Maybe you’ve sat through one of the live classes that remain the bread and butter of the bigger vendors. If the instructor tried to teach the fundamentals of the Uniform Securities Act to you, chances are he made a lot of noise about “exempt securities” and “exempt transactions” but never quite explained what the terms mean and–more important–what they don’t mean. When I used to teach for a big vendor in this industry, I had to use the sorry materials I was handed, and no matter how I tried to spin it, I could tell that many students walked out thinking the following:
- if the security is exempt, it is not subject to the Uniform Securities Act’s anti-fraud statutes
- if the security is exempt, the agent doesn’t have to be registered
- if it’s an unsolicited order, an unregistered person at a broker-dealer can accept it
- if the customers are all institutions, the agent of the broker-dealer does not have to be registered
What the above four bullet points have in common is this: they aren’t true. But, in the confusion of a four-hour Series 63 class or maybe a two-hour segment of a Series 65/66 class, it’s very easy to understand why students would come out thinking that way. So, let’s clear up some big points here. First, not every investment meets the definition of a “security,” but if it is a “security,” it is subject to the Uniform Securities Act’s antifraud regulations, whether it has to be registered or not. A US Treasury note doesn’t have to be registered, but if an agent offers one to me under false pretenses, that is still securities fraud. Second, all securities have to be registered except for all the securities that don’t have to be. A security that does not have to be registered is an “exempt security,” which means it’s still a “security” subject to antifraud regulations. It just doesn’t have to be registered. For example, US Government securities, municipal securities, bank securities, and highly rated commercial paper do not have to be registered. What about the agents selling them? If they work for a broker-dealer, they have to register. I mean, if agents selling municipal securities didn’t have to be registered, why would there be a Series 52 for people selling municipal securities? A Treasury note doesn’t have to be registered, but an agent of a broker-dealer selling Treasury notes to customers does have to be registered. The only time we care about whether the security is exempt is when the individual represents the issuer of that security and does not get special compensation to sell it. If the CFO of a company wants to essentially get a loan by selling commercial paper to an institution, she does not have to register. Or, even if the CFO wanted to sell an ownership stake in the company to institutions only, that would not meet the definition of an agent. But, again, if you represent a broker-dealer in selling securities, you have to be registered.
If a security is non-exempt, it still might escape registration if it’s sold through an exempt transaction. This is the one case where an “unregistered, non-exempt security” can be offered and sold without getting in trouble. But, if you’re an agent of a broker-dealer taking indications of interest for this offering, YOU have to be registered. You don’t work for the issuing corporation, right?Again, if you work for a broker-dealer selling securities, you have to be registered. The security might or might not have to be.
So, if the test asked if an agent of a broker-dealer would have to register just to sell municipal securities to institutional investors, the answer would be . . . absolutely. Why? Because he’s an agent of a broker-dealer. In the rare case where somebody works for the issuer of an exempt security or represents the ISSUER in an exempt transaction–getting no special compensation for the sales–that person escapes registration.