Unlawful Representations Concerning Registration
Now that you understand what broker-dealers must disclose, you also need to know what they must never say. Section 405 of the Uniform Securities Act (USA) prohibits certain representations about the meaning of registration.
Registration Is NOT Approval
Under USA Section 405(a), neither the filing of a registration application nor the fact that a person or security is effectively registered constitutes a finding by the Administrator that any filing is true, complete, or not misleading.
Registration does NOT mean the Administrator has:
- Passed upon the merits or qualifications of any person, security, or transaction
- Recommended any person, security, or transaction
- Given approval to any person, security, or transaction
A registration becomes "effective"; it is never "approved."
Unlawful Representations
Under USA Section 405(b), it is unlawful to make, or cause to be made, any representation to a prospective purchaser, customer, or client that is inconsistent with the principles above.
Examples of Unlawful Statements
| Unlawful Statement | Why It Violates Section 405 |
|---|---|
| "This security has been approved by the state" | Registration is never approval |
| "The Administrator has reviewed and endorsed this offering" | The Administrator does not endorse securities |
| "Registration means the state guarantees this is a good investment" | Registration carries no quality guarantee |
| "This broker-dealer is state-approved" | The correct term is "registered," not "approved" |
Correct Terminology
- Say: "This security is registered in this state" or "This security's registration is effective"
- Never say: "This security is approved" or "The state recommends this security"
Exemption Status: Same Rule
The fact that a security or transaction is exempt from registration also does NOT mean the Administrator has passed on its merits or recommended it. It is equally unlawful to represent that an exemption constitutes approval.
- An exempt security has simply met certain criteria that excuse it from the registration process
- Exemption says nothing about the quality or safety of the investment
Exam Tip: Gotchas
- Exempt status is not a seal of approval. An agent who tells a client that a U.S. Treasury bond is "safe because the state exempts it" violates Section 405. The exemption is about registration mechanics, not investment merit.
Why This Matters on the Exam
Exam Tip: Gotchas
- The Series 63 frequently tests this concept. An agent who tells a client "This stock has been approved by the state securities administrator" is making an unlawful representation under Section 405, even if the security is properly registered. The word "approved" is the red flag. The correct terminology is always "effective" or "registered."