Unit 8 - Regulation of Securities and Their Issues

Which of the following is included in the Uniform Security Act's definition of a security? A. An individual's vested interest in his 401(k) plan B. Fixed, guaranteed annuity payments made for life or for a specified period C. Commodity futures contracts D. A US Treasury bond

ANY BOND. Regardless of the nature of the issuer, is a security.

KAPCO Dividend Yield Fund, a closed-end investment company registered under the Investment Company Act of 1940, wishes to commence offering its shares in States A, B, C, and D. It could be required to: A. Coordinate its federal registration with each of the four states B. Notice file C. Register by qualification in each of the states D. Do none of these, because investment companies registered under the Investment Company Act of 1940 are federal covered securities and are exempt from registration

Answer: B. Although these are federal covered securities and exempt from traditional registration, as a registed investment company, you can expect that it will be required to engage in a notice filing.

In general, registration statements for securities under the Uniform Securities Act are effective for: A. A period determined by the Administrator for each issue B. 1 year from the effective date C. 1 year from the date of issue D. 1 year from the previous January 1

Answer: B. On the state level, securities registration statements are generally effective for 1 year from the effective date. However, the effective date may be extended for a longer period during which the security is being offered or distributed in a nonexempt transaction by the issuer or other person on whose behalf the offering is being made or by any underwriter who is still offering part of an unsold allotment or subscription taken by him as a participant in the distribution.

Under the Uniform Securities Act, which of the following person is responsible for proving that a securities issue is exempt from registration? A. Underwriter B. The person requesting the exemption C. State Administrator D. There is no need to prove eligibility for an exemption

Answer: B. The burden of proof for claiming eligibility for an exemption falls to the person claiming the exemption. In the event the registration statement was filed by someone other than the issuer (such as selling stockholders or a broker-dealer), that person must prove the claim.

Four months ago, one of your clients purchased 100 shares of stock that was sold under a Rule 147 exemption. He has just called to inform you that he is sold those shares to his neighbor at a nice profit. Under the provisions of the Rule 147 resale restrictions: A. The client had to wait at least six months from the date of the last sale by the issuer of any part of the issue B. The resale restrictions now pass to the buyer C. The resale restrictions only apply to residents of another state D. The resale must be through the broker-dealer who made the original sale

Answer: C. Although the rule has a six month resale restriction, that only applies to sales made to residence of other states. It is not a problem if you re-sell in a much shorter time to your neighbor.

Charlotte is an agent of Gibraltar Securities. Her most active customer told Charlotte that he is thinking about buying 10,000 shares of a retailer's stock fo rwhich Gibraltar will be participating in the underwriting syndicate. The SEC release date for the stock is anticiapted within 10 business days. What may Charlotte send to the client today? A. The preliminary prospectus and a reprint of a popular advertisement placed by the issuing corporation B. The preliminary prospectus C. An order request D. The final prospectus

Answer: C. Because the security is in registration until released by the SEC for public sale, only the unadulterated prospectus may be sent to parties indicating interest in purchasing the stock. Orders may not be accepted for a security whilel in registration. Because the final prospectus is indeed an offering document, it may not be presented until the SEC has released the security for public sale (made the security effective).

Which of the following are exempt transactions? I. A nonissuer transaction with a bank in a Nasdaq Capital Market Security II. An unsolicited request from an existing client to purchase a nonexempt security III. The sale of an unregistered security in a private, nonpublicly advertised transaction to 10 noninstitutional purchasers over a period not exceeding 12 months IV. The sale of unlisted securities by a trustee in bankruptcy A. I and II B. I, II, and III C. I, II, and IV D. I, II, III, and IV

Answer: C. Choice III is not an exempt transacto in because the private placement exemption is limited to 10 offerees, not 10 purchasers. All of the others are included in our list of exempt transactions.

Which of the following securities is not exempt from the registration and sales literature filing requirements of the Uniform Securities Act? A. Shares of investment companies registered under the Investment Company Act of 1940 B. Shares sold on the Nasdaq Stock Market C. AAA rated promissory notes of $100,000 that mature in 300 days D. Bonds issued by Saskatchewan, Canada

Answer: C. In order to be exempt, promissory notes cannot have a maturity beyond 270 days. Registered investment companies (think mutual funds) are federal covers securities, as are shares of companies listed on the Nasdaq Stock Market.

Which of the following is defined as a security under the Uniform Securities Act? A. A guaranteed, lump-sum payment to a any bond, regardless of the nature of the issuer is considered a security. The physical commodity and futures contracts on commodities are included in the list of nonsecurity investments, retirement plans and fixed annuities are not securities beneficiary under a modified endowment policy B. Fixed, guaranteed payments made for life or for a specified period under an annuity contract C. Commodity futures contracts D. An investment contract

Answer: D. An investment contract is defined as a security under the Uniform Securities Act. (Investment contract = security). It is much easier to remember what is not a security than what is!!!!

Which of the following describe indications of interest secured during the 20-day cooling-off period? I. Binding on the customer II.Nonbinding on the customer III. Binding on the broker-dealer IV. Nonbinding on the broker-dealer A. I and III B. I and IV C. II and III D. II and IV

Answer: D. Indications of interest are not binding on either party.

Registration is effective when ordered by the Administrator in the case of registration by: A. Coordination B. Integration C. Notice filing D. Qualification

Answer: D. Registration by qualification is the only registration method where the Administrator sets the effective date. The effective date under registration by coordination is set by the SEC, and notice filing is merely the filing of certain documents by certain federal covered securities.

A registration statement for an offering to be made in a state could be filed by all of the following except: A. The issuer B. An institution holding a large block of the shares C. A broker-dealer D. The state Administrator

Answer: D. The Administrator receives the filing but does not make it.

As defined in the Uniform Securities Act, each of the following would be considered an exempt transaction except: A. A trustee of a corporation in bankruptcy liquidates securities to satisfy debt holders B. An offer of a securities investment is directed to 10 individuals in the state during a period of 12 consecutive months C. An agent solicits insurance companies to purchase shares of nonexempt securities D. Preorganization certificates are subscribed to by nine investors in the state, earning the agent a modest commission

Answer: D. The nine investors are within the required ten but, in order for a preorganization certificate to be an exempt transaction, there can be no payment of funds or commissions. Transactions by fiduciaries, such as a trustee in bankruptcy (the only trustee who qualifies) and transactions within institutions, such as insurance companies, are exempt. The private placement exemption applies as long as there are no more than ten offers to individual (retail) purchasers within 12 consecutive months.

All of the following describe exempt transactions except: A. ABC, a broker-dealer, purchases securities from XYZ Corporation as part of an underwriting commitment B. First National Bank sells its entire publicly traded bond portfolio to Amalgamated National Bank C. Amalgamated National Bank sells its publicly traded bond portfolio to ABC Insurance Company D. Joan Smith, an employee of Amalgamated National Bank, buys securities recommended by her agent at ABC Securities Corporation, a registered broker-dealer

Answer: D. The purchase of securities from a broker-dealer by an employee of a bank is a non-exempt transaction - it is the sale of security by broker-dealer to a member of the public and is therefore non-exempt.

Both Rule 147 and rule 147A require that the issuer meet residency requirements. Meeting which of the following is not one of those requirements? A. At least 80% of the issuer's assets are located in the state B. At least 80% of the issuer's gross revenue must be derived from operations within the state. C. At least 80% of the proceeds of the offering must be used for business purposes within the state D. At least 80% of the issuer's employees must be located in the state

Answer: D. The requirement is that a majority of the issuer's employees are located in the state, not at least 80%.

Which of the following securities is not exempt from the registration and advertising requirements of the Uniform Securities Act? A. Shares of Commonwealth Edisin, a regulated, public utility holding company B. Securities issued by the nonprofit Carnegee Endowment for Peace C. Securities issued by a bank that is a member of the Federal Reserve System D. Variable annuity contracts issued by Metrodential Insurance Company, licensed to do business in the state

Answer: D. Variable annuities (whose performance depends on securities in a segregated fund) are non-exempt, which means they are covered by the act and have to register. Shares in public utilities, charitable foundations, and banking institutions that are members of the Federal Reserve System are included in our list of exempt securities.

A primary transaction is: A. The fist transaction between two parties in the over-the-counter market B. A sale between investors of securities traded on the NYSE C. A new offering of an issuer sold to investors D. When the proceeds of the sale go to the selling party

C. A primary transaction is a new offering of securities by an issue were sold to investors. The key is that the proceeds of the sale go to the issuer.

Which list of instruments below is not composed of securities? A. Stocks, treasury stock, rights, warrants, and transferable shares B. Voting trust certificates and interests in oil and gas drilling programs C. Commodity futures contracts and fixed payment life insurance contracts D. Options on securities and interests in multilevel distributorship arrangements

C. Commodity futures contracts and fixed payment life insurance contracts (Remember: there is a list of 6 items that are not securities)

Is a commodity futures contracts and the commodities themselves, a security? YES OR NO

NO

Is a fixed, guaranteed payments made for life or for a specified period are fixed annuity contracts, a security? YES OR NO

NO

Is a guaranteed, lump-sum payment to a beneficiary which is a endowment policy, a security? YES OR NO

NO

TRUE OR FALSE. Exempt transactions are most often identified by whom the transaction is with rather than what type of security is involved?

TRUE

What is not considered a security?

The physical commodity and futures contracts on commodities are included in the list of nonsecurity investments. Retirement plans and fixed annuities are not securities.

Which transactions are exempt?

Transactions between broker-dealers and issuers as part of an underwriting commitment; transactions between banks; and transactions between banks and insurance companies. (Remember transaction between financial institutions are exempt)

What is a secondary transaction?

Transactions between two investors in the over-the-counter market (the market between investors). . A sale between investors of securities traded on the New York Stock Exchange is another example of a secondary transaction. In both of those cases, the proceeds of the sale go to the selling party, but that party is not the issuer.

Is a Registered investment companies (think mutual funds) or shares of companies listed on the Nasdaq Stock Market federal covers securities?

YESS

Is a security issued by a state or Canadian province (and their subdivisions) an exempt security?

YESSS