Unit 4 Flashcards
Under the USA, which of the following are exempt transactions?
I. A transaction between an issuer and an underwriter
II. An unsolicited customer order to buy an exempt security
III. U.S. Treasury bonds
IV. Municipal securities
A) I and III
B) II and IV
C) III and IV
D) I and II
D) I and II
Transactions that occur between an issuer and underwriter and an unsolicited customer order to buy any security (exempt or nonexempt) are exempt transactions. It is important to remember that a transaction’s exempt status generally depends on the trade’s participants and/or type of trade, rather than on the security. U.S. Treasury bonds and municipal securities are exempt securities. The manner in which they are sold and to whom determines whether it is an exempt transaction.
As defined in the Uniform Securities Act, an issuer is any person who issues, or proposes to issue, a security for sale to the public. Based on that definition, which of the following is not an issuer?
A) The AAA Manufacturing Company, which proposes to offer shares to the public but has not completed the offering
B) The U.S. government announcing an offering of 20 year Treasury bonds
C) The City of Chicago, which is involved in a distribution of tax-exempt highway improvement bonds
D) A partner in the AAA Oil and Gas Partnership selling his interest in the investment
D) A partner in the AAA Oil and Gas Partnership selling his interest in the investment
The Uniform Securities Act defines an issuer as any person who issues, or proposes to issue, a security. The resale of a partnership interest by an investor is a nonissuer sale because the investor is not the issuer. Examples of issuers are a municipality such as the city of Chicago, which issues tax-exempt highway improvement bonds; the AAA Manufacturing Company, which proposes to offer shares to the public even though it has not completed the offering; and the United States government, when it offers Treasury bonds.
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, which of the following statements is TRUE?
A) The sale was legal because the sale took place in State X to a resident of that state.
B) The sale was legal because the bond is not required to be registered for sale in State X.
C) The sale was illegal because the bond is not registered for sale in State X.
D) The sale was illegal because municipal revenue bonds are not exempt securities.
B) 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 which are obligated to register.
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
A) be properly registered prior to making the offer
B) deliver a copy of the registration statement no later than with confirmation of the sale
C) deliver a preliminary (red herring) prospectus prior to the sale
D) deliver an effective (final) prospectus no later than with confirmation of the sale
D) 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.
Which of the following transactions is NOT exempt from registration?
A) A bona fide pledge of securities
B) A sale of an exempt security to an individual customer as a result of an agent’s solicitation
C) Transactions with banks, savings and loan associations, and other financial institutions
D) Transactions between an issuer and underwriter or between underwriters
B) A sale of an exempt security to an individual customer as a result of an agent’s solicitation
Solicited trades with individuals are not exempt transactions, even when the security being traded is exempt. Transactions between issuers and underwriters or between underwriters are exempt from registration and advertising filing requirements. A bona fide pledge of securities is not a transaction and this question is looking for a nonexempt transaction. Transactions with banks, savings and loan associations, and other financial institutions are exempt from registration and advertising filing requirements.
A client wants to purchase commercial paper. The licensed agent may indicate to the client that the security need not be registered if
I. the minimum denomination is $50,000
II. the maximum maturity is 270 days
III. it is rated in 1 of the 3 highest rating categories by a recognized rating agency
IV. it is in book entry form
A) I, II, and III
B) I and II
C) I and III
D) II, III, and IV
A) 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 and, 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.
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
A) I and III
B) I, II, and III
C) II and IV
D) I, II, III, and IV
D) 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 are not exempt under the Securities Act of 1933
Which of the following securities of Synergy, Inc., (an issuer whose stock trades on the Nasdaq Stock Market), does NOT have an exemption from registration with the state?
A) Synergy’s oil and gas limited partnership units (Synergy, Inc., is the general partner)
B) Synergy, Inc., preferred stock
C) Synergy, Inc., debentures
D) Synergy, Inc., senior bonds
A) Synergy’s oil and gas limited partnership units (Synergy, Inc., is the general partner)
Synergy’s oil and gas limited partnerships are not issued by Synergy, Inc.; Synergy is only the general partner. The oil and gas partnerships are issued by separate legal entities; they do not have the blue-sky exemptions. They must be registered in the states in which they are sold, unless they have some other exemption. Any security equal or senior in claim to an exempted common stock is exempted as well. The company’s preferred stock, senior bonds, and debentures all have blue-sky exemptions from state registration because the company’s common stock is traded on the Nasdaq Stock Market.
Under the Uniform Securities Act, an issuer is any person who issues or proposes to issue a security for sale to the public. According to the USA, which of the following is NOT an issuer?
I. The city of Chicago, which is involved in a distribution of tax-exempt highway improvement bonds
II. AAA Partnership, which issues certificates of interest or participation in its oil, gas, and mining titles
III. The AAA Manufacturing Company, which proposes to offer shares to the public but has not completed the offering
IV. The United States government, which proposes to offer Treasury bonds
I. The city of Chicago, which is involved in a distribution of tax-exempt highway improvement bonds
Under the Uniform Securities Act, an issuer is any person who issues or proposes to issue a security. However, with respect to certificates of interest or participation in oil, gas, or mining titles or leases, there is not considered to be any issuer, even though those certificates are included in the definition of “security.” Examples of issuers are a municipality such as the city of Chicago, which issues tax-exempt highway improvement bonds; the AAA Manufacturing Company, which proposes to offer shares to the public, even though it has not completed the offering; and the United States government, when it proposes to offer Treasury bonds.
Which of the following investment vehicles is NOT considered a security under the Uniform Securities Act?
A) Annuities with a fixed rate of return
B) Common stock issued and sold intrastate
C) U.S. government bonds
D) Commercial paper maturing in fewer than 270 days
A) Annuities with a fixed rate of return
A fixed annuity is not defined as a security and is subject to the rules and regulations of the state Insurance Commissioners. As such, a fixed annuity does not fall under the provisions of the Uniform Securities Act. Even though the U.S. government bonds (and, under certain conditions, the commercial paper) are exempt securities, they are still securities.
The Uniform Securities Act provides an exemption from registration for certain securities and for certain transactions. However, the Administrator is not empowered to deny an exemption from state registration to
I. U.S. government securities
II. private placement transactions
III. a transaction with an insurance company
IV. municipal bonds issued by another state
A) I and IV
B) I and III
C) II and IV
D) II and III
A) I and IV
Other than in a transaction involving a federal covered security, the Uniform Securities Act gives the power to the Administrator to deny an exemption to any exempt transaction such as private placements or transactions with professional investors, such as insurance companies or bank trust departments. However, when it comes to a security’s exemption, the Administrator may only deny exempt security status to an issue of a nonprofit organization or an investment contract issued in connection with an employee benefit plan, never a U.S. government security or one issued by another state.
Registration statements for securities
A) expire on December 31 of each year and must be renewed if further sales are to be continued
B) need not be filed with the Administrator if the securities are only sold in one state.
C) are effective for at least 2 years from their effective dates, or longer if the securities are still under distribution by the underwriters
D) may be amended after their effective dates as to the amount of securities issued, provided that underwriting fees and the initial offering price have not changed
D) may be amended after their effective dates as to the amount of securities issued, provided that underwriting fees and the initial offering price have not changed
Registration of securities under the USA may be amended after their effective dates as to the amount of securities issued, provided that underwriting fees and initial offering prices have not changed. Securities registration statements remain effective for 1 year from their effective date, and do not expire on December 31 of each year. Registrations of agents, investment advisers, and broker-dealers expire on December 31 and need to be renewed. Registration statements are effective for 1 year from their effective dates (or longer if the securities are still under distribution by the underwriters).
When comparing the limited offering exemption under federal law with that of the exemption in the Uniform Securities Act, which of the following statements is TRUE?
A) The Uniform Securities Act’s exemption for such transactions is narrower than the comparable federal exemption because offers are limited to a smaller number of nonqualified offerees.
B) The federal law permits purchases by both accredited and nonaccredited investors, while state law limits offers solely to those who are accredited investors.
C) The statutory resale restriction is the same under both state and federal law.
D) The federal law does not permit compensation on investments made by retail investors while the state law does.
A) The Uniform Securities Act’s exemption for such transactions is narrower than the comparable federal exemption because offers are limited to a smaller number of nonqualified offerees.
Under both laws, there are numerical limits placed on the number of investors who are not “qualified.” Under federal law, that would generally be a maximum of 35 nonaccredited persons. Under the Uniform Securities Act, that number would generally be an offer to no more than 10 noninstitutional persons in a particular state during any 12-month period. Please note the difference in terminology. Under federal law, those who are “qualified” (don’t count toward the numerical limit) are referred to as accredited investors, while under state law, those who are “qualified” are called institutional investors. Under the USA, commissions are limited to sales made to institutional, not retail clients. Under Regulation D, there is a requirement that noninstitutional investors sign an investment letter stating that the purchase was made for investment purposes only and not made with the intention of immediate resale. Under state law, all that is required is a reasonable belief that the purchase is being made for investment only. In both cases, purchases may be made by institutional and retail investors (and those retail investors do not have to be accredited).
Which of the following are nonissuer transactions?
I. An investment manager purchases 100,000 shares of XYZ on the NYSE.
II. An investment adviser sells a block of YYY Corp. shares to an overseas investor in a private transaction.
III. The president of Dot.com, Inc., sells his personal shares of Dot.com on the NYSE.
IV. Dot.com purchases its own shares on the open market in order to place them in treasury.
A) I, II, III, and IV
B) I only
C) III and IV
D) I and II
A) I, II, III, and IV
A nonissuer transaction is a transaction in which the proceeds do not directly or indirectly go to the issuer, as in a secondary transaction. When the investment manager purchases XYZ shares on the NYSE, the proceeds of the sale do not go to XYZ Corp. but to the investors who sold the stock. When an investment adviser sells YYY Corp. shares to an overseas private investment group, YYY Corp. does not benefit directly or indirectly because the proceeds go to the investment adviser, not to YYY Corp. When Dot.com purchases its own shares on the open market, the proceeds go to outside investors, not to Dot.com as the purchaser. However, if Dot.com resold its shares, the transaction would be an issuer transaction.
Which of the following securities is NOT exempt from the registration procedures of the Uniform Securities Act?
A) Variable annuities issued by an insurance company authorized to do business in this state
B) Common stock issued by a public utility company whose rates are subject to state regulation
C) Bonds issued by a church operating as a nonprofit organization under IRS Code Section 501(c)(3)
D) General obligation bonds issued by a city located in this state
A) 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.
Which of the following statements regarding the differences between Rule 506(b) and Rule 506(c) of Regulation D of the Securities Act of 1933 are TRUE?
I. Rule 506(c) offerings can be advertised, while Rule 506(b) offerings cannot.
II. Rule 506(c) offerings are limited to 35 nonaccredited investors, while Rule 506(b) offerings do not have a limit.
III. The bad actor provisions only apply to Rule 506(c) offerings.
IV. Rule 506(c) offerings are limited exclusively to accredited investors, while nonaccredited investors can participate in Rule 506(b) offerings.
A) I and II
B) II and III
C) I and IV
D) III and IV
C) I and IV
As long as the offering is limited exclusively to accredited investors, Rule 506(c) offerings may be publicly advertised; Rule 506(b) offerings can never be advertised. The limit of 35 nonaccredited investors applies to Rule 506(b); there is no limit on the number of accredited investors for either rule. Both rules are subject to the bad actor provisions.
