Unlawful Representations Concerning Registration
Now that you understand the disclosure documents required for different products, this section covers what agents and firms are not allowed to say about their own registration status or the registration of securities.
Registration Does Not Equal Approval (Uniform Securities Act Section 405)
Under Section 405 of the Uniform Securities Act (USA), the fact that a person or security is registered does not mean the Administrator has:
- Found that any filing is true, complete, or not misleading
- Passed on the merits of any person, security, or transaction
- Approved or given endorsement to any person, security, or transaction
A registration becomes "effective"; it is never "approved" by the Administrator.
Memory Aid: R does not equal E
Registration does not equal Endorsement. Registration is a legal filing; endorsement is a quality judgment. The Administrator does one, never the other.
Exam Tip: Gotchas
- Effectiveness is NOT approval. Section 405 explicitly rejects any interpretation that the Administrator has passed on the merits of a registration. The Administrator only confirms that filings are complete and procedurally proper.
Unlawful Statements
It is unlawful for any person to make a representation to a customer that is inconsistent with Section 405. Examples of prohibited statements include:
- "This security has been approved by the state"
- "The Administrator has verified that this investment is safe"
- "Because I am registered, you can trust that my recommendations are sound"
- "This offering was reviewed and endorsed by the state securities commission"
What Is Permissible
- An agent may truthfully state that they are registered or licensed in the state
- An agent may state that a security's registration is effective
- An agent may not imply that registration constitutes approval, endorsement, or merit-based review
The Key Distinction
| Statement Type | Permissible? | Why |
|---|---|---|
| "I am registered in this state" | Yes | Factual statement about status |
| "This security's registration is effective" | Yes | Factual statement about status |
| "The state has approved this investment" | No | Implies merit-based review |
| "My registration means my advice is trustworthy" | No | Implies endorsement by the state |
| "The Administrator reviewed and endorsed this offering" | No | Implies approval |
Exam Tip: Gotchas
- Any statement implying the Administrator approved, endorsed, or passed on the merits of a person, security, or transaction violates Section 405. The exam tests this with many variations.
- "Effective" is the only correct word. A registration becomes "effective," never "approved."