Unit 4 - Regulation of Securities and Issuers

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? I. XYZ participating preferred stock II. XYZ first mortgage bonds III. Warrants to purchase XYZ common stock IV. Rights issued in advance of an offering of additional XYZ common stock

All. 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. U4LO3

Under the National Securities Markets Improvement Act of 1996, the federal covered security exemption from state registration includes I. securities issued by investment companies registered under the Investment Company Act of 1940 II. securities traded on the Nasdaq Stock Market III. securities traded on the New York Stock Exchange IV. securities traded on the NYSE American LLC (formerly known as the American Stock Exchange [AMEX])

All. Federal covered securities refer to securities exempt from registration because they are regulated, or covered by federal legislation. The National Securities Markets Improvement Act of 1996 (NSMIA) eliminated dual regulation of securities by both federal and state securities legislation. The term "federal covered security" also refers to any security listed on a national securities exchange, any security equal to or senior in standing to one listed on a national securities exchange, or a right or warrant to purchase a security listed on a national securities exchange. U4LO3

Under the Securities Act of 1933, commercial paper is exempt from the prospectus delivery requirements or registration, unless its maturity is more than how many months? A) 3 months B) 6 months C) 12 months D) 9 months

For exemption under the Securities Act of 1933, commercial paper must mature in 9 months or less. U4LO3

Identify the accredited investors from the list below. I. An individual with a net worth of $800,000 and an annual salary of $150,000 II. A married couple with a net worth of $2 million consisting of net equity in their primary residence of $500,000 and pension plans and other assets worth $1.5 million III. An insurance company IV. A corporation with a net worth of $3 million

II & III. Institutional investors such as insurance companies are regarded as accredited investors. An individual with a net worth of $800,000 and a salary of $150,000 does not meet either of the 2 qualification criteria for individuals, while the married couple with a net worth of $2 million, which after excluding the net equity in the primary residence is still in excess of $1 million, is accredited. In order for a corporation to meet the definition, it must have a net worth of at least $5 million. U4LO3

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 recommendation pertains to an exempt security B) a fraudulent act C) permitted if the second agent was unaware of the omission D) permitted if the second agent receives no compensation for presenting the recommendation

b. 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. U4LO4

According to the Uniform Securities Act, which of the following is NOT an exempt transaction? A) Bonds with a rating below investment grade are sold to the ABC High Yield Bond Fund. B) A broker-dealer sells an entire new issue to 5 bank clients. C) A broker-dealer makes an offer of private placement securities to 15 individual investors within a 30-day period. D) The executor of an individual's estate liquidates individual stocks and invests the proceeds in a money market account at a bank.

c. The Uniform Securities Act defines a private placement as an offering made to no more than 10 noninstitutional investors in a 12-month period. If a private placement complies with this restriction, it is an exempt transaction. U4LO3

The Uniform Securities Act grants exemptions to the securities of a number of issuers. If you were the Administrator, which of the following securities would NOT be eligible for an exemption in your state? A) Equipment trust certificates issued by a regulated common carrier B) Common stock issued by the XYZ Trust Company, organized under the laws of a neighboring state, but not authorized to do business in this state C) Bonds issued by the Province of Alberta D) Debt securities issued by the ABC Savings and Loan Association, organized under the laws of a neighboring state, but not authorized to do business in your state

d. Any issue from a state or Canadian province is always exempt. Equipment trust certificates issued by any regulated common carrier are always exempt. Banks, savings institutions, and trust company securities are also exempt as long as they are organized under the laws of the United States or any state. However, securities issued by a savings and loan or building and loan are only exempt if the issuer is authorized to do business in this state. U4LO3

Which of the following is NOT an exempt transaction as defined in Section 402 of the USA? A) Sale of common stock by the county sheriff at the request of the state securities Administrator B) Corporate bond sale to an insurance company C) Sale of XYZ common stock, traded on the OTC Bulletin Board, to an individual investor by the executor of an estate D) Isolated sale of a corporate bond on behalf of the bond's issuer

d. First of all, don't panic when you see a Section number—just answer the question based on the specific topic; in this case, the definition of an exempt transaction. An isolated sale of a corporate bond on behalf of the bond's issuer is not exempt. Under the USA, only isolated nonissuer transactions are exempt. In this question, the transaction is on behalf of the issuer, so this transaction is not exempt. The sale of a corporate bond to an insurance company is the sale of a security to a financial institution; this is an exempt transaction. A sale of common stock by the executor of an estate, or by the county sheriff is considered a fiduciary transaction and is exempt regardless of the client or the type of security. U4LO3

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

d. 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. U4LO3