9.6 - Registration of Securities Under the Uniform Securities Act

An agent can purchase a security for a customer's account, when the security is not registered in that state, under which of the following circumstances? If the security is an exempt security. If the security is a warrant to purchase stock that is NYSE listed. A) Both I and II. B) I only. C) II only. D) Neither I nor II.

Answer: A A security must be registered in any state in which a transaction occurs unless the security or transaction is exempt. Exempt securities include government securities, municipal securities, and securities issued by nonprofit organizations. Stocks listed for trading on a national securities exchange such as the NYSE, usually referred to as federal covered securities, or those equal to them, such as rights and warrants, are also exempt from the registration requirements of the state.

If required by the Administrator, a stock traded on the Nasdaq Capital Market would most likely use which of these? A) Qualification. B) Criminalization. C) Notice filing. D) Coordination.

Answer: C Stocks listed on any of the three tiers of the Nasdaq Stock Market are federal covered securities and, as such, can only be required to notice file.

As defined in the NSMIA, federal covered securities would include open-end investment companies registered under the Investment Company Act of 1940 closed-end investment companies registered under the Investment Company Act of 1940 that trade on the OTC Bulletin Board bonds listed on the OTC-Link where the company's common stock trades on Nasdaq Bonds issued by the Province of Ontario A) I and II B) III and IV C) I, II, and III D) I, II, III, and IV

Answer: C Under the NSMIA, federal covered securities include all investment companies registered under the Investment Company Act of 1940, regardless of where they trade. Any stock listed on Nasdaq is federal covered and that makes any security equal to or senior (like their bonds) also federal covered, regardless of where they trade. Canadian municipal securities are not federal covered (although under the Uniform Securities Act they are exempt securities).

Under the Uniform Securities Act, a non-exempt transaction may take place in the state only if: A) the security is registered, exempt, or federal covered. B) the security is sold in an exempt transaction. C) it is offered privately to no more than 10 individuals in any 12 month period. D) it is between institutions.

Answer: A We are told that the transaction is not exempt. Therefore, unless the security is exempt (or federal covered), the only way to have a legal sale is for it to be registered.

The National Securities Markets Improvement Act of 1996 (NSMIA) created a new definition known as a covered security. In general, these securities do not have to register on a state level. If XYZ common stock is listed for trading on the NYSE, which of the following XYZ securities are considered covered? XYZ participating preferred stock XYZ first mortgage bonds Warrants to purchase XYZ common stock Rights issued in advance of an offering of additional XYZ common stock A) I and IV B) I, II, III and IV C) I, II and III D) II and III

Answer: B Common stock listed on the New York Stock Exchange is a covered security as defined in the NSMIA. Furthermore, any security equal to or senior to that common stock is considered to be covered as well. Warrants and rights are equal to the common stock and the preferred stock and mortgage bonds are senior to the common stock.

Under the Uniform Securities Act, it is legal for a investment adviser representative to tell a client that: A) her qualifications have been found satisfactory by the Administrator. B) a registered security has been approved for sale in the state by the Administrator. C) a registered security may lawfully be sold in that state. D) an exempt security is not required to be registered because it is safer than a nonexempt security.

Answer: C An IAR may indicate that a security is registered or is exempt from registration; all of the other statements are prohibited.

Under the Uniform Securities Act, before a corporation can issue a security in a state, that security must be: A) exempt from registration in other states in which it is issued. B) registered with the SEC and in the state of issue. C) registered in the state or exempt from registration in the state. D) registered in one other state and with the SEC.

Answer: C Before issuing a security in a state, the issuer must either register the security in the state or be exempt from registration under the Uniform Securities Act.

Under the National Securities Markets Improvement Act of 1996, which of the following statements describe federal covered securities? A security registered under the USA. A security registered under the Investment Company Act of 1940. A security of a company regulated by the U.S. Federal Reserve Board. A security issued by the U.S. government. A) II and IV. B) II, III and IV. C) I and II. D) II and III.

Answer: B A federal covered security has a federally imposed exemption from state registration so selecting a choice that includes registering under the USA cannot be correct. The list includes most securities exempt from registration under the federal Securities Act of 1933 (those issued by the U.S. government and state and local governments as well as bank securities regulated by the Federal Reserve Board). In addition, it includes a number of securities registered with the SEC, primarily those traded on the exchanges and Nasdaq as well as investment companies registered under the Investment Company Act of 1940.

Under which of the following conditions may an agent sell an unregistered nonexempt security? A) When the broker/dealer employing the agent has no office in the state. B) If the order was unsolicited. C) Never. D) Only to a noninstitutional client.

Answer: B Agents may accept unsolicited orders from clients, institutional or not, in unregistered nonexempt securities. If the transaction is with an institutional client, it can be solicited. In the case of unsolicited orders, the Administrator may demand written acknowledgement from the client that, in fact, the order was unsolicited.

The National Securities Markets Improvement Act of 1996 (NSMIA), which amended the Uniform Securities Act, pre-empts state registration of federal covered securities. Under the NSMIA, all of the following are federal covered securities EXCEPT: A) securities offered pursuant to the provisions of Rule 506 of Regulation D under the Securities Act of 1933. B) warrants trading on the OTC Bulletin Board offered by a company whose common stock trades on the Nasdaq Stock Market. C) municipal securities of an issuer within the state of issuance. D) securities issued by unit investment trusts registered under the Investment Company Act of 1940.

Answer: C The NSMIA is designed to eliminate dual registration or regulation of securities. Because these municipal securities are issued in the state in which they are offered, there is no federal authority to regulate them. They are not federal covered securities and can be regulated by the state in which they are offered (although they are exempt from registration under the USA). Securities issued by any investment company registered under the Investment Company Act of 1940 are federal covered. Securities offered pursuant to the provisions of Rule 506 of Regulation D under the Securities Act of 1933 are federal covered. Rule 506 is the exemption from registration for the private offering of securities to a limited number of investors, often called private placements. Finally, if the common stock of an issuer is traded on the Nasdaq Stock Market, then any security equal to it (rights and warrants) or senior to it (preferred stock and debt securities), is also federal covered.

Which of the following are included in the definition of federal covered security? ABC common stock, domiciled in Delaware, listed on the NYSE, and sold to a resident of Delaware. ABC common stock, domiciled in Delaware, listed on the NYSE, and sold to a resident of Maryland. City of Portland, Maine, GO bond sold to a resident of Augusta, Maine. City of Portland, Maine, GO bond sold to a resident of Augusta, Georgia. A) I, II, III and IV. B) I and II. C) II, III and IV. D) I, II and IV.

Answer: D Any security listed on the NYSE, regardless of the corporation's or the customer's state of domicile, is a federal covered security. Municipal bonds, exempt securities under the Securities Act of 1933, are also federal covered securities with one significant exception: if the issuer is a political entity in this state and it is sold to a resident of this state, it is not considered a federal covered security in this state.

Which of the following activities would be prohibited for an agent? Executing a transaction in a discretionary account. Charging a larger than average commission on certain transactions. Soliciting sales of a security not yet registered A) I, II and III. B) III only. C) II only. D) II and III.

Answer: B An agent is prohibited from soliciting sales of a security that has not been registered. An agent is not prohibited from executing a transaction in an account over which he has been granted discretionary authority. An agent may also charge higher than average commissions on certain transactions typically involving low market volume securities and penny stocks among others.

Under the USA, it is unlawful for a person to offer or sell a security in a state unless the security is: a federal covered security. exempt from registration under the USA. registered in the state sold in an exempt transaction A) II or III. B) I, II, III or IV. C) II, III, or IV. D) I or IV.

Answer: B It is unlawful to sell a security in a state unless the security is registered in that state, exempt from registration under the USA, sold in an exempt transaction, or is a federal covered security.

As referred to in the NSMIA, the term "covered security" would apply to preferred stock in the XYZ Corporation whose common stock is listed on the NYSE common stock in ABCD, Inc., a stock traded in the Pink Sheets Springfield, Illinois, municipal bonds sold to a resident of Springfield, Illinois Springfield, Illinois, municipal bonds sold to a resident of Springfield, Missouri A) II and III B) III and IV C) I and IV D) I and II

Answer: C Any security equal or senior to one listed on the NYSE is a covered security. Municipal bonds are a covered security except in their state of issuance. Pink Sheet and OTC Bulletin Board securities are not considered covered.

Which of the following statements is NOT true? A) Federal covered securities include securities listed on national exchanges. B) Transaction exemptions must be established before each transaction. C) Exempt securities must reestablish their exemptions at least annually. D) Federal covered securities include those registered under the Investment Company Act of 1940.

Answer: C Exempt securities need not reestablish their exemptions annually or otherwise. Exempt securities are exempt because their issuers are exempt while the basis for an exemption for a transaction must be established before each transaction. Neither the exempt security nor the transaction exemptions are mutually exclusive and a security or transaction may qualify for 2 or more of these exemptions. The term "federal covered securities" includes registered investment companies as well as securities listed on national exchanges.

Securities traded in which of the following marketplaces would be excluded from the definition of federal covered securities? A) Nasdaq Stock Market. B) New York Stock Exchange. C) Toronto Stock Exchange. D) American Stock Exchange.

Answer: C Federal covered securities include those on exchanges registered with the SEC, such as the NYSE, the AMEX, and the Nasdaq Stock Market as well as investment companies registered under the Investment Company Act of 1940.

In which of the following instances would an investment adviser representative be exempt from the antifraud rules of the Uniform Securities Act? A) Since the IAR understands how nervous a particular client is, he never admits a loss in the account to that client. B) In an effort to avoid possible conflicts of interest, the IAR only does personal trades through an account set up with a fictitious name. C) The IAR makes a presentation at a seminar where the only topic discussed is fixed annuities. D) The IAR is also an agent of a broker/dealer and, in that capacity, makes a recommendation to a nonadvisory client.

Answer: C Since fixed annuities are not securities, a presentation dealing solely with that topic is not covered under the antifraud statutes of the USA.

Which of the following securities of Synergy, Inc., (an issuer whose stock trades on the Nasdaq Stock Market), does NOT have an exemption from registration with the state? A) Synergy, Inc., preferred stock. B) Synergy, Inc., senior bonds. C) Synergy, Inc., debentures. D) Synergy's oil and gas limited partnership units (Synergy, Inc., is the general partner).

Answer: D Synergy's oil and gas limited partnerships are not issued by Synergy, Inc.; Synergy is only the general partner. The oil and gas partnerships are issued by separate legal entities; they do not have the blue-sky exemptions. They must be registered in the states in which they are sold, unless they have some other exemption. Any security equal or senior in claim to an exempted common stock is exempted as well. The company's preferred stock, senior bonds, and debentures all have blue-sky exemptions from state registration because the company's common stock is traded on the Nasdaq Stock Market.