State Law, the Uniform Securities Act, and the Series 63

Two layers of regulation

State securities regulation predates the federal regime. The first state statute was enacted in Kansas in 1911, more than two decades before the Securities Act of 1933, and the laws acquired the nickname blue-sky laws from the description of speculative schemes backed by nothing but so many feet of blue sky.

So the United States has two layers: federal securities law administered by the SEC, and state securities law administered by each state's securities Administrator. A transaction can violate one, the other, or both.

The National Securities Markets Improvement Act of 1996 divided the territory. It created the category of federal covered security — exchange-listed securities, investment company shares, securities sold to qualified purchasers, and certain exempt offerings — for which state registration is pre-empted. States may still require a notice filing and a fee for a federal covered security, and their anti-fraud authority is untouched, but they may not review the merits of the offering.

NSMIA drew a parallel line for investment advisers: larger advisers register with the SEC and are federal covered advisers, while smaller ones register with the states. Again, state anti-fraud authority survives.

What did not move is the regulation of broker-dealers' agents. An agent transacting with residents of a state registers in that state, and that is the requirement the Series 63 exists to test.

NASAA and the Uniform Securities Act

The North American Securities Administrators Association is the association of state, provincial and territorial securities regulators in the United States, Canada and Mexico. Its US members are the securities regulators of all fifty states, the District of Columbia, Guam, Puerto Rico and the US Virgin Islands.

NASAA develops model regulatory policies — model acts, model rules and statements of policy — for potential adoption by its members or by state legislatures. The status of those documents is worth getting exactly right, because it is a testable point and it is counterintuitive: NASAA's model acts, model rules and statements of policy have no legal force or effect standing on their own. They acquire force only when a jurisdiction adopts them, and each jurisdiction decides for itself whether and how to do so.

The statute the exam tests is the Uniform Securities Act of 1956, as amended by NASAA — not the Uniform Securities Act of 2002, which the Uniform Law Commission subsequently produced and which the Series 63 does not test. That is an unusual and specific fact, and it means that a study source built around the 2002 Act is testing the wrong statute.

The exam also draws on federal law: the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, SEC rules, and FINRA rules. So the Series 63 is not purely a state law exam; it is an exam about the rules governing an agent's conduct, drawn from wherever those rules live.

Throughout this course, the Administrator means the state official or agency administering the state's securities law — the title varies by state and the Act brackets it for that reason.

The exam

The Series 63 consists of 65 multiple-choice questions, of which 60 are scored and 5 are unidentified pretest items. Candidates are allowed 75 minutes, and it is a closed book test. To pass, a candidate must correctly answer at least 43 of the 60 scored questions — about 72 percent.

Examinations are assembled individually by a test development algorithm from a pool of eligible questions using difficulty and content parameters, so two candidates sitting at the same time receive different questions and are held to a consistent standard.

FINRA administers the exam. A firm schedules a candidate by filing a Form U4 through WebCRD; an individual not employed by a member firm can enrol themselves through FINRA's Test Enrollment Services System — so, like the SIE and unlike the Series 7, the Series 63 can be taken without a sponsor. Once enrolled, a 120-day testing window opens within which the exam must be scheduled and taken.

The retake rules are NASAA's and they differ from FINRA's, which is a genuinely useful thing to know: a minimum of 30 days after a first failure, a minimum of 30 days after a second, and a minimum of 180 days after a third and each subsequent failure. FINRA's own exams use 15 and 60 days. Do not assume one set applies to the other.

And passing does not itself confer the right to transact securities business in any state. It satisfies part of the requirement for registration as an agent; the state's own licensing process does the rest.

The eight subjects and what they mean for study

NASAA publishes the weighting, and it is lopsided in a way that should reshape a study plan.

Ethical Practices and Obligations: 15 questions, 25 percent.

Communication with Customers and Prospects: 12 questions, 20 percent.

Regulation of Broker-Dealer Agents: 8 questions, 13 percent.

Regulation of Broker-Dealers: 7 questions, 12 percent.

Remedies and Administrative Provisions: 7 questions, 11 percent.

Regulation of Securities and Issuers: 5 questions, 9 percent.

Regulation of Investment Advisers: 3 questions, 5 percent.

Regulation of Investment Adviser Representatives: 3 questions, 5 percent.

Conduct and communication together are 27 of the 60 scored questions — 45 percent. Registration of all four categories of person together is 21. That is the opposite of most candidates' instinct, which is to memorize registration procedure and treat ethics as common sense.

It is not common sense. The conduct questions turn on specific prohibitions with specific boundaries: what may be guaranteed and what may not, when a loan to a customer is permitted, what discretion requires in writing, when sharing in an account is allowed. Those boundaries are the exam.

This course is weighted accordingly: two lessons on foundations and definitions, four on registration, four on communication and conduct, and two on enforcement and preparation.

It is not affiliated with, endorsed by or produced in cooperation with NASAA, FINRA or the SEC, and it contains no exam questions. NASAA expressly prohibits the unauthorized use or reproduction of its examination questions and reserves the right to refer anyone who compromises the exam to state regulators and law enforcement.