Unlawful Representations Concerning Registration

With filing requirements covered, there's one critical rule about what you can and cannot say about registration. This is one of the most frequently tested topics on the Series 63.

USA Section 405(a) - What Registration Does Not Mean

Under USA Section 405(a), three key facts must be understood:

  1. The fact that a registration application has been filed does not constitute a finding by the Administrator that the filing is true, complete, or not misleading

  2. The fact that a person or security is effectively registered does not mean the Administrator has:

    • Passed on the merits of the person, security, or transaction
    • Passed on the qualifications of any person
    • Given approval to any person, security, or transaction

  3. The fact that an exemption or exception is available does not mean the Administrator has approved or recommended anything

The correct language: A registration has become "effective," never "approved," "endorsed," or "recommended."

USA Section 405(b) - Unlawful Representations

It is unlawful to make or cause to be made any representation to a prospective purchaser, customer, or client that is inconsistent with Section 405(a).

Examples of Unlawful Representations

  • "This security has been approved by the state"
  • "The Administrator has reviewed and endorsed this investment"
  • "Because this security is registered, it has been deemed safe by the state"
  • "The state has passed on the merits of this offering"
  • "The Administrator recommends this investment"

What You Can Say

  • "This security's registration has become effective in this state"
  • "This person is registered with the state"
  • "The registration statement has been filed with the Administrator"

Why This Matters for the Exam

Registration is a procedural step, not an endorsement. Think of it like a driver's license: the DMV confirmed you met the requirements, but it did not endorse you as a great driver.

The prohibition applies regardless of whether the security is properly registered. Even a fully registered security cannot be described as "approved" by the state.

Exam Tip: Gotchas

  • A fully registered security can still generate an unlawful representation. Registration does not equal approval. Even if the security is legitimately registered, calling it "approved" violates Section 405(b).
  • The correct word is "effective," never "approved," "endorsed," or "recommended." Any of those substitute words is unlawful.
  • This rule applies to persons and securities. Registration of either one does not imply the Administrator passed on its merits.
  • An available exemption also does not mean Administrator approval. Exemptions are procedural, not endorsements.
  • All communication types are covered: written, oral, and electronic representations are all subject to Section 405(b).