Unit 8 | Regulation Of Securities & Their Issuers Flashcards
Which list of instruments below is not composed of securities?
A. Stock, treasury stock, rights, warrants, and transferable shares
B. Voting trust certificates and interests in oil and gas drilling programs
C. Commodity futures contracts and fixed payment life insurance contracts
D. Options on securities and interests in multilevel distributorship arrangements
C. Commodity futures contracts and fixed payment life insurance contracts are included in our list of six items that are not securities.
Which of the following is a security under the Uniform Securities Act?
A. A guaranteed, lump-sum payment to a beneficiary under a modified endowment policy
B. Fixed, guaranteed payments made for life or a specified period under an annuity contract
C. Commodity futures contracts
D. An investment contract
D. An investment contract is a security under the Uniform Securities Act. The term is often used as a synonym for security. A guaranteed, lump-sum payment to a beneficiary is an endowment policy excluded from the definition of a security. Fixed, guaranteed payments made for life or a specified period are fixed annuity contracts not defined as securities. Commodity futures contracts and the commodities themselves are not securities. It is much easier to remember what is not a security than what is.
Which of the following is included in the Uniform Security Act’s definition of a security?
A. An individual’s vested interest in his 401(k) plan
B. Fixed, guaranteed annuity payments made for life or for a specified period
C. Commodity futures contracts
D. A U.S. Treasury bond
D | Any bond, regardless of the nature of the issuer, is considered a security. The physical commodities and futures contracts on commodities are included in the list of nonsecurity investments. Retirement plans and fixed annuities are not securities.
LO 8.a
A primary transaction is
A. the first transaction between two parties in the over-the-counter market.
B. a sale between investors of securities traded on the New York Stock Exchange.
C. a new offering of an issuer sold to investors.
D. when the proceeds of the sale go to the selling party.
C | A primary transaction is a new offering of securities by an issuer sold to investors. The key is that the proceeds of the sale go to the issuer. Transactions between two investors in the over-the-counter market are called secondary transactions (the market between investors). A sale between investors of securities traded on the New York Stock Exchange is another example of a secondary transaction. In both of those cases, the proceeds of the sale go to the selling party, but that party is not the issuer.
LO 8.b
Which of the following securities is not exempt from the registration and advertising requirements of the Uniform Securities Act?
A. Shares of Commonwealth Edisin, a regulated public utility holding company
B. Securities issued by the nonprofit Carnegee Endowment for Peace
C. Securities issued by a bank that is a member of the Federal Reserve System
D. Variable annuity contracts issued by Metrodential Insurance Company, licensed to do business in the state
D. Segregated fund-based variable annuities fall under the nonexempt category, which implies that they are governed by the Securities Act and must be registered. However, our list of exempt securities includes shares in public utilities, charitable foundations, and banking institutions that are members of the Federal Reserve System. These securities are not bound by the registration requirements of the Securities Act.
Both Rule 147 and Rule 147A require that the issuer meet residency requirements.
Meeting which of the following is not one of those requirements?
A. At least 80% of the issuer’s assets are located in the state.
B. At least 80% of the issuer’s gross revenue must be derived from operations within the state.
C. At least 80% of the proceeds of the offering must be used for business
purposes within the state.
D. At least 80% of the issuer’s employees must be located in the state.
D. According to the requirement, it is mandatory for the issuer to have a majority of its employees located within the state. However, the minimum percentage required for the same is not less than 80%. This requirement means that the issuer must ensure that more than half of its employees are based within the state, failing which they may be unable to comply with the requirement above.
Which of the following securities is not exempt from the registration and sales literature filing requirements of the Uniform Securities Act?
A. Shares of investment companies registered under the Investment Company Act of 1940
B. Shares sold on the Nasdaq Stock Market
C. AAA-rated promissory notes of $100,000 that mature in 300 days
D. Bonds issued by Saskatchewan, Canada
C | To be exempt, promissory notes cannot mature beyond 270 days. Registered investment companies (think mutual funds) are federally covered securities, as are shares of companies listed on the Nasdaq Stock Market. Any security issued by a state or Canadian province (and their subdivisions) is an exempt security.
LO 8.c
Four months ago, one of your clients purchased 100 shares of stock that was sold under a Rule 147 exemption. He has just called to inform you that he has sold those shares to his neighbor at a nice profit. Under the provisions of the Rule 147 resale restrictions,
A. the client had to wait at least 6 months from the date of the last sale by the issuer of any part of the issue.
B. the resale restrictions now pass to the buyer.
C. the resale restrictions only apply to residents of another state.
D. the resale must be made through the broker-dealer who made the original sale.
C | Although the rule has a 6-month resale restriction, that only applies to sales made to residents of other states. It is not a problem if you re-sell in a much shorter time to your neighbor.
LO 8.c
Which of the following are exempt transactions?
I. A nonissuer transaction with a bank in a Nasdaq Capital Market Security
II. An unsolicited request from an existing client to purchase a nonexempt security
III. The sale of an unregistered security in a private, nonpublicly advertised transaction to 10 noninstitutional purchasers over a period not exceeding 12 months
IV. The sale of unlisted securities by a trustee in bankruptcy
A. l and II
B. I, II, and III
C. I, II, and IV
D. I, II, III, and IV
C. Choice III is not an exempt transaction because the private placement exemption is limited to 10 offerees, not ten purchasers. All of the others are included in our list of exempt transactions.
Under the Uniform Securities Act, which of the following persons is responsible for proving that a securities issue is exempt from registration?
A. Underwriter
B. The person requesting the exemption
C. State Administrator
D. There is no need to prove eligibility for an exemption.
B. The burden of proof for claiming eligibility for an exemption falls to the person claiming the exemption. If someone other than the issuer (such as stockholders selling or a broker-dealer) files the registration statement, that person must prove the claim.
All of the following describe exempt transactions except
A. ABC, a broker-dealer, purchases securities from XYZ Corporation as part of an underwriting commitment.
B. First National Bank sells its publicly traded bond portfolio to Amalgamated National Bank.
C. Amalgamated National Bank sells its publicly traded bond portfolio to ABC Insurance Company.
D. Joan Smith, an employee of Amalgamated National Bank, buys securities recommended by her agent at ABC Securities Corporation, a registered broker-dealer.
D | When an employee of a bank buys securities from a broker, it is considered a regular purchase - just like any other member of the public buying securities. This status means that it is not exempt from regulations that apply to such purchases. However, some transactions between financial institutions are exempt from these regulations. For example, transactions between banks and broker-dealers, between banks, and between banks and insurance companies are exempt. The main factor that determines whether a transaction is exempt or not is who is involved in the transaction rather than what type of security is being bought or sold.
LO 8.d
As defined in the Uniform Securities Act, each of the following would be considered an exempt transaction except
A. a trustee of a corporation in bankruptcy liquidates securities to satisfy debt holders.
B. an offer of a securities investment is directed to 10 individuals in the state during a period of 12 consecutive months.
C. an agent solicits insurance companies to purchase shares of nonexempt securities.
D. preorganization certificates are subscribed to by nine investors in the state, earning the agent a modest commission.
D | The nine investors are within the required ten, but for a preorganization certificate to be an exempt transaction, there can be no payment of funds or commissions. Transactions by fiduciaries, such as a trustee in bankruptcy (the only trustee who qualifies), and transactions with institutions, such as insurance companies, are exempt. The private placement exemption applies as long as no more than ten offers to individual (retail) purchasers within 12 consecutive months.
LO 8.d
Which of the following describe indications of interest secured during the 20-day cooling-off period?
I. Binding on the customer
II. Nonbinding on the customer
III. Binding on the broker-dealer
IV. Nonbinding on the broker-dealer
A. I and III
B. I and IV
C. II and III
D. II and IV
D | Indications of interest are not binding on either party.
LO 8.e
Charlotte is an agent of Gibraltar Securities. Her most active customer told Charlotte that he is thinking about buying 10,000 shares of a retailer’s stock for which Gibraltar will be participating in the underwriting syndicate. The SEC release date for the stock is anticipated within 10 business days. What may Charlotte send to the client today?
A. The preliminary prospectus and a reprint of a popular advertisement placed by the issuing corporation
B. The preliminary prospectus
C. An order request
D. The final prospectus
B | Because a security is in registration until released by the SEC for public sale, only the unadulterated prospectus may be sent to parties indicating interest in purchasing the stock. Orders may not be accepted for a security while in registration. Because the final prospectus is indeed an offering document, it may not be presented until the SEC has released the security for public sale (made the security effective).
LO 8.e
KAPCO Dividend Yield Fund, a closed-end investment company registered under the Investment Company Act of 1940, wishes to commence offering its shares in States A, B, C, and D. It could be required to
A. coordinate its federal registration with each of the four states.
B. notice file.
C. register by qualification in each of the states.
D. do none of these because investment companies registered under the Investment Company Act of 1940 are federally covered securities and are exempt from registration.
B. Although these are federal-covered securities and exempt from traditional registration, as a registered investment company, you can expect that it will be required to engage in a notice filing.
