Legal Framework Synthesis

This synthesis ties together all six Legal Framework units to help you navigate registration requirements, exemptions, and enforcement on the exam.

Who Are the Four Securities Professionals?

Think of it this way: Investment advisers (IAs) and IARs are on the advice side. Broker-dealers (BDs) and agents are on the transaction side. After an IAR advises a client, an agent at a BD executes the trade.

Exam Tip: Gotchas

• IAs register with SEC OR state, never both. BDs register with both. This is the key distinction.
• IARs and agents register with state only. When registration is required, the individuals always register at the state level, never with the SEC.

What Is the Registration Decision Tree?

Step 1: Is This Person an IA/BD?

Investment Adviser (Three-Prong Test):

All three must be met:

1. Gives advice on securities
2. In the business of advising (regular activity)
3. Receives compensation (direct or indirect)

Broker-Dealer:

• In the business of effecting securities transactions
• For others (broker) or own account (dealer)

Step 2: Are They Excluded from the Definition?

Memory Aid: L.A.T.E. professionals are excluded from the IA definition when their advice is solely incidental to their profession. (The "no special compensation" condition belongs to the separate broker-dealer exclusion, not to L.A.T.E.)

Step 3: Are They Exempt from Registration?

Exam Tip: Gotchas

• De minimis = 5 or fewer, not 6. "No more than 6" or "6 or fewer" exceeds the limit.
• Federal IA exemption: insurance companies, not banks. Under the Advisers Act an adviser whose only clients are insurance companies is exempt from federal registration, while banks are excluded from the adviser definition outright. State law draws the line differently: the USA's institutional list covers banks and insurance companies alike.
• The 5-or-fewer-clients de minimis applies to IAs and IARs, not to BDs or agents. An IAR has its own version: no place of business in the state and fewer than 6 resident clients there in the preceding 12 months, the same numeric ceiling as the IA test. There is no client-count de minimis for BDs, and none for agents either, but agents have a separate, narrower federal de minimis transaction-type exclusion (an established customer's account held 30+ days, assigned to the associated person 14+ days), not a client-count test.

Step 4: Federal or State Registration?

For Investment Advisers (AUM-Based):

Memory Aid: The buffer zones: $100M = eligible, $110M = required, $90M = must leave.

Exam Tip: Gotchas

• "The home state does not examine advisers" has one name: New York. It is the only state that does not examine or inspect its state-registered investment advisers, so a mid-size adviser ($25M-$100M AUM) headquartered there must register with the SEC instead. That is a mandatory trigger, not a choice, unlike the 15-state rule on the same row.

What Are the Key Thresholds?

How Do Exclusions Differ From Exemptions?

Why does this matter? Excluded professionals never meet the definition, so they never register. Exempt professionals do meet the definition but qualify for an exception based on their client base or business model.

What Are the Key Forms?

Exam Tip: Gotchas

• Form ADV Part 2 = Brochure. Must be delivered to clients initially and annually.
• Form U4 is for individuals (agents, IARs). Form BD is for the firm. Agents file through the CRD; IARs file through the separate IARD system.
• A state ADV-W withdrawal becomes effective 30 days after filing. The Administrator retains jurisdiction to bring proceedings on the willful-violation ground for 1 year afterward. (SEC withdrawal is effective in 60 days.)
• Form BDW follows the same state timeline as ADV-W. It becomes effective 30 days after filing, and the Administrator can bring willful-violation proceedings for 1 year afterward. Unlike ADV-W, BDW is filed with the SEC and state together, since BD registration itself is dual.

What Are the Penalties and Enforcement Powers?

Criminal Penalties (1956 USA Baseline)

• Maximum fine: $5,000 per violation
• Maximum imprisonment: 3 years per violation
• Statute of limitations: 5 years from the date of the violation

Memory Aid: State penalties = 5-5-3 ($5,000 fine, 5 years to prosecute, 3 years prison). All numbers are 5 or under.

Civil Liability

• Rescission offer: Seller offers purchase price + legal interest minus income received; buyer has 30 days to respond (silence = seller released)
• Statute of limitations: 3 years from the transaction OR 2 years from discovery, whichever is earlier
• Joint and several liability: Any controlling person, officer, director, or materially aiding party can be held for the full amount

Administrator Powers

Think of it this way: The administrator has investigative and administrative power, but only courts can impose criminal penalties or issue binding legal orders like injunctions.

Exam Tip: Gotchas

• Administrator cannot issue injunctions. Only courts can do that.
• Administrator does not "approve" securities. Registration does not mean approval.
• Cease and desist ≠ injunction. C&D is administrative; injunction is judicial.

What Are the Registration Actions?

Exam Tip: Gotchas

• Cancellation is nonpunitive. Used when registrant dies, becomes incompetent, or cannot be located.
• Denial, suspension, revocation require prior notice, opportunity for a hearing, and written findings. Due process protection: the Administrator need not hold a hearing that isn't requested.
• The Administrator can postpone or suspend a registration without a prior hearing (a summary action), pending final determination. A hearing must be set within 15 days of a written request; if none is requested, the order simply stays in effect.

Exam Question Framework

When you see a legal framework question, ask:

1. Who is this person? (IA, IAR, BD, agent, issuer)
2. Are they excluded from the definition? (L.A.T.E., banks, etc.)
3. If not excluded, are they exempt from registration? (de minimis, private fund/venture capital adviser, etc.)
4. If registration required, with whom? (SEC vs state, AUM thresholds)
5. What form do they file? (ADV, U4, BD)
6. What are the consequences of violation? (criminal vs civil, state vs federal)

What Should You Check on Exam Day?

• IAs register with the SEC or a state, never both; BDs register with both; when IARs and agents register, it is always at the state level, never with the SEC.
• Exclusion means never meeting the professional's definition at all (antifraud rules still apply); exemption means meeting the definition but skipping registration.
• The AUM buffer zones: under $25M is state-only, $100M is SEC-eligible, $110M is SEC-required, and dropping below $90M forces withdrawal from the SEC.
• De minimis (5 or fewer retail clients, no place of business in the state) applies to IAs and IARs (an IAR's version: fewer than 6 resident clients, no place of business in the state): there is no client-count de minimis for BDs or agents, though agents have a separate, narrower transaction-type de minimis exclusion.
• A control person under the Advisers Act/USA holds 25% or more of the voting rights or profits of a common-control adviser.
• The Administrator can investigate, subpoena, and deny/suspend/revoke registrations, and can issue cease and desist orders, but only a court can issue injunctions, impose criminal penalties, or make arrests.
• Denial, suspension, and revocation require prior notice and an opportunity for a hearing; cancellation and withdrawal do not.