Series 66

AAA

Regulation of Securities - Exempt Transactions

The USA exempts certain transactions from registration - usually transactions in securities that are already registered on a federal level, have some sort of federal association, or in some way are not transacted among the public at large. After you read the following list, the best bet for the test is simply to try to use common sense. If an issuer is effecting a transaction for an average person or purchasing the security for his or her portfolio, the transaction is most likely not exempt.
The Administrator has the power to exempt any transaction he or she deems not necessary of registration. The Administrator can also deny an exemption, if he or she deems that state registration is necessary. If an Administrator feels that an exempt security falls under a state provision (like anti-fraud), he or she may require that the federally exempt security be registered with the state.According to the USA, exempt transactions include the following:

  • Isolated non-issuer transactions - An isolated non-issuer transaction, whether or not it is affected by or through a broker-dealer.
  • Non-issuer transactions - A non-issuer transaction by or through a broker-dealer registered (or exempt from registration), in a security of a class that has been outstanding in the hands of the public for at least 90 days, if, at the date of the transaction:
    • the issuer of the security is engaged in business, is not in bankruptcy, and is not in any type of merger and the security is:
      • sold at a reasonable price.
      • not representative of an unsold allotment of the underwriter.
      • nationally recognized.
  • Transaction in a security of a foreign issuer - A non-issuer transaction by or through a broker-dealer registered or exempt from registration under this [Act] in a security of a foreign issuer that is a margin security.
  • Non-issuer transaction involving the SEC - A transaction where the issuer of the security files a report with the Securities and Exchange Commission.
  • Non-issuer transaction by or through a broker-dealer
    It is vitally important that these transactions are exempt only if they are by or through a broker-dealer registered or exempt from registration in a security that:
    • is rated at the time of the transaction by a nationally recognized statistical rating organization in one of its four highest rating categories
    • has a fixed maturity or a fixed interest or dividend, if:
      • a default has not occurred during the current fiscal year or within the three previous fiscal years or during the existence of the issuer;
      • the issuer is engaged in business, is not in the organizational stage or in bankruptcy or receivership, and is not and has not been within the previous 12 months a blank check, blind pool, or shell company that has no specific business plan or purpose.
  • Non-issuer unsolicited - A non-issuer transaction by or through a broker-dealer registered or exempt from registration affecting an unsolicited order or offer to purchase.
  • Non-issuer transaction through pledge - A non-issuer transaction executed by a bona fide pledgee without the purpose of evading the USA.
  • Non-issuer transaction by a federal covered investment advisor - A non-issuer transaction by a federal covered investment advisor with investments under management in excess of $100,000,000 acting in the exercise of discretionary authority.
  • Security exchange - A transaction where no cash, or partial cash, is exchanged - this type of transaction is only valid after a hearing with and approval from the Administrator.
  • Transaction between Issuer and Underwriter
  • Secured transactions - Transactions secured by a note, bond, mortgage or security agreement, if:
    • a general solicitation of the transaction is not made.
    • a commission or other remuneration is not made.
  • Fiduciary transactions - A transaction by an executor, administrator of an estate, sheriff, marshal, receiver, trustee in bankruptcy, guardian or conservator
  • Sale or offer of sale to:
    • an institutional investor
    • federally covered investment advisor
    • any other exempt person
  • Sale by or on behalf of an issuer if:
    • no more than 25 people purchase the security in the state registered, in a 12-month period
    • a general advertisement or solicitation is not made in connection to the offer
    • commission is not paid
    • the issuer believes that purchasers' interest is purely for investment
  • Transaction to existing owners
  • Offer to sell, but not a sale:
    • Of a security that is not exempt from registration under the Securities Act of 1933
      • a registration has not been filed with the state, but is effective at a federal level
      • a solicitation of interest is provided
      • a stop order has not been issued by the Administrator
  • Rescission offers - Offers of rescission are defined under civil liabilities.
  • Offer of sale to a person from another state
  • Transactions of employee stock plans including:
    • stock purchase, savings, option, profit-sharing, pension, or other benefit plans for:
      • directors, general partners, trustees, officers, consultants and advisors
      • family members who acquire securities though gifts or domestic relations orders
      • former employees, who were providing services when the securities were offered
      • insurance agents, who are the exclusive agent of the issuer
  • Transactions involving:
    • a stock dividend
    • a judicially approved reorganization

Exam Tips and Tricks
A common "trick" question on the exam involves the "certain issuers" exemption from securities registration. Some of the incorrect options may include securities issued by bank holding companies (only banks themselves are exempt) and airlines (only railroads are exempt).

Federal Covered Securities
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