do not miss one question, you miss a cluster.

NASAA wants to know if someone is an Investment Adviser. There is a three-part test, and you need all three.

• A is Advice about securities. Not real estate, not gold bars, not the baseball cards in your closet.
• B is Business. You do it regularly, or you hold yourself out as doing it.
• C is Compensation. You get paid. Any form counts.

All three, you are an IA. Miss one, you are not. The exam hands you a character missing exactly one prong and asks if they have to register. Find the missing prong.

This is the line that separates passing from almost passing, and people blow it because the two words feel like the same word. They are not.

Excluded means the law never saw you as an adviser in the first place. You were never in the room. Exempt means the law sees you just fine. It is an adviser. It just waves you through registration anyway.

The classic exclusions: the "LATE" crowd

Professionals whose advice is solely incidental to their real job and who take no special pay for it. Lawyers, Accountants, Teachers, Engineers. Plus banks and broker-dealers. The second one of them starts charging specifically for securities advice and holding out as an adviser, they fall out of the club and become an IA.

An IA registers with the SEC or with the state. Almost never both for the same work. The line is Assets Under Management.

• Under $100M: register with the state. You are state-covered.
• $100M and up: register with the SEC. You are a federal covered adviser.
• The buffer, roughly $100M to $110M: you get to choose. Cross the top and you go federal. Fall back under the bottom and you go back to the state.

⚠ Verify the exact buffer numbers and the oddball cases (mid-size advisers in states without exam authority, pension consultants) against current NASAA and SEC material before you trust them. Those thresholds get tweaked.

Little advisers go to the states. Big advisers go to the feds. That is the whole shape of it.

Suitability asks one question: was this an okay thing to recommend? Fiduciary duty asks a harder one: was this the best thing for the client, and did they know everything you knew?

The investment adviser standard is two duties welded together. Duty of loyalty: put the client's interest ahead of your own and disclose every conflict. Duty of care: give advice that is actually in their best interest, on an ongoing basis, with the skill of a professional.

This is a higher bar than the old suitability standard that brokers historically lived under. An adviser cannot just clear "not unreasonable." They have to clear "best interest, fully disclosed." When an answer choice involves the adviser quietly benefiting, it is almost always wrong. The phrase that saves the others: full and fair disclosure of all material conflicts of interest.

NASAA keeps a long list of prohibited and unethical business practices. You do not need to recite it. You need to recognize it when it walks past wearing a story. The greatest hits:

• Churning: trading to generate commissions, not returns.
• Unsuitable recommendations: ignoring the client's situation and objectives.
• Unauthorized trades: exercising discretion without prior written authority.
• Borrowing from or lending to a client. Almost always prohibited.
• Commingling client funds with the firm's own money.
• Front running: trading ahead of a client's known order.
• Selling away: doing securities business off the books, outside the firm.
• Market manipulation: painting the tape, matched orders, spreading rumors.
• Misrepresentation or material omission, including overstating your credentials.
• Guaranteeing a client against loss.
• Sharing in a client's account without consent.

Notice a pattern. Most of these are some flavor of putting yourself, your firm, or your commissions ahead of the client. That is the tell.

The ethics section has tells. Certain words mark the wrong answer so reliably that you can use them as a filter when you are stuck.

Watch for: guarantee, no risk, can't lose, promise, assured return. An adviser cannot guarantee performance, guarantee against loss, or promise a specific result.

The only "guarantee" that is real in securities is a third party (like an issuer's parent) guaranteeing principal, interest, or dividends on a security itself. An adviser personally guaranteeing your account will not drop? That is a violation, full stop. When you see a client being told they cannot lose, you have usually found the answer.

Form ADV has two parts and they point in opposite directions. Part 1 is for the regulators: the dry registration data. Part 2 is the brochure, written in plain English, and it is for clients.

The brochure must be delivered to clients and discloses the adviser's services, fees, conflicts, disciplinary history, and business practices. It must also be delivered, or offered, on an ongoing basis each year.

⚠ verify against current NASAA material for the exact brochure delivery hours and days. There is a delivery-timing rule and a related client right to rescind the contract if the brochure was delivered too late, and those specifics drift over time. Concept: deliver the brochure up front, and a late delivery can give the client a short window to cancel.

At the state level, advisory contracts must be in writing. They must spell out the fee and how it is calculated, the services, and the term.

Two consent rules live here. The contract cannot be assigned to another adviser without the client's consent. And if the adviser is a partnership, clients must get notice of a change in the partnership's membership.

Performance-based fees (a cut of gains) are generally prohibited, with an exception for clients who are sufficiently wealthy or sophisticated, the qualified or accredited tier. ⚠ verify against current NASAA material for the exact net-worth and assets-under-management thresholds.

Then there is custody: holding or controlling client cash or securities. Custody triggers serious obligations: a qualified custodian, a surprise exam by an accountant, and account statements to clients. The sneaky one: automatically deducting your advisory fee from the client's account can itself count as custody.

Here is the rule that ignores every exemption you learned. The anti-fraud provisions of the Uniform Securities Act apply to everyone. Exempt securities, exempt transactions, federal covered advisers, all of them.

A security being exempt from registration does not make it exempt from fraud rules. Fraud is fraud. The Administrator's anti-fraud authority follows the conduct, not the registration status.

Now the move that flips half the trick questions. Many conflicted actions are not automatically illegal. They become permissible with full disclosure plus informed client consent. Acting as principal in a trade, a conflict of interest, an agency cross: disclose it, get consent before the transaction is completed, and the "gotcha" answer often becomes the allowed one.

So read the fact pattern for two things: did they disclose, and did the client agree. If yes to both, the scary-sounding action may be perfectly fine. If the adviser hid it, it is your answer, and it is a violation.

The Administrator is the state regulator with real teeth. Here is the full enforcement toolkit:

• Deny a registration before it goes effective.
• Suspend an existing registration while the facts are sorted out.
• Revoke a registration for cause.
• Cancel a registration when someone is no longer in business or cannot be found (no misconduct needed).
• Bar a person from the industry in the state.
• Issue a cease-and-desist order, and here is the part the exam loves: a C&D can be issued without a prior hearing. The order goes out fast; a hearing can follow.
• Subpoena records and witnesses, including out-of-state if the state has jurisdiction.
• Issue stop orders on securities registrations to halt an offering.
• Seek injunctions and civil or criminal penalties, but it does this through the courts.

The Administrator's jurisdiction is the state. An Administrator in one state has no direct enforcement power in another, though they cooperate through NASAA.

One line the exam draws hard: the Administrator does not put anyone in prison. Courts do. The Administrator can initiate, refer, and seek penalties, but a conviction and imprisonment happen in a court, not an Administrator's office.

Two categories, two completely different things, and the exam will not remind you which is which.

Exempt securities

The instrument itself is exempt from registration because of what it is:

• U.S. government and agency obligations
• State and municipal bonds
• Securities issued by banks and savings institutions regulated by federal or state banking authorities
• Certain insurance company securities
• Nonprofit or charitable organization securities
• Short-term commercial paper (certain money-market instruments, typically under 270 days)

Exempt transactions

The deal itself is exempt regardless of what the security is. The security could be anything:

• Isolated nonissuer transactions: an ordinary secondary-market trade between two individuals, not part of a series.
• Unsolicited brokerage transactions: a client calls and demands the trade without the agent pitching it.
• Private placements: sales to a limited number of investors under specific conditions (the exact numbers and conditions vary by state and by applicable federal rule).
• Institutional or professional buyer transactions: sales to sophisticated parties such as institutional investors, other BDs, or IAs.
• Fiduciary or executor transactions: sales by a trustee, executor, or guardian acting in a court-appointed capacity.

Anti-fraud applies to both categories regardless of any exemption. An exempt security sold via fraud is still fraud. An exempt transaction executed via misrepresentation is still a violation.

The $100M line is the headline. The edge cases are what the exam actually tests once you know the headline.

The thresholds (verify all figures)

⚠ Verify every specific dollar figure and client count below against current NASAA and SEC material before you trust them. These thresholds have drifted over time and will drift again.

• Under roughly $25M AUM: generally must register with the state, cannot register with the SEC at all.
• Roughly $25M to $100M (mid-size advisers): register with the state in which you have your principal office. Some states have exceptions (states without an examination requirement for IAs), which can push a mid-size adviser to SEC registration.
• $100M and up: register with the SEC. You are a federal covered adviser.

The $100M to $110M election buffer

If your AUM is in the buffer range, you can elect to register with the SEC or stay with the state. Cross the top of the buffer (over roughly $110M) and you are required to move to the SEC. Drop well below the bottom (back under roughly $90M or $100M depending on the specific rule) and you must go back to the state. The exam tests the direction: cross the top, go federal; fall well below, go back to state.

The de minimis exemption

An adviser with no place of business in a state and only a small number of clients in that state may qualify for an exemption from that state's registration requirement. The concept is that an out-of-state adviser with a handful of in-state clients should not have to register in every state. The exact client count is specified in the rule and should be verified against current NASAA material before the exam.

• Fee means IA, commission means BD. Find the operative word and move on.
• ABC test for an IA: Advice, Business, Compensation. All three required.
• Excluded = never an adviser in the eyes of the law. Exempt = an adviser who skips registration.
• LATE crowd (Lawyers, Accountants, Teachers, Engineers) is excluded only when advice is solely incidental and there is no special pay.
• Under $100M AUM register with the state. $100M and up register with the SEC. Verify the buffer against current NASAA material.
• A federal covered adviser does not register with a state, but the state can require a notice filing and keeps anti-fraud authority.
• Fiduciary duty (loyalty plus care, best interest, full disclosure) is a higher bar than broker suitability.
• Prohibited practices share a tell: putting the adviser, firm, or commissions ahead of the client (churning, front running, commingling, borrowing from a client).
• Magic wrong words: guarantee, no risk, can't lose, promise. Guaranteeing a client against loss is prohibited.
• Form ADV Part 1 is for regulators, Part 2 (the brochure) is for clients, delivered up front and annually. Late delivery can create a right to rescind. Verify timing against current NASAA material.
• Custody triggers a qualified custodian, surprise exams, and client statements. Automatic fee deduction can itself count as custody.
• Anti-fraud reaches everyone, including exempt securities and federal covered advisers. Disclosure plus informed consent before the transaction makes many conflicted actions permissible.
• Administrator powers: deny, suspend, revoke, cancel, bar, issue cease-and-desist (no hearing needed), subpoena, stop orders. Courts impose prison. The Administrator does not.
• Exempt security (government, municipal, bank, nonprofit, short-term commercial paper) vs exempt transaction (isolated nonissuer, private placement, institutional, fiduciary/executor). Anti-fraud still applies to both.
• Private placement is an exempt TRANSACTION, not an exempt security. Mixing those two is the most common Domain 1 miss.
• Mid-size advisers (roughly $25M to $100M) generally register with the state. The $100M to $110M buffer lets you elect; cross the top and you must go federal. Verify against current NASAA material.
• De minimis: an adviser with no place of business in a state and only a small number of clients there may be exempt from that state's registration. Verify the exact client count against current NASAA material.