Lesson 8.2: Exempt Securities Under State and Federal Law

Question 1

Under the Securities Act of 1933, securities issued by a charitable organization are exempt if:

Answer 1

the organization is a nonprofit.

The Securities Act of 1933 exempts securities issued by charitable or religious organizations from the registration and prospectus delivery requirements as long as the organizations are nonprofits.

Charitable or religious organizations must be nonprofits in order to gain exemption from full registration.

Question 2

Under the Uniform Securities Act (USA), it is unlawful to sell:

Answer 2

a nonexempt, nonregistered security issued by a foreign corporation from a country with which the U.S. government maintains diplomatic relations.

Nonexempt, nonregistered securities cannot be lawfully sold in a state unless in an exempt transaction (and nothing in the question indicates that is the case). The fact that they are issued by a foreign corporation is irrelevant; nonexempt securities must be registered. A federal covered security need not be registered in a state. Securities issued by banks, not bank holding companies, are always exempt securities.

Question 3

For which of these must a consent to service of process be filed for registration?

I. Investment adviser representatives
II. Broker-dealers
III. Investment advisers
IV. Agents

Answer 3

I, II, III, and IV

The consent to service of process is required for all initial registrations with the Administrator. It appoints the state Administrator as attorney for the registrant so that legal papers may be properly served. On the exam, the consent to service of process is considered to be a permanent document not subject to annual renewal.

Question 4

All of the following are exempt from state registration requirements except

A) a Canadian government bond.
B) a registered open-end investment company whose portfolio consists exclusively of Georgia municipal bonds.
C) a closed-end investment company registered under the Investment Company Act of 1940 but not traded on a recognized stock exchange.
D) stock issued by a Canadian company that provides actuarial services to insurance companies.

Answer 4

D) stock issued by a Canadian company that provides actuarial services to insurance companies.

Securities issued by Canadian governmental entities, such as the federal government or the provincial governments and their municipalities, are exempt from registration under the USA in the same fashion as U.S. government and municipal securities. However, Canadian corporate issuers do not enjoy an exemption unless qualifying under special conditions, such as being listed on the NYSE or Nasdaq and, therefore, are a federal covered security. Investment companies registered under the Investment Company Act of 1940, regardless of where they trade, are exempt from registration because they are federal covered securities.

Question 5

Under the Uniform Securities Act, all of the following issues would be exempt from registration except

A) stock issued by a savings and loan association authorized to do business in this state.
B) bonds issued by the City of New Orleans.
C) stock issued by an insurance company not offering policies in this state.
D) an investment contract issued in connection with an employee stock purchase plan.

Answer 5

C) stock issued by an insurance company not offering policies in this state.

Had the insurance company been authorized to do business in this state, its securities offering would be exempt.

The securities exempt from the registration requirements of the Uniform Securities Act include securities issued by the U.S. or Canadian government or any state, province, or political subdivision; securities issued or guaranteed by any foreign government with which the United States has diplomatic relations; securities issued by banks, savings and loans, insurance companies, and credit unions; securities issued or guaranteed by common carriers and public utilities (e.g., railroads); securities listed on national exchanges (e.g., NYSE, Nasdaq); securities issued by nonprofit, religious, or charitable organizations; commercial paper; investment contracts issued in connection with employee benefit plans; and any securities issued by cooperatives or associations.

Question 6

The National Securities Markets Improvement Act of 1996 (NSMIA) affects federal and state laws in that:

Answer 6

A) federal securities laws preempt state laws.

The NSMIA defines the functions and respective responsibilities of the SEC and state Administrators. State law does not preempt federal law, and the NSMIA requires states to adapt their securities laws to comply with the standards required by the NSMIA.

Question 7

A state securities Administrator does not require the filing of:

Answer 7

A) advertising and sales literature relating to the sale of exempt securities.

A state securities Administrator may require the filing of advertising and sales literature relating to the sale of nonexempt securities, financial reports from broker-dealers and investment advisers, and pamphlets and marketing letters used by broker-dealers in an attempt to increase their business. Exempt securities are not required to register with the state Administrator and, therefore, are exempt from the filing requirements for advertising and sales literature.

Question 8

Securities issued by which of the following are exempt from the registration and disclosure requirements of the Uniform Securities Act (USA)?

I. The United States or any territory
II. A state or political subdivision of a state
III. A common carrier (e.g., a railroad) regulated in respect to its rates and charges by the United States or a state
IV. Banks and savings institutions

Answer 8

I, II, III, and IV

The Uniform Securities Act exempts all of the securities listed from registration and disclosure requirements. Banks and common carriers are under the regulatory supervision of other government agencies.

Question 9

To be exempt under Rule 506(b) of Regulation D of the Securities Act of 1933, the sale of securities must be limited with respect to the number of:

Answer 9

nonaccredited investors to whom the security is sold.

Rule 506(b) of Regulation D provides a private placement exemption for securities that are sold to no more than 35 nonaccredited investors. There is a limit to neither the number of shares that can be issued nor the number of accredited investors who may purchase the shares. It is Rule 506(c) of Regulation D that permits advertising as long as the issue is sold exclusively to accredited investors.

Question 10

All of the following securities are exempt from registration under the USA except

A) stock issued by an insurance company traded on the Nasdaq Stock Market.
B) bonds issued by the City of Winnipeg.
C) bonds traded on the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]).
D) stock of a bank holding company traded on the OTC Link.

Answer 10

D) stock of a bank holding company traded on the OTC Link.

Bank securities are exempt from state registration, but those of nonexempt bank holding companies are not. Securities issued by an insurance company authorized to do business in the state are exempt, even if not listed on a national stock exchange. Securities listed on the NYSE, the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]), and the Nasdaq Stock Market, whether stocks or bonds, are exempt as federal covered securities. City of Winnipeg bonds are municipal issues and are exempt from registration.

Question 11

Which of the following statements regarding a red herring is not true?

A) A red herring is used to accept indications of interest from investors.
B) The final offering price does not appear in a red herring.
C) An agent may accept funds to be placed in escrow until the effective date if the request to do so is made by a potential purchaser.
D) Additional information may be added to a red herring at a later date.

Answer 11

C) An agent may accept funds to be placed in escrow until the effective date if the request to do so is made by a potential purchaser.

An agent is not permitted to accept funds from potential purchasers of a new issue before the effective date.

Question 12

Under the Securities Act of 1933, what securities is required to register with the SEC?

Answer 12

Bank holding company securities are not exempt from registration requirements under the Securities Act of 1933. Treasury securities, agency securities (such as GNMA pass-through certificates), and municipal securities (such as revenue bonds) are exempt from registration requirements under the act.

Question 13

Which of the following securities are exempt from registration under the Uniform Securities Act?

I. Municipal securities
II. Government securities
III. Stock or bonds issued by an insurance company authorized to do business in this state

Answer 13

I, II, and III

All government and municipal securities are exempt from registration requirements under the Uniform Securities Act, as are insurance company securities if the company is authorized to do business in this state.

Question 14

Under the Uniform Securities Act, what is true regarding the Administrator’s power to deny or revoke an exemption?

Answer 14

An order revoking an exemption may be issued without prior notice to the persons affected.

An order revoking an exemption, sometimes called a summary order, may be made effective without prior notice. The injured party may request a hearing in writing, which must be granted within 15 business days of receipt of the request. No denials or revocations may be made on a retroactive basis. The Administrator does have the power to revoke the exemption granted to securities issued by nonprofit entities. In any proceeding, the burden of proving an exemption is on the person claiming it, not the Administrator.

Question 15

Under the provisions of the Uniform Securities Act, securities exempt from registration requirements include which of these?

I. Securities issued by the U.S. government
II. Securities issued by a building and loan association organized under the laws of any state and authorized to do business in this state
III. Bonds issued by an insurance company organized under the laws of any state and authorized to do business in this state

Answer 15

I, II, and III

Securities exempt from registration requirements include securities issued by the state or U.S. government; securities issued by foreign governments with whom the U.S. maintains diplomatic relations; and any securities issued by savings and loan or building and loan associations, insurance companies, and credit unions authorized to do business in this state.

Question 16

Under the Uniform Securities Act, a nonexempt transaction may take place in the state only if:

Answer 16

the security is registered, exempt, or federal covered.

We are told that the transaction is not exempt. Therefore, unless the security is exempt (or federal covered), the only way to have a legal sale is for it to be registered.

Question 17

The Uniform Securities Act (USA) considers certain securities to be exempt from the registration requirements of the act. Under the USA, which of the following is an exempt security?

A) Corporate bonds
B) Commercial paper with a term of more than one year
C) Equipment trust certificate issued by a railroad that is regulated by a state’s regulatory body
D) Preferred stock

Answer 17

C) Equipment trust certificate issued by a railroad that is regulated by a state’s regulatory body

Several types of securities are specifically exempt under the act, including equipment trust certificates issued by a state-regulated or federally regulated railroad. High-quality (receives a rating in one of the three highest rating categories from a nationally recognized statistical rating organization) commercial paper is exempt if the term is nine months or less and it is issued in denominations of $50,000 or more.

Question 18

The Securities Act of 1933 regulates:

Answer 18

offerings of new securities.

The Securities Act of 1933 is designed to prevent fraud and protect the public from misrepresentation in the marketing of new issues. Remember, the Securities Act of 1933 deals with new issues, whereas the Securities Exchange Act of 1934 deals with the secondary market, persons (i.e., broker-dealers, associate members), and exchanges.

Question 19

Section 402 of the Uniform Securities Act contains a listing of those securities that are granted an exemption from the registration and advertising filing requirements of the act. Excluded from the listing would be:

Answer 19

corporate debentures.

Unless some other condition is given, such as the issuer’s common stock is listed on an exchange or Nasdaq (making it federal covered), a corporate debenture is not an exempt security. State and local issues (the USA includes the District of Columbia in its definition of state) and Canadian provinces are exempt. Any security issued by a federally chartered credit union or one that is authorized to do business in the state is exempt.

Question 20

Under the Uniform Securities Act, the requirements for filing of advertising and sales literature dealing with an exempt security with the Administrator:

Answer 20

do not apply.

An exempt security or transaction is exempt from the registration requirements and the requirements for filing of advertising and sales literature. It is not exempt from the antifraud provisions of the act.

Question 21

Which of the following are federal covered securities?

I. A security quoted on the Nasdaq Stock Market
II. Shares of an investment company registered under the Investment Company Act of 1940
III. An offering in a security exempt from registration under the Securities Act of 1933
IV. A security that has a federally imposed exemption from state securities registration

Answer 21

I, II, and IV

Any Nasdaq security, shares of a registered investment company, a security that has a federally imposed exemption from state securities registration, and a security traded on a regulated exchange are all federal covered securities. Please note that the question is asking to identify federal covered securities. An offering is not a security; it is an attempt to sell.

Question 22

The Uniform Securities Act contains a number of exemptions from registration of securities. Which of the following do not qualify for any of those exemptions?

I. A bond issued by a corporation
II. A bond issued by the City of Athens, Greece
III. A bond issued by the Province of Manitoba
IV. A security issued by a credit union authorized to do business in the state

Answer 22

I and II

Securities issued by political subdivisions of countries other than the United States and Canada are not exempt unless guaranteed by their federal government (and that government has diplomatic relations with the United States). The only way the corporate bond would be exempt is if it was issued by a company whose common stock was federal covered. Because the question does not tell us that, we must assume it is not.

Question 23

The National Securities Markets Improvement Act of 1996 (NSMIA) created a new definition known as a covered security. In general, these securities do not have to register on a state level. If XYZ common stock is listed for trading on the NYSE, which of the following XYZ securities are considered covered?

I. XYZ participating preferred stock
II. XYZ first mortgage bonds
III. Warrants to purchase XYZ common stock
IV. Rights issued in advance of an offering of additional XYZ common stock

Answer 23

I, II, III, and IV

Common stock listed on the New York Stock Exchange is a covered security as defined in the NSMIA. Furthermore, any security equal to or senior to that common stock is considered to be covered as well. Warrants and rights are equal to the common stock and the preferred stock and mortgage bonds are senior to the common stock.

Question 24

Under the Securities Act of 1933, when registering securities with the SEC, who must sign the registration statement?

I. The chief executive officer (CEO)
II. The chief operating officer (COO)
III. A majority of the board
IV. The chief financial officer (CFO)

Answer 24

I, III, and IV

The principal executives of the company involved with money and a majority of the board of directors are required to sign the registration statement attesting to the facts presented as being true to the best of their knowledge and belief. This includes the chief executive officer, chief financial officer, and a majority of the board, but not the chief operating officer.

Question 25

Which of the following are exempt from registration under the Uniform Securities Act?

I. Preferred stock issued by ZXZ Corporation, whose common stock is traded on the NYSE
II. Common stock issued by a national bank
III. Equipment trust certificates issued by a railroad company regulated by a state or federal agency
IV. A debenture traded in the over-the-counter market issued by a corporation whose common stock trades on the NYSE

Answer 25

I, II, III, and IV

All the securities listed are exempt from registration under the Uniform Securities Act. Preferred stock issued by corporations whose common stock trades on the NYSE is a federal covered security and is exempt from registration with the states. The same is true for a debenture of a company registered on the NYSE, even though the debenture is traded over the counter. The issuers of equipment trust certificates (railroads) are regulated by other agencies, and issuers of bank securities (commercial banks) are regulated by the Federal Reserve and Office of the Comptroller of Currency (OCC); their securities are exempt from registration by the states. The National Securities Markets Improvement Act of 1996 (NSMIA) prohibits dual regulation of securities.

Question 26

Under the Uniform Securities Act, before a corporation can issue a security in a state, that security must be:

Answer 26

registered in the state or exempt from registration in the state.

Before issuing a security in a state, the issuer must either register the security in the state or be exempt from registration under the Uniform Securities Act.

Question 27

Which of the following are included in the definition of federal covered security?

I. ABC common stock, domiciled in Delaware, listed on the NYSE, and sold to a resident of Delaware
II. ABC common stock, domiciled in Delaware, listed on the NYSE, and sold to a resident of Maryland
III. City of Portland, Maine, GO bond sold to a resident of Augusta, Maine
IV. City of Portland, Maine, GO bond sold to a resident of Augusta, Georgia

Answer 27

I, II, and IV

Any security listed on the NYSE, regardless of the corporation’s or the customer’s state of domicile, is a federal covered security. Municipal bonds, exempt securities under the Securities Act of 1933, are also federal covered securities with one significant exception: if the issuer is a political entity in this state and it is sold to a resident of this state, it is not considered a federal covered security in this state.

Question 28

All of the following are exempt securities under the Uniform Securities Act except

A) securities issued by a bank holding company.
B) securities issued by the Canadian government.
C) securities issued by a federal savings and loan association.
D) securities issued by a Canadian province.

Answer 28

A) securities issued by a bank holding company.

Securities issued by a bank are exempt. However, this answer refers to a bank holding company that is considered to be an ordinary company subject to state registration if not otherwise exempt.

Question 29

The registration requirements of the Securities Act of 1933 would not apply to?

Answer 29

Fixed annuities and other fixed insurance contracts

Although federal covered securities, such as those listed on the NYSE, and securities issued by insurance companies and foreign governments are exempt under the Uniform Securities Act, they are not exempt under the Securities Act of 1933. The registration requirements never apply to non-security products, such as fixed annuities.

Question 30

XYZ Corp. will issue a new security and distribute it through a public offering. Under the Securities Act of 1933, who will be included in XYZ’s registration statement?

Answer 30

A registration statement must contain the identity of owners of more than 10% of the issuer’s stock, an estimate of the proceeds and a description of the use to which they will be put, and the identity of the underwriter, among many other things. It must also identify all the issuer’s officers and members of the board of directors, their holdings of the issuer’s securities, and their salaries. Because the description of the HR manager does not indicate that the individual is an officer or member of the board of directors (director in the title simply means manager of the department), this employee need not be identified in the registration statement.

Question 31

Ways in which offerings under Rule 506(c) of Regulation D of the Securities Act of 1933 differ from those under Rule 506(b) include:

Answer 31

A) the issuer must take “reasonable steps” to verify that all purchasers are accredited investors in a 506(c) offering, while no such obligation falls upon issuers in a 506(b) offering.
B) all purchasers of the Rule 506(c) securities must be accredited investors as defined in Rule 501, whereas Rule 506(b) permits a limited number of sophisticated but not accredited investors.
C) general solicitation is permitted under Rule 506(c) offerings; no advertising is permitted under Rule 506(b).

Under the NSMIA, any security issued under the federal transaction exemption offered under Rule 506, either (b) or (c), is considered a federal covered security. Rule 506(c) permits advertising (general solicitation) but requires that the issuer take reasonable steps to ensure all purchasers meet the accredited investor standard. In a Rule 506(b) offering, up to 35 nonaccredited investors are permitted with no limit placed on the number of accredited investors.

Question 32

Under the National Securities Markets Improvement Act of 1996 (NSMIA), investment companies registered under the Investment Company Act of 1940 are required to register their securities:

Answer 32

at the federal level only.

The NSMIA requires that the SEC, rather than individual states, assume responsibility for the registration and regulation of federal registered mutual funds and other investment companies. Thus, these federal registered investment companies are no longer required to register at the state level; however, they will likely have to pay state filing fees by going through the notice filing procedure.

Question 33

Exempt securities

Answer 33

Exempt securities need not reestablish their exemptions annually or otherwise. Exempt securities are exempt because their issuers are exempt, while the basis for an exemption for a transaction must be established before each transaction. Neither the exempt security nor the transaction exemptions are mutually exclusive, and a security or transaction may qualify for two or more of these exemptions. The term federal covered securities includes registered investment companies as well as securities listed on national exchanges.

Question 34

Securities of which of the following issuers are exempt under the Uniform Securities Act?

I. National banks
II. State banks
III. Bank holding companies
IV. Federal savings and loan associations

Answer 34

I, II, and IV

Under the USA, the registration exemption for bank-issued securities is justified by strict financial requirements imposed on banks by banking industry regulators such as the FDIC, the Comptroller of the Currency, and the Federal Reserve. Both federal and state banks and federal savings and loan associations are subject to such regulation. However, bank holding companies (as separate legal or corporate entities) are subject to state registration if not otherwise exempt. Thus, securities issued by bank holding companies are not exempt securities under the act.

Question 35

Under the registration provisions of the Uniform Securities Act, it is unlawful for an agent in the state to sell XYZ securities unless:

Answer 35

XYZ is a federal covered security.

If XYZ is a federal covered security, it is not required to register with the state. Nonexempt securities and nonexempt persons must be registered to be sold (securities) or to do business (persons).

Question 36

XYZ Corporation is registering a new issue of common stock. A final prospectus must be delivered within the statutory time limits to:

Answer 36

any person who purchases shares of the issue.

Under both the Securities Act of 1933 and the Uniform Securities Act, a prospectus must be given to any purchaser of a new issue of common stock. Under federal law, the time limit is no later than completion of the trade. Under state law, the prospectus has to be delivered prior to the sale, not the offer. Those solicited by an agent will generally received the red herring (preliminary) prospectus, not the final prospectus. And those who receive the red herring may submit an indication of interest. Those turning in an indication of interest are required to receive a final (effective) prospectus only if they decide to purchase.

Question 37

Under the Uniform Securities Act, all of the following are exempt from registration except

A) common stock only sold intrastate.
B) securities issued by a 501(c)(3) nonprofit religious organization.
C) airport authority bonds.
D) airplane equipment trust certificates.

Answer 37

A) common stock only sold intrastate.

Local companies that issue common stock sold only within the state must register their securities with the state Administrator. Airport authority bonds, airplane equipment trust certificates, and securities issued by religious organizations are exempt from registration with the state Administrator.

Question 38

Common stock of KAPCO, Inc., trades on the NYSE. Which of the following securities would not be exempt from registration under the Uniform Securities Act?

A) Limited partnership interests in a shopping center with KAPCO, Inc., as the general partner
B) KAPCO, Inc., subordinated debentures, traded on the OTC Pink Market
C) KAPCO noncumulative preferred stock
D) Stock rights to acquire KAPCO common stock

Answer 38

A) Limited partnership interests in a shopping center with KAPCO, Inc., as the general partner

When an issuer’s stock is listed on the NYSE, any security it issues that is equal to or senior to that stock is a federal covered security and exempt from registration with any state. Remember that any debenture is senior to the issuer’s stock. When that issuer acts as a general partner in a real estate offering, it is not its security that is being sold, so the exemption does not apply.

Question 39

An agent is registered in State X but not in State Y. The agent sells a resident of State X a new State Y municipal revenue bond. If the bond is not registered for sale in State X:

Answer 39

The sale was legal because the bond is not required to be registered for sale in State X.

Any municipal bond is considered an exempt security under the Uniform Securities Act. Therefore, the sale of an exempt unregistered security by a properly registered agent is perfectly legal. If you selected the choice that the sale was legal because it took place in State X to a resident of that state, you are missing the point. The question is focused on the security, not the agent. In addition, that choice implies that the sale of any unregistered security, exempt or nonexempt, made by a properly registered agent is legal, and that is not so in the case of those obligated to register.

Question 40

Laurel is an agent of Harbor Securities. Her most active customer told her that he is thinking about buying 10,000 shares of a technology company’s stock for which Harbor will be participating in the underwriting syndicate. The SEC release date for the stock is anticipated within 10 business days. What may Laurel accept from the client today?

Answer 40

Laurel can accept an indication of interest.

Because a security is in registration until released by the SEC for public sale, orders may not be taken. Customers may submit a nonbinding indication of interest. That indication of interest may not include any form of payment. Orders may not be accepted for a security while it is in registration. During the cooling-off period, no research reports or any other type of literature may be distributed. The only exception is the red herring (preliminary prospectus).

Question 41

Under the Securities Act of 1933, which of the following are exempt securities?

I. Securities issued by the U.S. government, government agencies, and any state or municipality
II. Any security issued by a religious, educational, charitable, or not-for-profit institution
III. Any security issued by a federal or state bank, savings and loan association, building and loan association, or similar institution
IV. Any interest in a railroad equipment trust

Answer 41

I, II, III, and IV

Most of the securities exempt from registration and prospectus delivery requirements in the Securities Act of 1933 are also exempt under the Uniform Securities Act. Securities exempt under the Securities Act of 1933 include government issues, commercial paper, securities issued or guaranteed by financial institutions, regulated common carrier issues, and nonprofit charitable or religious institutions. Three securities are exempt under the Uniform Securities Act and not exempt under the Securities Act of 1933:

• Stocks and bonds issued by insurance companies
• Securities issued by foreign governments
• Securities listed on certain exchanges not exempt under the Securities Act of 1933

Question 42

Under the Securities Act of 1933, what does not meet the definition of prospectus?

Answer 42

A telephone call from ​an agent of a broker-dealer​ to a client advising the purchase of a security

Any written communication that offers a security for sale—including newspaper and media communications, such as radio and television offers—is considered a prospectus. This definition excludes individual offers made orally and discussions between an agent and a customer. A publicity release that describes a security, a newsletter from a brokerage firm announcing the availability of a security, and an advertisement in a newspaper describing the benefits of a certain mutual fund may be considered prospectuses. A telephone call from an agent to a client advising the purchase of a security is not considered a prospectus because it involves an individual telephone solicitation between an agent and a client.

Question 43

The Uniform Securities Act lists a number of securities that are exempt from both the registration and the advertising filing requirements of the act. Included in that list would be all of the following except

A) securities issued by the XYZ Industrial Loan Association organized and supervised under the laws of this state.
B) securities issued by the Podunk and Western Railroad, a regulated common carrier.
C) common stock issued by the Bailey Brothers Building and Loan, organized under the laws of New York State and authorized to do business in this state.
D) universal life insurance policies issued by insurance companies authorized to do business in the state.

Answer 43

D) universal life insurance policies issued by insurance companies authorized to do business in the state.

Universal life insurance policies are not exempt securities for one simple reason—they are not securities. Each of the other choices is included in the USA’s listing of exempt securities.

Question 45

When a stock is listed on the New York Stock Exchange, it is:

Answer 45

exempt from state registration requirements.

Securities listed on the New York Stock Exchange (NYSE), NYSE American LLC (formerly known as the American Stock Exchange [AMEX]), or Nasdaq Stock Market are federal covered securities and do not need registration in any state under the Uniform Securities Act.

Question 46

An issuer wishing to comply with Regulation D of the Securities Act of 1933 must file Form D with the SEC:

Answer 46

no later than 15 days after the first sale.

Issuers wishing to avail themselves of the private placement exemption offered under Regulation D of the Securities Act of 1933 must file Form D with the SEC no later than 15 days after the first sale.

Question 47

Which of the following are exempt securities under the Uniform Securities Act?

I. Common stock, not listed on any regulated exchange, purchased by an open-end investment company registered under the Investment Company Act of 1940
II. Preferred stock issued by an insurance company authorized to do business in this state
III. Municipal bonds issued by Toronto, Ontario
IV. Private placements

Answer 47

II and III

Common stock not listed on any regulated exchange and purchased by an open-end investment company is an exempt transaction, but that common stock is not an exempt security. Securities issued by insurance companies and Canadian municipal securities are exempt from registration under the USA. Any security that represents an interest in, or debt of, or is guaranteed by an insurance company organized under the laws of any state and authorized to do business in this state is exempt. Qualifying private placements are exempt transactions, not exempt securities.

Question 48

An intrastate offering is exempt from:

Answer 48

federal registration.

An intrastate offering (Rule 147 exemption) is limited to companies that do business in one state and limit stock or bond sales to that state’s residents. Even though this offering may be exempt from SEC registration, it is not exempt from registering with that one state. Blue-sky registration (Uniform Securities Act registration) means the same thing as state registration.

Question 49

An issuer properly files Form D in accordance with Rule 503 of Regulation D of the Securities Act of 1933. As such, the securities that are the subject of any transaction are:

Answer 49

federal covered securities.

Securities sold under Regulation D of the Securities Act of 1933 are private placements and, under the NSMIA, are considered federal covered securities.

Question 50

Although certain common stocks, known as federal covered securities, are exempt from state registration, the Administrator has the power to request from the issuer all of the following except

A) a consent to service of process.
B) copies of the registration statement filed with the SEC.
C) a contact person located within the state for purposes of legal service.
D) a copy of the issuer’s articles of incorporation.

Answer 50

C) a contact person located within the state for purposes of legal service.

The consent to service of process eliminates the need for any local representation for legal purposes.

Question 51

As defined in the NSMIA, which of these are federal covered securities?

I. Open-end investment companies registered under the Investment Company Act of 1940
II. Closed-end investment companies registered under the Investment Company Act of 1940 that trade on the OTC Bulletin Board
III. Bonds listed on the OTC Link where the company’s common stock trades on Nasdaq
IV. Bonds issued by the Province of Ontario

Answer 51

I, II, and III

Under the NSMIA, federal covered securities include all investment companies registered under the Investment Company Act of 1940, regardless of where they trade. Any stock listed on Nasdaq is federal covered, and that makes any security equal to or senior (like their bonds) also federal covered, regardless of where they trade. Canadian government and municipal securities are not federal covered (although, under the Uniform Securities Act, they are exempt securities).

Question 52

Which securities are exempt from registration requirements under the Uniform Securities Act?

Answer 52

Securities issued by an insurance company organized under the laws of any state and authorized to do business in that state are exempt from registration. NYSE-listed issues are federal covered, and nonprofit organizations and commercial paper with a maturity of 270 days or less in denominations of at least $50,000 and in the top three ratings are also exempt.

Question 53

The first of the federal securities acts was the Securities Act of 1933. This act requires persons selling a new offering to their clients to:

Answer 53

deliver an effective (final) prospectus no later than with confirmation of the sale.

The Securities Act of 1933, sometimes referred to as the paper act, requires that an effective, or final, prospectus be delivered to all purchasers of a new offering no later than with confirmation of the sale. It is not required that purchasers receive a red herring prospectus, and only the SEC gets copies of the registration statement. Yes, they must be properly registered to make the offer (and sale), but that comes under the people act, (the Securities Exchange Act of 1934).

Question 54

Under the Securities Act of 1933, a registration statement for a security generally becomes effective how many days after it is filed?

Answer 54

A registration statement for a security becomes effective 20 days after it is filed, unless the SEC orders a delay.

Question 55

If required by the Administrator, a stock traded on the Nasdaq Market would most likely use?

Answer 55

Notice filing

Stocks listed on the Nasdaq Stock Market are federal covered securities and, as such, can only be required to notice file.

Question 56

Corporate debt securities (such as commercial paper) are exempt from registration under the Securities Act of 1933 if their maturities do not exceed how many days?

Answer 56

270 days

(9 months)

Corporate debt securities (such as commercial paper) with maturities of 270 days or less are exempt from registration; longer maturities would subject them to the act’s registration and disclosure requirements.

Question 57

If a public customer plans to purchase stock in a company that has been listed on a stock exchange for the past year in a regular-way secondary transaction, when must the customer receive the prospectus?

Answer 57

No prospectus delivery requirements for this transaction

Because this is a secondary market transaction in a listed stock, there is no requirement that a prospectus be delivered to the customer.

Question 58

The provisions of the Securities Act of 1933 include all of the following except

A) regulation of offerings of new securities.
B) prohibition of fraud in the sale of new securities.
C) regulation of the secondary market.
D) a requirement that an issuer provide full and fair disclosure about an offering.

Answer 58

C) regulation of the secondary market.

The Securities Act of 1933 regulates new issues of corporate securities sold to the public and is designed to prevent fraud in the sale of newly issued securities. Trading and the secondary markets are regulated under the Securities Exchange Act of 1934.

Question 59

In 1933, Congress passed the Securities Act, which required the registration of new issues before their offering to the public. However, the law contained a number of exemptions, including that for:

Answer 59

equipment trust certificates issued by a regulated common carrier.

Although each of these is considered an exempt security under the Uniform Securities Act (state laws), only the securities of a regulated common carrier carry an exemption from federal registration.

Question 60

Under the Uniform Securities Act, the sale of stock of a state bank is exempt from which of the following?

I. Prospectus requirements
II. Antifraud provisions
III. Registration requirements

Answer 60

I and II

Both the Uniform Securities Act and the Securities Act of 1933 exempt securities issued by banks, trusts, or savings and loans. While the security is exempt under both acts from registration and prospectus delivery requirements, it is never exempt from the antifraud provisions of the acts.

Question 61

Federal covered securities, as defined under the Uniform Securities Act,

Answer 61

include shares of an investment company registered with the SEC under the Investment Company Act of 1940

It is true that many federal covered securities are registered with the SEC. However, the term also includes those exempt from registration, such as government and municipal bonds. Although these investment company securities are exempt from registration in any state, the state may still require a notice filing, including a consent to service of process and payment of fees, for these offerings to be sold in the state. If the common stock is a covered security, as one listed on the NYSE would be, then any security with a senior claim, such as preferred stock or bonds, would also be considered federal covered.

Question 62

What is a security not exempt from the registration procedures of the Uniform Securities Act?

Answer 62

Variable annuities issued by an insurance company authorized to do business in this state

Variable annuities are not exempt from state registration because the payments from the annuity are dependent on the performance of a segregated fund invested in securities. Municipal securities and regulated public utilities are exempt from registration. Securities issued by religious and charitable organizations are exempt from registration under the USA.

Question 63

The National Securities Markets Improvement Act of 1996 (NSMIA), which amended the Uniform Securities Act, preempts state registration of federal covered securities. Under the NSMIA, all of the following are federal covered securities except

A) warrants trading on the OTCQB offered by a company whose common stock trades on the Nasdaq Stock Market.
B) securities offered pursuant to the provisions of Rule 506 of Regulation D under the Securities Act of 1933.
C) municipal securities of an issuer within the state of issuance.
D)
securities issued by unit investment trusts registered under the Investment Company Act of 1940.

Answer 63

C) municipal securities of an issuer within the state of issuance.

The NSMIA is designed to eliminate dual registration or regulation of securities. Because these municipal securities are issued in the state in which they are offered, there is no federal authority to regulate them. They are not federal covered securities and can be regulated by the state in which they are offered (although they are exempt from registration under the USA). Securities issued by any investment company registered under the Investment Company Act of 1940 are federal covered. Securities offered pursuant to the provisions of Rule 506 of Regulation D under the Securities Act of 1933 are federal covered. Rule 506 is the exemption from registration for the private offering of securities to a limited number of investors, often called private placements. Finally, if the common stock of an issuer is traded on the Nasdaq Stock Market, then any security equal to it (rights and warrants) or senior to it (preferred stock and debt securities) is also federal covered. Please note that the OTCBB (OTC Bulletin Board) was replaced in 2021 by the OTCQB.

Question 64

The Securities Act of 1933

Answer 64

The purpose of the Securities Act of 1933 is to provide investors with full disclosure about a new securities issue. Misleading information can lead to civil and perhaps even criminal liability. The act is federal in scope, whereas blue-sky laws refer to state securities regulations.

Question 65

The RAN Corporation’s common stock is listed on the New York Stock Exchange. To raise additional working capital, RAN’s board of directors has authorized the sale of $75 million in subordinated debentures. Under the Uniform Securities Act, which of the following is not a true statement?

Answer 65

The Administrator can require the RAN Corporation to register the debentures prior to an offering in the state.

Because the RAN Corporation’s common stock is listed on the NYSE, it (and any security equal or senior to it) is a federal covered security. As such, the state has no registration authority over the security. However, notice filing and payment of fees may be required. The Administrator always has the power to enforce antifraud statutes.

Question 66

When a new issue of common stock is in registration, agents are permitted to:

Answer 66

send a copy of the preliminary prospectus.

An issue in registration has not yet become effective. A preliminary prospectus may be sent, and indications of interest may be accepted, but no orders or money are accepted until the effective date.

Question 67

A client wants to purchase commercial paper. The licensed agent may indicate to the client that the security need not be registered if which of these are true?

I. The minimum denomination is $50,000.
II. The maximum maturity is 270 days.
III. t is rated in one of the three highest rating categories by a recognized rating agency.
IV. It is in book-entry form.

Answer 67

I, II, and III

Commercial paper may qualify as an exempt security if the minimum denomination is $50,000, has a maturity of not more than 270 days, and is rated in one of the three highest rating categories by a nationally recognized rating agency. It may or may not be in book-entry form (electronic records with no paper certificate); that has nothing to do with an exemption from registration. How do we know this is referring to the exemption under the Uniform Securities Act instead of the Securities Act of 1933, which has no rating requirement? The first reason, and most important, is that this is the NASAA exam; by default, unless stated otherwise, all questions refer to the USA and NASAA model rules. The second is the use of the term agent. That is a registration designation found only in state law.