Securities - Securities Exemptions

Before we begin this section, it is important to distinguish that there are two different types of exemptions, according to the USA.
The specific types of exemptions are:

  • Securities exempt from registration, and
  • Transactions exempt from registration.

This may get a little confusing, as there can be both securities and transactions that are exempt, or either can be exempt individually.

Keep in mind: a security that is not exempt must be registered. Additionally, all transactions that are exempt are generally known to be exempt before the transaction ever takes place.

Previously we defined those items that are securities and those which are not. The Uniform Securities Act specifies several securities that are exempt from registration requirements and the filing of advertising materials. The law specifically emphasizes that they are not exempt from the anti-fraud provisions of the law. Here's a list of the most important securities exemptions, we'll then follow it up with explanations.

  1. Government Securities
  2. Financial Institution Securities
  3. Public Utility and Common Carrier Securities
  4. Insurance Company Securities
  5. Securities Listed on Stock Exchanges
  6. Not-for-Profit Enterprise Securities
  7. Commercial Paper
  8. Options or Warrants

Do these look familiar as exemptions? Sure, earlier, we made a list of exempt securities when we were defining the term, "agent". The statement was that, "If the agent represents issuers of exempt securities..." then the person did not have to register as an agent under the Uniform Securities Act. Those listed above are exempt securities.

Now let's look at the logic that underlies this.

  1. Government Securities: Securities issued by levels of government extending from local city municipal bonds through the U.S. government are exempt from regulation except for the anti-fraud laws. This exemption extends to those securities issued by the governments. There is a difference in the way that Canadian government securities and those of other nations are handled under the Uniform Securities Act:
  • Securities issued by the Canadian government and by the municipal governments of Canada are exempt. This would include bonds issued by provinces and cities.
  • Securities issued by the national governments of other countries with which the U.S. maintains diplomatic relations are exempt but not those issued by foreign political entities below the national level.

    For example: A city of Toronto municipal bond is exempt from registration under the Uniform Securities Act, but a bond issued by the city of London, England would not be exempt

The next three we can deal with - in one respect - as sharing some of the same characteristics that qualify for exemption.

  1. Financial Institution Securities: Issued or guaranteed by domestic banks, savings and loan associations or credit unions
  2. Public Utility and Common Carrier Securities: Issued or guaranteed by any railroad, common carrier, or utility which is regulated by the Interstate Commerce Commission or state Public Service Commission
  3. Insurance Company Securities: Regulated by state insurance commissions. This does notinclude the variable products sold by the companies.

    The logic is that, if an institution is a highly-regulated entity, such as those above, the SEC has already examined their registration and they are also subject to additional oversight. Thus, there is no need for an additional level of regulation.

  4. Securities Listed on Stock Exchanges: Previously, we have defined "federal covered securities" as those the comprise the stocks listed on the exchanges and the NASDAQ. The NSMIA (National Securities Markets Improvement Act) preempts what had been state registration requirements for covered securities. This amendment affects Section 18 of the 1933 Act, and essentially states that offerings of covered securities will be exempt from further registration requirements. This exemption is often called the "blue-chip exemption."
  5. Not-for-Profit Enterprise Securities: Securities issued by persons organized and operated as non-profit or religious organizations are exempt from registration. NASAA has, in recent years been concerned about the potential abuse of this exemption and has worked to ensure that the Administrators have the necessary tools to prevent fraud.
  6. Commercial Paper: Included in this category are instruments that may, on the exam, be called "promissory notes", "banker's acceptances" or "time drafts". To qualify for an exemption these must meet three conditions:
    • Securities exempt from registration, and
    • Transactions exempt from registration.

The concept behind the commercial paper exemption is that, if such instruments are short-term, safe investment vehicles in a relatively high denomination, it is unlikely that the general public is at risk from fraud.

  1. Options or Warrants: Within this category are put or call option contracts, warrants, subscription rights on warrants or an option (or similar derivative security) whose underlying assets is a security (or index) consisting of foreign currency.

    These securities qualify for exemption IF they meet the following criteria:

    • Securities issued by the Canadian government and by the municipal governments of Canada are exempt. This would include bonds issued by provinces and cities.
    • Securities issued by the national governments of other countries with which the U.S. maintains diplomatic relations are exempt but not those issued by foreign political entities below the national level.

      For example: A city of Toronto municipal bond is exempt from registration under the Uniform Securities Act, but a bond issued by the city of London, England would not be exempt

Question: May a non-exempt security (one which should be registered) legally be traded in a state where it is not registered?

Answer: Yes, if it is traded in an exempt transaction.

Exempt Transactions
Related Articles
  1. Professionals

    Internal Advisor Consultant: Job Description & Average Salary

    Learn about the internal advisor consultant position and the national average salary as well as the key skills, education and experience needed.
  2. Professionals

    Career Advice: Stockbroker Vs. Insurance Agent

    Compare and contrast careers as a stockbroker and insurance agent. Understand the skills and attributes required for success in each career.
  3. Professionals

    Series 63 Exam Prep: The Broker-Dealer

    Before you take the series 63, you need to understand jurisdiction and how it affects broker-dealers.
  4. FA

    The Basics of The Series 79 Exam

    Passing the Series 79 exam is usually necessary for anyone who wants to work in investment banking.
  5. Your Clients

    Events in 2016 That'll Alter Your Retirement Plans

    Retirement savers who are trying to see what lies ahead can expect these changes affecting their retirement plans in 2016.
  6. Term

    What is the Series 66?

    The Series 66 exam is one of two tests required to register as both a securities agent and an investment advisor.
  7. Professionals

    Internal Advisor Consultant: Career Path & Qualifications

    Discover more about the responsibilities of an internal advisor consultant, the average salary he can expect and the qualifications he will need for the job.
  8. Your Practice

    How Likely is a New Fiduciary Rule in 2016?

    New fiduciary standards for advisors working with retirement accounts are on the horizon. Will they become reality in 2016?
  9. Professionals

    Breaking Down Financial Securities Licenses

    Find out which exam you need to begin your career as an investment professional.
  10. Brokers

    Duck These Illegal Sales Tactics Used By Brokers

    Many unscrupulous brokers employ illegal swindling tactics to sell bad securities. Here are sales strategies that should indicate red flags to investors.
RELATED TERMS
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  2. Series 6

    A securities license entitling the holder to register as a limited ...
  3. Comprehensive Automated Risk Data ...

    The Comprehensive Automated Risk Data System (CARDS) is an initiative ...
  4. Corporate Financing Committee

    A regulatory group that reviews documentation that is submitted ...
  5. Division Of Reserve Bank Operations ...

    An entity under the Federal Reserve System that manages certain ...
  6. Series 79

    A examination to ensure a candidate is qualified to become a ...
RELATED FAQS
  1. Do I have to be a U.S. citizen to sit for the Series 63 exam?

    United States citizenship is not required for Series 63 test-takers. Candidates may take the exam inside or outside the U.S. ... Read Full Answer >>
  2. My 120-day Series 63 exam window is about to close, but I need more time to study. ...

    Extensions are available on rare occasions. Candidates should apply for an extension with the North American Securities Administrators ... Read Full Answer >>
  3. Is there a limit on the number of times I can re-take the Series 63 exam?

    There is no limit to the number of times a candidate may retake the Series 63 exam. The North American Securities Administrators ... Read Full Answer >>
  4. How long must I wait after failing the Series 63 exam before I can take it again?

    Waiting periods are in place for candidates who wish to retake the Series 63 exam. Between retakes, the waiting period is ... Read Full Answer >>
  5. Are waivers granted to the 180-day waiting period to re-take the Series 63 exam?

    Candidates retaking the Series 63 exam must wait for 30 days after failing it on the first or second attempt. After failing ... Read Full Answer >>
  6. If I failed the Series 66, does the waiting period apply if I want to take the Series ...

    The waiting period only applies to retaking the same North American Securities Administrators Association (NASAA) exam. Candidates ... Read Full Answer >>
  7. Does NASAA or anyone else give out the series 63 exam questions?

    Outside of the proctored exam, no access to Series 63 exam questions is offered. Providing access to questions would invalidate ... Read Full Answer >>
  8. Are series 63 exams given outside of the United States?

    Series 63 exams are offered at authorized testing centers around the world. The exam does not require U.S. citizenship. Test ... Read Full Answer >>
  9. How often, and how, is a series 63 exam updated?

    Series 63 exams draw questions from a test bank based on state regulations, the Uniform Securities Act and North American ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center