S66 Unit 8 (Regulation of Securities and Their Issuers) Quiz

Under the NSMIA, state securities Administrators retain authority to A) enforce antifraud provisions. B) forward all filing fees received from issuers, broker-dealers, and agents to the SEC. C) regulate the securities registration and offering process for registered investment companies. D) impose state registration requirements on all investment advisers.

A) enforce antifraud provisions. Explanation Under the NSMIA, state Administrators are not prohibited from enforcing the antifraud provisions of state and federal securities laws. Investment companies and SEC-registered advisers are exempt from state registration, but they may be required to pay state filing fees. LO 8.g

A broker-dealer is the lead underwriter in a new issue. During the period this new security issue is in registration, which of the following will usually be distributed? I) Subscription forms enabling clients to place a down payment on the issue II) A red herring prospectus III) The company's latest research report on that stock IV) Indication of interest forms A) II and III B) II and IV C) III and IV D) I and II

B) II and IV Explanation During the period a new securities issue is in registration, the underwriters usually prepare and distribute the red herring prospectus, along with forms to indicate interest in the issue. No firm orders or payment may be accepted prior to the date the issue is effective for sale. LO 8.e

Which of the following would be included in the USA's definition of "exempt transaction"? I) Isolated nonissuer transactions. II) Private placements. III) Sales by fiduciaries. IV) Sales of registered nonexempt securities by agents to their individual clients. A) I and III. B) I, II, III, and IV. C) IV only. D) I, II, and III.

D) I, II, and III. Explanation The term" exempt transaction" includes sales by fiduciaries, private placements and isolated nonissuer transactions. Any solicited sale to an individual client, even of a properly registered security, is not an exempt transaction. LO 8.d

Each of the following statements regarding registration of securities by coordination is true except A) the registration becomes effective at the state level concurrent with SEC registration if the Administrator has not entered an order to deny it. B) the Administrator may reduce the required time that the registration statement must be on file prior to becoming effective. C) the registration statement must contain or be accompanied by consent to service of process. D) state registration must be effective prior to federal registration.

D) state registration must be effective prior to federal registration. Explanation State registration must be coordinated with federal registration. In most cases, the registration statement must be on file with the Administrator for 10 days, but the Administrator has the power to shorten that period. The registration statement becomes effective concurrent with the SEC and must contain or be accompanied by consent to service of process. LO 8.g

Under the Securities Act of 1933, a registration statement for a security generally becomes effective how many days after it is filed? A) 20 B) 10 C) 30 D) 31

A) 20 Explanation A registration statement for a security becomes effective 20 days after it is filed, unless the SEC orders a delay. LO 8.c

When describing exempt transactions under the Uniform Securities Act, which of the following are fiduciaries? I) Executor of an estate II) Administrator in intestacy III) Custodian for a minor in an UTMA account IV) An agent with authority over time and price execution A) I and II B) II and IV C) III and IV D) I and III

A) I and II Explanation Both executors and administrators are fiduciaries. An agent is a fiduciary if the agent has discretionary authority over the assets in the account, but time and price authority is not considered discretion. A sale made by the custodian for a minor in an UGMA or UTMA account does not qualify as an exemption transaction under the USA, even though, as a matter of law, the custodian is functioning in a fiduciary capacity. LO 8.d

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

A) I and IV Explanation Any security equal or senior to one listed on the NYSE is a covered security. The hierarchy goes from common stock (the most junior) to preferred stock and then to any debt security. Equal to the common stock would be rights and warrants. Municipal bonds are a covered security except in their state of issuance. OTC Link and OTCQB securities are not considered federal covered securities. LO 8.c

The Uniform Securities Act requires that a consent to service of process be filed for the registration of which of these? I) Trustees II) Issuers III) Investment advisers IV) Broker-dealers A) III and IV B) II and IV C) I, II, III, and IV D) I and II

A) III and IV Explanation The state securities Administrator has jurisdiction over investment advisers, broker-dealers, and any who are associated with those entities. Issuers don't register; it is their securities that do. The Administrator may have jurisdiction over securities offered for sale by a company in the Administrator's state and generally requires a consent to service of process for a securities registration. LO 8.g

Under the Uniform Securities Act, which of the following statements is not true regarding registration of securities? A) Registration statements that comply with the Uniform Securities Act automatically comply with requirements in the Investment Company Act of 1940. B) A post-effective amendment must be filed if there are any material changes in the information on file. C) The Administrator may require that the proceeds of the sale of securities be escrowed until sales reach a certain level. D) The Administrator may require periodic sales and other reports to be filed.

A) Registration statements that comply with the Uniform Securities Act automatically comply with requirements in the Investment Company Act of 1940. Explanation The Administrator may require certain reports to be filed and that the registration statement and other offerings be updated as necessary. A post-effective amendment must be filed if there have been any material changes to information on file. Administrators may require the proceeds of the sale to be escrowed when it would take specific amounts of money to achieve the primary purpose of the offering. Registration of investment companies must comply with the Investment Company Act of 1940, and investment companies are not required to register with the state. LO 8.f

Under the Uniform Securities Act, which of the following statements regarding private placements is true? A) The security ​that is the subject of the private placement ​need not be registered. B) Being an exempt transaction, the antifraud provisions do not apply. C) The offering must be made to fewer than 15 noninstitutional persons. D) A prospectus must be provided before the offering.

A) The security ​that is the subject of the private placement ​need not be registered Explanation Private placements are offers to no more than 10 noninstitutional persons in a 12-month period for investment purposes (not immediate resale), where no commissions are paid, directly or indirectly. Such transactions are exempt from registration requirements. The fraud provisions apply to any person involved with the purchase or sale of a security, whether registered or exempt, and the prospectus delivery requirements apply to registered securities. Please note that when it comes to institutional clients, there are no numerical limitations on offers, no required holding periods, and no restrictions on payment of commissions. LO 8.d

If a broker-dealer purchases 100,000 shares of common stock from an individual investor, this is A) a nonissuer transaction. B) a local transaction. C) a prohibited transaction. D) a private placement.

A) a nonissuer transaction. Explanation In a nonissuer transaction, the proceeds of the trade do not benefit or go to the issuer. LO 8.b

The Uniform Securities Act requires that a consent to service of process be filed by each of the following except A) a trustee operating in a fiduciary capacity in the state. B) an applicant for registration as an investment adviser in the state. C) an applicant for registration as a broker-dealer in the state. D) an issuer that proposes to offer a security in the state.

A) a trustee operating in a fiduciary capacity in the state. Explanation The state securities Administrator has jurisdiction over investment advisers, broker-dealers, and anyone who is associated with those entities. The Administrator also has jurisdiction over securities offered for sale by a company in the Administrator's state and requires a consent to service of process to be filed by the issuer. Trustees do not register with the Administrator; there is no jurisdiction. LO 8.g

Under the Uniform Securities Act, commercial paper with a maturity of nine months or less, with a minimum denomination of $50,000, with a rating in the top three grades of a recognized rating agency A) need not be registered as a security. B) can only be issued by underwriters. C) must be sold on the New York Stock Exchange. D) must be registered as a security.

A) need not be registered as a security Explanation As found in the USA, any short-term debt instrument in the top three grades of a recognized rating service (such as Moody's or Standard & Poor's) with 270 days or less to maturity issued in face amounts of $50,000 or more as commercial paper, a promissory note, a bill of exchange, a draft, or a banker's acceptance is exempt from registration. LO 8.c

All of the following are exempt securities under the Uniform Securities Act except A) securities issued by a bank holding company. B) securities issued by the Canadian government. C) securities issued by a federal savings and loan association. D) securities issued by a Canadian province.

A) securities issued by a bank holding company. Explanation Securities issued by a bank are exempt. However, this answer refers to a bank holding company that is considered to be an ordinary company subject to state registration if not otherwise exempt. LO 8.c

If securities of an issuer registered with the state are outstanding, how long after the effective date of registration must an issuer wait before the registration may be withdrawn? A) Only at the Administrator's discretion B) 12 months C) 18 months D) 6 months

B) 12 months Explanation Registration statements are usually effective for a period of one year from the effective date and may not be withdrawn during this period if any of the securities of the issuer of the same class are still outstanding. LO 8.f

Under the Uniform Securities Act, a security that is exempt from the registration requirements is also exempt from which of these? I) The requirements for filing of advertising and sales literature II) The antifraud provisions III) The civil liabilities provisions A) II and III B) I only C) I, II, and III D) I and III

B) I only Explanation An exempt security is only exempt from the registration requirements and the requirements for filing of advertising and sales literature. There are no exemptions from the antifraud provisions. Civil liability arises anytime a security is sold or advice is rendered in violation of the act, regardless of whether any security involved was registered or exempt. LO 8.g

Which of the following securities are exempt from registration at the state level? I) Issue of a savings and loan association authorized to do business in this state II) General obligation municipal bond III) Bond issued by a company that has common stock listed on the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]) A) I only B) I, II, and III C) II and III D) II only

B) I, II, and III Explanation The USA exempts a number of different issues from registration, including securities issued by a bank, or anything that functions like a bank (e.g., a savings and loan or credit union). Securities issued by a governmental unit are always exempt. Securities listed on the NYSE American LLC (formerly known as the American Stock Exchange [AMEX]) are part of a group known as federal covered securities that also includes those listed on the New York Stock Exchange and Nasdaq Stock Market issues. If the common stock is listed, then any security of that issuer that is equal or senior in claim to the common is also considered exempt. LO 8.c

Which of the following statements concerning the sale of securities by issuers to financial institutions is true? A) It is an exempt security. B) It is an exempt transaction. C) It is a nonexempt transaction. D) It is a nonissuer transaction.

B) It is an exempt transaction. Explanation Any offer or sale to a bank, savings institution, trust company, insurance company, investment company, or other financial institution, institutional buyer, or broker-dealer is an exempt transaction. Because the type of issuer (i.e., corporation, bank) was not stated, it is not known whether the security is exempt. LO 8.d

An issuer is planning to offer securities for sale in State A and several other states. Which of the following statements regarding registration in State A under the Uniform Securities Act is not true? A) The Administrator may, as a condition of registration by qualification or coordination, rule that the securities can only be sold on a specified form of subscription and that a signed copy must be filed with the Administrator. B) The Administrator may not, as a condition of registration by qualification or coordination, require the security to be deposited in escrow and the proceeds to be impounded until the issuer receives a specified amount. C) Every registration must specify the total amount of securities to be offered in State A, the states in which the offering is to be made, and any adverse order or judgment by a regulatory authority.

B) The Administrator may not, as a condition of registration by qualification or coordination, require the security to be deposited in escrow and the proceeds to be impounded until the issuer receives a specified amount. Explanation The Administrator may, as a condition of registration by qualification or coordination, require the security to be deposited in escrow and the proceeds to be impounded until the issuer receives a specified amount. It is true that every registration must specify the amount of securities to be sold in the state, the states in which the offering is to be made, and any adverse order or judgment of a regulatory authority. The Administrator may, by order, permit omission of any item of information or document from a registration statement. The Administrator may, as a condition of registration by qualification or coordination, rule that the securities can only be sold on a specified form of subscription and that a signed copy must be filed with the Administrator. LO 8.f

A bank purchases 200 shares of a stock. In regard to this purchase, the bank would be considered A) a corporate investor. B) an institutional investor. C) a public investor. D) a small investor.

B) an institutional investor. Explanation Banks and insurance companies are regarded as institutional investors, regardless of the size of orders they place. (Although in most real-world situations the orders placed by institutional investors are substantial blocks of stocks and/or bonds, they don't have to be.) The term public investor implies individuals and households. LO 8.d

Under the Securities Act of 1933, all of the following must sign a registration statement for a new issue of nonexempt securities except A) the chief executive officer of the issuer. B) the managing underwriter of the issuer. C) a majority of the members of the board of directors. D) the chief financial officer of the issuer.

B) the managing underwriter of the issuer. Explanation The registration statement, which is an issuer document, must be signed by members of the board, as well as by the CEO and the CFO. It is also signed by the lawyers and accountants representing the issuer who express their opinions on the legal and accounting aspects of the proposed new issue. LO 8.c

As defined in the Uniform Securities Act, an issuer is any person who issues, or proposes to issue, a security for sale to the public. Based on that definition, which of the following is not an issuer? A) The City of Chicago, which is involved in a distribution of tax-exempt highway improvement bonds B) AAA Manufacturing Company, which proposes to offer shares to the public but has not completed the offering C) A partner in the AAA Oil and Gas Partnership selling his interest in the investment D) The U.S. government announcing an offering of 20-year Treasury bonds

C) A partner in the AAA Oil and Gas Partnership selling his interest in the investment Explanation The Uniform Securities Act defines an issuer as any person who issues, or proposes to issue, a security. The resale of a partnership interest by an investor is a nonissuer sale because the investor is not the issuer. Examples of issuers are municipalities such as the City of Chicago, which issues tax-exempt highway improvement bonds; AAA Manufacturing Company, which proposes to offer shares to the public even though it has not completed the offering; and the United States government, when it offers Treasury bonds. LO 8.b

Which of the following transactions would not be exempt under the Uniform Securities Act? A) A customer calls his broker-dealer and submits an order to purchase a specific security. B) Securities are sold that were collateral for a defaulted loan. C) A registered dealer sells Canadian government securities to a retail client. D) The executor of an estate sells securities to liquidate the property.

C) A registered dealer sells Canadian government securities to a retail client. Explanation Unsolicited, nonissuer transactions (customer calls the broker-dealer to order or sell a security) are exempt transactions, as are fiduciary transactions to liquidate estates or receiverships by guardians, executors, administrators, trustees in bankruptcy, or conservators. Sales of securities that had been pledged as collateral for a defaulted loan are also exempt transactions. The sale of Canadian government securities by a registered dealer represents a security that is exempt under the Uniform Securities Act, but the transaction itself is not. LO 8.d

Sales made under the provisions of Rule 506(b) of Regulation D must be reported on A) Form U4. B) Form 13F. C) Form D. D) Form 506.

C) Form D Explanation Form D is the form that must be filed electronically with the SEC no later than 15 days after the first sale of securities in the offering. LO 8.d

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) II and III B) I and III C) II and IV D) I and IV

C) II and IV Explanation Indications of interest are not binding on either party. LO 8.e

Under the Uniform Securities Act, which of the following persons is responsible for proving that a securities issue is exempt from registration? A) No need to prove eligibility for an exemption B) Underwriter C) Issuer D) State Administrator

C) Issuer Explanation 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. LO 8.d

In which of the following instances would an investment adviser representative (IAR) be exempt from the antifraud rules of the Uniform Securities Act? A) Because the IAR understands how nervous a particular client is, he never admits a loss in the account to that client. B) The IAR is also an agent of a broker-dealer and, in that capacity, makes a recommendation to a nonadvisory client. C) The IAR makes a presentation at a seminar where the only topic discussed is fixed annuities. D) 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. Explanation Because fixed annuities are not securities, a presentation dealing solely with that topic is not covered under the antifraud statutes of the USA. LO 8.g

According to the Uniform Securities Act, each of the following is a security except A) a limited partnership in an oil and gas exploration program. B) a U.S. Treasury bill. C) a contract in soybean futures. D) an interest in a condominium project with a rental pool.

C) a contract in soybean futures. Explanation Interests in a condominium complex that has a rental pool feature, U.S. Treasury bills, and limited partnership interests in oil and gas exploration programs are securities under the USA. The USA excludes certain financial instruments from the term security, such as term and whole insurance policies, commodity futures contracts, and collectibles. LO 8.a

Under the Uniform Securities Act, the definition of security includes a wide range of items. One of these is a two-party agreement representing a promise to repay a specific sum on a specified date that, if it meets certain requirements, is exempt from registration. This agreement is commonly called A) a futures contract. B) a loan contract. C) a promissory note. D) a debenture.

C) a promissory note. Explanation This is the basic definition of a promissory note, and it is one of the many items fitting the definition of a security under the USA. On the exam, the most common example of a promissory note is commercial paper. Another place the term appears is when agents offer unregistered promissory notes for sale claiming they are exempt from registration because notes are not securities (false). LO 8.a

Section 402 of the Uniform Securities Act contains a listing of those securities that are granted an exemption from the registration and advertising filing requirements of the act. Excluded from the listing would be A) bonds issued by the District of Columbia. B) securities issued by a credit union authorized to do business in the state. C) corporate debentures. D) bonds issued by a Canadian province.

C) corporate debentures. Explanation Unless some other condition is given, such as the issuer's common stock is listed on an exchange or Nasdaq (making it federal covered), a corporate debenture is not an exempt security. State and local issues (the USA includes the District of Columbia in its definition of state) and Canadian provinces are exempt. Any security issued by a federally chartered credit union or one that is authorized to do business in the state is exempt. LO 8.c

Under the Uniform Securities Act, the requirements for filing of advertising and sales literature dealing with an exempt security with the Administrator A) apply only to advertising. B) always apply. C) do not apply. D) apply only to sales literature.

C) do not apply Explanation An exempt security or transaction is exempt from the registration requirements and the requirements for filing of advertising and sales literature. It is not exempt from the antifraud provisions of the act. LO 8.c

An intrastate offering is exempt from A) state registration. B) all registrations. C) federal registration. D) blue-sky registration.

C) federal registration. Explanation An intrastate offering (Rule 147 exemption) is limited to companies that do business in one state and limit stock or bond sales to that state's residents. Even though this offering may be exempt from SEC registration, it is not exempt from registering with that one state. Blue-sky registration (Uniform Securities Act registration) means the same thing as state registration. LO 8.c

Federal covered securities, as defined under the Uniform Securities Act, A) must be registered in the state before they can be offered within the state B) must be registered with the SEC before they can be offered in the state C) include shares of an investment company registered with the SEC under the Investment Company Act of 1940 D) would not include securities senior to a common stock listed on the NYSE

C) include shares of an investment company registered with the SEC under the Investment Company Act of 1940 Explanation It is true that many federal covered securities are registered with the SEC. However, the term also includes those exempt from registration, such as government and municipal bonds. Although these investment company securities are exempt from registration in any state, the state may still require a notice filing, including a consent to service of process and payment of fees, for these offerings to be sold in the state. If the common stock is a covered security, as one listed on the NYSE would be, then any security with a senior claim, such as preferred stock or bonds, would also be considered federal covered. LO 8.c

Under the provisions of the Uniform Securities Act, which of the following transactions may be made legally with unregistered, nonexempt securities? A) A rights offering B) A public offering C) A sale in a discretionary account D) A private placement

D) A private placement Explanation The USA states that unregistered, nonexempt securities may legally be sold in exempt transactions. Private placement transactions may legally include the sale of unregistered, nonexempt securities because they are defined as exempt transactions under the Uniform Securities Act. A transaction qualifies as private placement when the offer is directed to 10 or fewer noninstitutional persons during a 12-month period and no commission is paid on sales to noninstitutional buyers. LO 8.d

Under the Uniform Securities Act, which of the following would NOT be considered an exempt transaction? A) The sale of ABCD common stock, listed on the OTC Bulletin Board, to an insurance company. B) The sale of an unregistered nonexempt security to an individual client at that client's request. C) An executor liquidates the estate's portfolio. D) An agent sells U.S. treasury bonds to an individual client.

D) An agent sells U.S. treasury bonds to an individual client. Explanation Even though the bonds are an exempt security, the sale to an individual client is not an exempt transaction. Sales to institutions, or sales by fiduciaries, or unsolicited transactions are all exempt. LO 8.d

Under the Uniform Securities Act, securities issued by which of the following entities are included in the definition of issuers of exempt securities? I) State of Michigan II) City of Calgary, Alberta III) City of Birmingham, UK IV) Kapco Leveraged Partners, an unregistered hedge fund whose adviser is registered with the SEC A) I, II, and III B) I, II, III, and IV C) I, II, and IV D) I and II

D) I and II Explanation Securities issued by any state, Canadian province, or political subdivision thereof are considered exempt securities. Securities issued by foreign national governments with which the United States has diplomatic relations (sovereign debt)—but not their political subdivisions, such as a city in the United Kingdom—are considered exempt securities. Securities issued by SEC-registered investment companies are federal covered securities and, under the NSMIA, are exempt from state registration requirements. Unregistered hedge funds are not, regardless of with whom their advisers are registered. LO 8.c

Under Regulation D, accredited investors in a private placement must meet minimum standards that may include which of the following? I) Annual income in excess of $200,000 for at least the last two years II) Annual income in excess of $100,000 for at least the last two years III) Net worth, excluding the primary residence, in excess of $1 million IV) Net worth, excluding the primary residence, in excess of $200,000 A) I and IV B) II and III C) II and IV D) I and III

D) I and III Explanation The requirement for an accredited investor under the private placement exemption is either a net worth, excluding the primary residence, in excess of $1 million, or annual income in excess of $200,000 in the last two years and the same or more income expected this year, or $300,000 for joint incomes. LO 8.d

Securities issued by which of the following are exempt from the registration and disclosure requirements of the Uniform Securities Act (USA)? I) The United States or any territory II) A state or political subdivision of a state III) A common carrier (e.g., a railroad) regulated in respect to its rates and charges by the United States or a state IV) Banks and savings institutions A) I and II B) II and IV C) II and III D) I, II, III, and IV

D) I, II, III, and IV Explanation The Uniform Securities Act exempts all of the securities listed from registration and disclosure requirements. Banks and common carriers are under the regulatory supervision of other government agencies. LO 8.c

An agent puts together a recommendation for a customer but is unable to attend the meeting. Another agent from the firm meets with the customer and presents the recommendation but omits some material facts. According to the Uniform Securities Act, this is A) permitted if the second agent receives no compensation for presenting the recommendation. B) permitted if the recommendation pertains to an exempt security. C) permitted if the second agent was unaware of the omission. D) a fraudulent act.

D) a fraudulent act. Explanation The agent making a recommendation to a customer is responsible for presenting all the material facts. Material facts must be presented to a customer, regardless of the type of security sold or whether a commission is to be earned or not. Remember, a material fact is one that is critical to the investment decision-making of a client. LO 8.g

B) II and III Explanation Under the USA, the Administrator can revoke any transaction exemption, except those involving federal covered securities. When it comes to revoking a security's exemption, the only two where the Administrator has the power to do so are those issued by nonprofit organizations and in connection with an employee benefit plan. LO 8.d

The Uniform Securities Act contains a number of security exemptions. The act empowers the Administrator to revoke the exemption for which of the following? I) Any security listed or approved for listing upon notice of issuance on the Nasdaq Stock Market; any other security of the same issuer that is of senior or substantially equal rank; any security called for by subscription rights or warrants so listed or approved; or any warrant or right to purchase or subscribe to any of the foregoing II) Any security issued by any person that is organized and operated not for private profit but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes, or as a chamber of commerce or trade or professional association III) Any investment contract issued in connection with an employee's stock purchase, savings, pension, profit-sharing, or similar benefit plan if the Administrator is notified in writing 30 days before the inception of the plan IV) Any security issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state A) III and IV B) II and III C) I and II D) I and IV