A client signs an advisory contract Monday morning. By Tuesday the firm has accepted a referral fee from a fund sponsor. By Friday the state Administrator has subpoenaed the firm's records. Whether this ends in a fine, a suspension, or a quiet correction turns on rules drawn from four overlapping bodies of law, and the Series 66 tests them as a single weave.
The Uniform Securities Act (NASAA's model statute that states adopt to harmonize securities law and close interstate loopholes) defines "security" broadly so that creative packaging cannot escape oversight. NASAA, the North American Securities Administrators Association, drafts the model rules states adopt. The word "uniform" appears in nearly every state law name because of NASAA's harmonization mission.
The Supreme Court's Howey test fills the statutory definition with a four-part working rule. An instrument is an investment contract, and therefore a security, if there is an investment of money, in a common enterprise, with an expectation of profit, derived primarily from the efforts of others.
Common mistakes
- Confusing exempt securities with exempt transactions. Treasuries are exempt securities: they stay exempt across every sale. A private placement is an exempt transaction: only that particular sale is exempt. Selling that same security in a different way may require registration.
- Assuming exempt from registration means exempt from antifraud. USA antifraud reaches every offer or sale of every security, registered or not, exempt or not. The exam routinely tests this with a Treasury or municipal-bond fact pattern where the salesperson lies.
- Mixing up Administrator powers with court powers. The Administrator issues administrative orders, cease-and-desist, registration denial, rescission. The Administrator does not impose criminal sentences. Criminal penalties are assessed by a court after referral.
Bottom line
- The Uniform Securities Act defines a security via the Howey test (investment of money, common enterprise, expectation of profit from others' efforts); the state Administrator registers securities, agents, broker-dealers, and IARs absent an exemption.
- Federal covered securities (NYSE/Nasdaq listings, investment company shares, Reg D Rule 506) bypass state registration but still owe notice-filing fees and remain subject to state antifraud rules.
- Administrator actions are administrative (denial, suspension, revocation, cease-and-desist, subpoena, rescission); the $5,000 and 5-year criminal cap is imposed by a court, not the Administrator.
- Civil rescission runs the earlier of 2 years from discovery or 3 years from sale; recovery equals principal plus interest minus income received, plus attorney fees.
Exam shortcut
Howey checklist ("MCEE"): Money invested, Common enterprise, Expectation of profit, Efforts of others. If all four are present, it is a security; if any one is missing, it is not. NSMIA split: "Issuer paperwork preempted, salesperson and antifraud preserved." When a question describes a federal covered security and asks what the state can still require, the answer is notice filing, agent registration, and antifraud, never issuer registration.
The full lesson (about 4,152 words, 28 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- D19
- D20
- D21
- D22
- D23
- D24
- D25
- D26
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