Regulation of Securities - Federal Covered Securities
Federal covered securities are exempt from state registration. The USA defines a federal covered security as follows:
"A security that is, or upon completion of a transaction will be, a covered security under Section 18(b) of the Securities Act of 1933 (15 U.S.C. Section 77r(b)) or rules or regulations adopted pursuant to that provision."
More specifically, a federal covered security, also known as a "covered security", is defined as follows:
- Securities issued by an open-end mutual fund, closed-end mutual fund, unit investment trust, or face amount certificate company, that is registered under the Investment Company Act of 1940
- Securities offered pursuant to the provisions of Rule 506 of Regulation D under the Securities Act of 1933
- Securities offered by a municipal/governmental issuer, unless the issuer is located in the state in which the securities are being offered
- Securities offered by an issuer exclusively to its existing security holders where no commission or other remuneration is paid directly or indirectly for soliciting the exchange
Federal covered securities include:
- Securities either listed, or authorized for listing, on the New York Stock Exchange, Nasdaq National Market System, American Stock Exchange, Chicago Board Options Exchange, Tier 1 of the Pacific Exchange, and Tier 1 of the Philadelphia Stock Exchange, or any other national exchange determined by the SEC to have proper listing standards
- Securities issued by an investment company registered under the Investment Company Act of 1940
- Securities "offered or sold pursuant to most exemptions contained in the Securities Act of 1933, intrastate exemptions, non-profit exemptions, and any/all municipal/government securities sold in the state where the issuer is located".
Exam Tips and Tricks
Please note that Nasdaq small-cap securities are not federal covered securities. This could easily show up on the exam.
Exam Tips and Tricks
Questions about securities registration tend to be very straightforward. Remember that only two questions involving securities registration are scheduled to be on the exam. Here are two likely questions on the topic of exempt securities or transactions: ABC Corporation has never previously issued securities registered by the SEC. It can register in the State by which method(s)?
Registration by filing Registration by coordination Registration by qualification Registration by administration
- I only
- II only
- II & III
- I, III & IV
The correct answer is "c": registration by filing is only available to companies that have previously registered securities with the SEC, and registration by administration is not a valid registration method.
Which of the following securities are not exempt under the Uniform Securities Act?
- Limited partnerships
- Convertible bonds of a NYSE-listed company
- U.S. Treasury bonds
- Stock issued by a non-profit organization
The answer is "a", since all the other options listed are specifically exempted.