A client calls and says, "Buy 500 shares of XYZ right now." You have no discretionary authority. You execute the trade anyway because it sounds urgent. You just committed a violation, not because the trade was bad, but because a verbal order without prior written discretionary authorization crosses the line. The Series 65 tests whether you know exactly where that line sits.
The Uniform Securities Act uses a broad definition. Stocks, bonds, notes, and investment contracts all qualify. The critical test comes from the Supreme Court's 1946 Howey decision.
KEY: The Howey test has four elements: (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits, (4) derived primarily from the efforts of others.
If all four are met, the instrument is a security regardless of what anyone calls it. A "membership interest" in a real estate syndication where you contribute capital and a manager does all the work? That passes Howey. A condo you buy and manage yourself? It does not.
Common mistakes
- Confusing exempt securities with exempt transactions. Exempt securities are always exempt from registration regardless of how they are sold. Exempt transactions depend on the circumstances of the sale, the same non-exempt security can be sold in an exempt transaction.
- Thinking the Administrator can deny registration based on merit under all methods. Merit review is available only under registration by qualification. The Administrator cannot evaluate the merits of an offering registered by notification or coordination. If the exam asks "which registration method allows the Administrator to impose conditions?" the answer is always qualification.
- Believing blanket consent covers principal transactions. Each principal transaction requires its own disclosure and written client consent before settlement. A one-time blanket authorization in the advisory contract does not satisfy this requirement. The trap answer will say "the client signed a blanket consent form at account opening."
Bottom line
- The Howey test defines a security: investment of money in a common enterprise with expectation of profits from others' efforts
- Three registration methods: notification (seasoned issuers), coordination (filed with SEC), qualification (state-only, merit review and conditions possible)
- Administrator powers: deny, suspend, revoke, cancel (nonpunitive), issue stop and cease-and-desist orders, subpoena anyone
- Advisory contracts must prohibit assignment without client consent and may never guarantee against loss
Exam shortcut
When a question asks about registration methods, check two things first: has the issuer filed with the SEC (if yes, coordination is available) and has the issuer been in business 36+ months with no defaults (if yes, notification is available). If neither, qualification is the only option. Remember: "Cancel is Clean-up." Cancellation is the nonpunitive action, the registrant is gone, dead, or unreachable.
The full lesson (about 6,098 words, 41 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- D30
- D31
- D32
- D33
- D34
- D35
- D36
- D37
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