The Foundation - That Word "Exempt"

One of the major terms that causes confusion for Series 63 candidates is the word, "exempt." Webster's defines exempt as "not subject to or bound by a rule, obligation, etc. applying to others." Applying that idea to securities, if a stock is exempt from registration, it does not have to be registered.

So what is a "non-exempt security"? Following the logic above, a non-exempt security, would be one to which the state's laws would apply, which means that it would have to register, right? Well, yes, most of the time.

If a non-exempt stock is traded in an exempt transaction, it would not be a violation of the USA. Confusing? Yes, but become accustomed to the use of the word in these contexts.

A note from the Official Comments that accompany the USA 2002 may help to clarify:

    • A (n) ... exempt security retains its exemption when initially issued and in subsequent trading.
    • A ... transaction exemption must be established for each transaction.

In other words, if a stock, such as a NYSE listed stock that was approved for listing at its Initial Public Offering (IPO), is exempt from registration under the USA, it is exempt in both the primary (new) market and in subsequent secondary market trading.

If a stock is a non-exempt stock, then it should be registered unless the circumstances that bring it into the state make the transaction exempt. We'll look at this in detail under exempt transactions.

It may also be helpful to consider the word "exclusion" in the context of the USA, as opposed to "exemption".

For example, in defining the term "security", the USA definition stated that it did not include "an interest in a contributory or noncontributory pension or welfare plan subject to the Employee Retirement Income Security Act of 1974."

In other words, a qualified pension plan is excluded from the definition of security. Certain stocks, such as those listed on exchanges are, by contrast, exempt from registration.

We'll have some sample questions to strengthen your handling of these sometimes-confusing terms.

The most frequent exemptions are:

    • U.S. Government and Municipal Securities: These are exempt from everything except the anti-fraud laws. For the most part, we can also add securities issued by foreign governments with which the U.S. maintains diplomatic relations. The exam questions you see might focus on Canadian securities.
    • Banks: The regulatory structure for federal and state banking is, in most cases, considered sufficient to ensure that the public is not being defrauded.
    • Institutions: The USA is principally structured to protect the investing public from fraud, not institutions. The essential idea here is that institutions are (or should be) sophisticated investors that have the expertise available to investigate securities offerings, allowing them to take risks that the normal investor should not.

Exam Tips and Tricks
Keep these in mind. We'll be seeing them many times in this text. Also note that if an exemption is available, it will normally be used. No one wants to spend the time or money registering if it is not required.

With the definitions out of the way, let's now take a look at the origin of the USA.

Exam Tips and Tricks
You will be tested on the USA, not on individual state regulations (Blue Sky Laws), as most states simply mirror the model legislation of the USA. The bullet points below outline the origin of the Uniform Securities Act.

National Conference of Commissioners on Uniform State Laws (NCCUSL)
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