Series 63 Securities

Question 1

Security

Answer 1

An investment in an enterprise for profit, with a third party performing the management

Question 2

List of securities

Meaning an interest, certificate, participation in, receipt for, guarantee of, or warrant or right to subscribe to or purchase any of:

Answer 2

• note
• stock
• treasury stock
• bond
• debenture
• evidence of indebtedness
• commodity options
• certificate of interest or participation in a profit-sharing agreement
• collateral trust certificate
• pre organization certificate or subscription
• transferable share
• investment contract
• variable contract
• whiskey warehouse receipt
• voting trust certificate
• certificate of deposit for a security
• fractional undivided interest in oil, gas, or other mineral rights; or
• put, call, straddle, option, or privilege on
  
  • a security, certificate of deposit, or group of index of securities, including an interest therein or based on the value thereof;
  • entered into on a national securities exchange relating to foreign currency

Question 3

NOT a Security

Answer 3

• an insurance or endowment policy or annuity contract under which an insurance company promises to pay a fixed sum of money
• commodities or futures contract
• IRA or Keogh; or
• an interest in a contributory or non contributory pension or welfare plan subject to ERISA of 1974

Question 4

Corporate Securities

Answer 4

Corporate issues include the following types of securities:

• Common stock, preferred stock, transferable shares, rights,warrants,and treasury stock
• Certificates of deposit for security, such as an ADR, which are foreign securities of deposit in a foreign branch of US Bank
• Real estate investment trust certificates, in which real property and mortgages are the main investment
• Equipment trust certificates, in which equipment owned by the issuing corporation is used as collateral to back the certificate
• Collateral trust certificates, in which marketable securities are used as collateral to back the certificate
• Voting trust certificates, which are special corporate issues used in proxy positions to attempt to remove existing management
• CMO, in which the collateral backing the obligation is a pool Of conventional mortgages

Question 5

Government securities

Issues by US govt or govt of another country

Answer 5

• Obligations of the US government, such as treasury bonds
• Obligations of foreign governments, such as bonds issued by Canada (as well as political subdivisions of Canada) or Mexico
• Obligations of state and local government and political subdivisions, such as townships
• Government agency obligations, which include Government National Mortgage Association (Ginnie Mae)

Question 6

Options

Answer 6

These include call and put options (enabling the investor to buy or sell the underlying security), which are option contracts on stocks, debt instruments, market indexes, and foreign currencies

Question 7

Investment Company Securities

Answer 7

• open-end investment company shares (mutual funds), the sponsor redeems these shares
• close-end investment company (publicly traded shares), they are negotiated on the open market and no redeemable
• unit investment trusts (UIT) are investment contracts that have fixed portfolios or contractual plan companies, which are used to purchase other investment company shares
• face amount certificates are investment contracts in which the issuer pays an investor a stated face amount at a specified future date

Question 8

Tax-sheltered securities

Answer 8

• limited partnership agreements
• certificates of interest in mining, oil, or gas drilling programs
• real estate cooperatives and condominiums; and
• farmland, planting, and breeding programs, when a third party manages the enterprise

Question 9

Guaranteed securities

Answer 9

In which the payment of principal, interest, and/or dividends is assured (guaranteed) by the party backing the security

Question 10

Miscellaneous securities

Answer 10

• merchandising marketing schemes and multilevel distributorship programs are also known as network marketing arrangements. they have been defined as securities in order to protect investors from past abuses in the selling of these interests
• Whiskey warehouse receipts, or simply warehouse receipts
• Commodity options contract

Question 11

Exclusion from the definition of a security

Answer 11

• Insurance policies
• Fixed annuities
• Commodities futures contracts (commodity options contracts ARE securities, commodity futures are NOT)
• Interested contributory or noncontributory retirement plans such as pension plan, IRAs, Keogh plans (even though the underlying investment within these plans are usually defined as securities, the plans themselves are NOT)

Question 12

Registration of securities

Required by all non-exempt securities

Answer 12

Forms call for:

• A description of the company properties and businesses
• A description of the security to be offered for sale
• information about the management of the company; and
• Financial statements certified by independent accountants

It is unlawful under USA act for any person to sell or offer any unregistered securities in the state unless they are federally covered (securities registered on a national exchange or on NASDAQ) or exempt

-process of registering a security before the state is commonly known as “blue-skying” an issue

Question 13

Administrator

Answer 13

USA act provides that very state has an administrator to administer the provisions of the act. The administrator can be the state securities commission, its commissioner, or its secretary

Question 14

Registration statement

Answer 14

This includes the amount of securities being offered, notifications of other states receiving registration statements, and any adverse filings

This is the initial step in registering a security can only be done by issuer, registered B/D, or a person on whose behalf the offering is being made (non-issuer distribution)

• effective for 1 year ( this effective date can be extended providing that there is no stop order denying the registration in effect
• may not be withdrawn for 1 year from its effective date if any securities of the same class are outstanding, unless the administrator permits a withdrawal in accordance with specific rulings

Question 15

Filing fee

Answer 15

• must accompany the registration statement
• usually based on a percentage of the total offering price of the security
• if not paid in full, registration will be stopped or denied

Question 16

General provisions

Answer 16

• registration statement
• filing fee
• amendment (if necessary)

Administrator may also request:

• the issuer to file quarterly reports to disclose the price of the offering
• that a prospectus or disclosure document be sent to each person to whom an offer or sale is made

At their discretion, they may also permit the omission of any information or requirement

Question 17

3 types of securities registration

Answer 17

• notice filing (this is not technically a registration; it operates more like a notice to the state for federally covered securities)
• registration by coordination; and
• registration by qualification

Question 18

Registration By Filing

Notification or Notice Filing

Answer 18

• only available to well-established corporations that are considered federally covered
• easiest an least costly way to file
• corporation uses the prospectus on file with SEC under Securities Act of 1933 as the filing document with the state. the company simply notifies the administrator that it is meeting the requirements mandated by that state and pay any appropriate fees
• MFs and UITs are federally covered and may file this way as long as it is accompanied by any required fees
• the documentation for this filing must include a consent to service of process (if required by that state) and other papers containing the following:
  
  • statement of eligibility
  • name, address, type of organization of the issuer
  • a descriptive statement of the security being registered; and
  • a copy of the most current prospectus of the security on file with SEC
• If any part of offering is being made for the benefit of anyone other than issuer (non-issuer distribution), statement must include:
  
  • that person’s name and address
  • amount of securities being offered
  • reason for the offering

-When the federal registration becomes effective, the state registration is effective as well. A notice filing for MFs and UITs becomes effective on the same day the information is filed with the administrator

Question 19

Registration By Coordination

Answer 19

• an issuer may perform this registration if the same offering is to be registered with the SEC under the Securities Act of 1933. Most IPOs are registered by coordination. Filing the SEC information with the state will satisfy the state registration requirements
• can be used by any issuer but is a more stringent process to follow. if registration by filing is not available, this may be the next best alternative
• issuer must file the consent to service of process, registration statement, and the following information to the state:
  
  • 3 copes of current prospectus on file with SEC
  • a copy of articles of incorporation and bylaws of the issuer
  • any underwriter agreements
  • a copy of any indenture relating to the issue
  • a specimen of the security to be issued; and
  • any other appropriate information or documents requested by administrator
• If no stop order is in effect, the state registration becomes effective when the federal registration becomes effective provided the following conditions exist:
  
  • the state registration has been on file for at least 10 business days (depending on state, it may be 20); and
  • a statement containing the minimum and maximum purposes offering prices and maximum underwriting discounts and commissions has been on file with the state for at least 2 business days prior to effective date

Question 20

Registration By Qualification

Answer 20

• most difficult due to detail of disclosures required
• may be used in any state for any security that is not an IPOD filed with the SEC and does not meet requirements for notification filing
• intrastate security (one being registered in only one state) will typically be registered by qualification

required information:

• general information about issuer. for non-issuer distribution, the name, address, and amount of securities owned by the person on whose behalf the offering is made;
• information on all officers, and directors of the issuer, including earnings for each director for the past and current year
• information on all shareholders of 10%?or more of issuer’s securities
• amounts paid to promoters and non-issuers over the past 3 years and anticipated future payments. Administrator may require that if promoter is compensated with stock that the stock be held in escrow for up to 3 years after effective date to keep promoter from immediately cashing out a profit
• terms of the offering and proposed utilization of the sales proceeds by issuer
• a current income statement, balance sheet, and description of issuer’s capitalization and long-term debt
• a copy of any prospectus or other disclosure documents, advertisement, and sales literature related to the offering
• All contracts made within the past 2 years and disclosure of any litigation. If the security is a debt offering, a legal opinion is also required
• The issuer’s articles of incorporation, any indenture related to the offering, and a specimen of the security being offered
• Any additional information required by the administrator

A registration by qualification becomes effective on a date determined by the administrator. If there are no misstatements or omissions of material facts found, the effective date is usually 30 days after the filing date.

Question 21

Denial, Suspension and Revocation of Registration

Answer 21

Administrator has the authority to issue a stop order denying the effectiveness of a registration statement, or to suspend or revoke the registration of an issue if it is deemed in the public’s best interest and there is just cause in accordance with the USA act. Would usually occur under following conditions:

• The registration statement is incomplete or contains false or misleading information concerning any material fact
• A provision of the USA act has been willfully violated by any person involved in the offering
• Security is already subject to a stop order or injunction by another state or federal court
• issuer’s method of business or enterprise includes illegal activities, or an office of the issuer or underwriter has been convicted of a securities crime
• the offer tends to be fraudulent or is made on terms that are deemed unfair or inequitable to the purchaser
• the issuer is ineligible for the registration method applied for
• proper filing fees have not been paid

Administrator may not enter a stop order against a registration based upon facts that were known by the administrator when the registration became effective, unless the proceedings are initiated within 30 days of effective date.

If stop order is issued, Administrator is required to promptly notify all parties that the order has been entered and the reason. Registrant is allowed to have the matter presented before a hearing, which must e held within 15 days of written request.

Question 22

Exempt securities

Answer 22

security that is exempt from both state registration requirements and advertising filing requirements

still subject to antifraud and registration provisions of USA act

Question 23

USA specifies these as exempt securities

Answer 23

• any security issued by US govt, any municipality, or agency of the government or any state
• Canadian (local and national) government securities and securities of other foreign gifts with which the US maintained diplomatic relations
• issues k banks, S&Ls, trusts companies, and federal credit unions. exemption does not apply to bank holding companies
• building and loan association issues
• insurance company issues, except variable contracts
• railroad and common carrier issues regulated by Interstate Commerce Commission
• public utility issues regulated by Public Utility Holding Act of 1935
• any security listed on NYSE or any other exchange that has registered with SEC and, the NASDAQ system including the rights or warrants to purchase these issues, and any other exchange approved by administrator (ie federally covered securities)
• issues of nonprofit or charitable organizations and professional trade associations and cooperatives
• promissory notes that mature in 270 or less that are issued in denominations of at least 50k and carry a rating in 1 of 3 highest categories of a nationally-recognized rating organization. this essentially exempts corporate commercial paper
• securities issued for employees as savings plans, pensions plans, profit sharing, and stock purchase plans
• muni bonds and bonds sold outside of state they were originally issued

Question 24

Federal Covered Securities

Answer 24

USA defines these as:

• securities listed on NYSE, NASDAQ, or any other national exchange determined by SEC as having similar listing standards
• an issuer’s securities that have equal or greater seniority than a listed security
• securities that are offered on sold to qualified purchasers. SEC defines as sophisticated investors
• securities issued by investment companies registered under the Investment Company Act of 1940. this includes MFs
• certain exempt securities and some private placements. muni securities are not covered securities within the issuer’s state
• states cannot require registration, subject the offering to state review or regulate any of the offering documents
• states can require issuers to file a notice and/or consent to service of process ad require registration fee. These rules do not apply to NYSE or NASDAQ securities
• state can also initiate investigation and enforcement actions for dead, deceit, or unlawful conduct against a B/D or its agents in conjunction with the offer or sale of covered securities

Question 25

Exempt transactions

Generally trades that don’t involve the public

Answer 25

• isolated non-issuer transactions. no more than 5 trades within 12-month period and B/D cannot be resident of the state
• certain non-issuer transactions in outstanding securities that are subject to registration and reporting requirements of Securities Exchange Act of 1934, trading of issues registered under Investment Company Act of 1940, or transactions by companies that have been reporting to SEC for at least 180 days prior to transaction
• unsolicited non-issuer transaction effected through a registered B/D. administrator typically requires that B/D retain on file a documented non-solicited statement from client
• fiduciary transactions made by executors, administrators, sheriffs, marshals, trustees in bankruptcies, guardians and conservators
• transactions between issuers and underwriters
• real estate mortgages or deeds of trusts where the entire mortgage or deed, together with the bonds, is sold as an entire unit
• a transaction by a bona fide pledge if the sale is not for the intent of evading the act
• any transaction with a bank, insurance company, trust, investment company, pension or profit-sharing trust, other B/D, or other institutional buyer
• private placement offers no more than 10 persons in a 12-month period, provided that the seller believes that all purchasers are buying for investment. no commissions can be paid for soliciting buyers other than financial or institutional investors. this state private placement exemption is different than federal Regulation D exemption, which allows a sale to a maximum of 35 non-accredited investors and an unlimited number of institutional investors
• a sale of a pre organization subscription, if no commissions are paid for soliciting any buyer, in which the number of subscribers is limited to 10 persons and no payment is made
• offers to existing shareholders where no commissions are paid for soliciting buyers. this applies mainly to right offerings and warrants whereby an existing shareholder subscribes to a new issue of security by exercising their subscription rights
• an offer (but not a sale) of a security for which a registration statement has been filed but not ER effective

Question 26

Denial and revocation of exemptions

Answer 26

Administrator can deny or revoke as long as prior notice is given to all interested parties, an opportunity for a hearing is provided an written findings of fact and laws are provided

Administrator can further summarily deny or revoke an exemption pending final determination of proceedings. if a summary order is effected, administrator must notify all interested parties with the reason for the order and provide that a hearing be set within 15 days of receipt of written request

Burden of proving existence of exemption for any proceeding under USA act rests on person claiming exemption