Series 63

AAA

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 exempt from registration, and
    • Transactions exempt from registration.

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 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 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:

    • The maturity cannot exceed 270 days (which is actually the standard)
    • The denominations must be $50,000 or more
    • The instrument must qualify for a safety rating from a service, such as Standard & Poor's (S&P), in the top three categories. In the S&P ratings these are: AAA, AA, A.

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
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