Unit 8 - Regulation of Securities and Their Issuers

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

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

ABC Securities is a two-office broker-dealer in State X that intends to underwrite an initial public offering of 1 million shares of stock for Circular, Inc. If the issue will be offered exclusively to residents of State X, registration of this offering A) will most likely occur by qualification. B) is not required because of the de minimis test. C) will most likely occur by notice filing. D) will most likely occur by coordination.

A) will most likely occur by qualification. An issue done solely within one state (intrastate offering) is registered using qualification. Notice filing is used by certain issues of federal covered securities, primarily investment companies. Coordination is the simultaneous registration on both the federal and state levels; neither of those two could possibly apply to the circular offering. LO 8.g

Which of the following is not a security? A) A variable annuity B) An interest in a real estate condominium sold with a rental pool C) A $1 million whole life insurance policy D) A promissory note with a six-month maturity

C) A $1 million whole life insurance policy Under the Uniform Securities Act, whole life insurance policies are not securities. Condominiums used as a personal residence are not securities, but when a rental pool arrangement exists, third-party management seeking a profit for the investor exists, which meets the Howey definition of an investment contract. Commercial paper is an example of a promissory note. LO 8.a

The Uniform Securities Act would consider which of the following insurance products to be a security? A) Mortgage life insurance B) Variable life insurance C) Modified endowment life insurance D) Fixed annuity

B) Variable life insurance The key is the word variable. Insurance products are excluded from the definition of a security unless the word variable is part of the description. So variable life and variable annuities are securities; the rest are not. LO 8.a

Which of the following is not an issuer under the Uniform Securities Act? A) A new company that offers shares to the public in an IPO B) A corporation that proposes to issue securities but has not done so as of yet C) A broker-dealer trading securities as an agent for the account of others D) A company whose shares trade on the New York Stock Exchange

C) A broker-dealer trading securities as an agent for the account of others A broker-dealer that trades securities as an agent for its clients is not acting in the capacity of an issuer. If the broker-dealer were offering its own shares to the public through underwriting, it would then be an issuer. A corporation that proposes to issue securities but has not as yet done so is, for purposes of the act, an issuer. A company offering its shares to the public in an IPO is an issuer. A company whose shares trade on the NYSE is an issuer whose shares are now trading in the secondary market. LO 8.b

As referred to in the NSMIA, the term federal covered security would apply to which of the following? 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) II and III B) III and IV C) I and IV D) I and II

C) I and IV Any security equal or senior to one listed on the NYSE is a federal covered security. Municipal bonds are a federal covered security except in their state of issuance. Over the counter securities are not considered federal covered. LO 8.d

A primary issue is A) a new offering of an issuer sold to investors B) a secondary market transaction in a security recently offered to the public. C) the first transaction between two parties in the over-the-counter market. D) a sale between investors of securities traded on the New York Stock Exchange.

A) a new offering of an issuer sold to investors A primary issue is a new offering of securities by an issuer sold to investors. Transactions between two investors in the over-the-counter market refer to secondary transactions (the market between investors). A sale between investors of securities traded on the New York Stock Exchange is another example of a secondary transaction. LO 8.b

Each of the following persons is able to issue securities except A) an individual. B) a corporation. C) a partnership. D) a credit union.

A) an individual. Individuals (natural persons) cannot issue securities. You can't sell stock in yourself. LO 8.b

Under the provisions of the Uniform Securities Act, securities exempt from registration requirements include which of these? I Securities issued by the U.S. government II Securities issued by a building and loan association organized under the laws of any state and authorized to do business in this state III Bonds issued by an insurance company organized under the laws of any state and authorized to do business in this state A) II and III B) I, II, and III C) I and II D) I only

B) I, II, and III Securities exempt from registration requirements include securities issued by the state or U.S. government; securities issued by foreign governments with whom the U.S. maintains diplomatic relations; and any securities issued by savings and loan or building and loan associations, insurance companies, and credit unions authorized to do business in this state. LO 8.c

Fearing loss of a potential sale, an agent omits facts that a prudent investor requires to make informed decisions. Under the Uniform Securities Act, this action is A) fraudulent for nonexempt securities only. B) fraudulent for exempt securities only. C) fraudulent for both exempt and nonexempt securities. D) not fraudulent if there was willful intent to omit the information.

C) fraudulent for both exempt and nonexempt securities. Material facts are facts that an investor relies on to make investment decisions. The willful omission of a material fact in the sale, purchase, or offer of a security is fraudulent. This applies whether the security offered is exempt or nonexempt. LO 8.g

Which of the following can issue stock? A) A state B) A city C) The U.S. Treasury D) A corporation

D) A corporation Corporations issue stock. Federal and state governments, including municipalities, can issue debt securities but not equity securities. Even though the advertisements read, "Take stock in America, buy U.S. Savings Bonds," that is a fiction because you can't buy stock in a government and, of course, buying bonds is lending money. LO 8.b

Which of the following is not defined as a security under the Uniform Securities Act? A) A fixed-annuity contract B) Treasury bonds issued by the U.S. government C) Common stock issued by a bank D) Bonds issued by the Canadian national government

A) A fixed-annuity contract A fixed-annuity contract is an insurance contract, not a security. It is only when an insurance contract contains the word variable that it is a security. LO 8.a

Under the terms of the Uniform Securities Act (USA), an agent who sells shares of a Nasdaq Stock Market security to an insurance company has engaged in A) a sale exempt from the registration and advertising provisions of the USA. B) an issuer transaction. C) an unlawful transaction. D) an unsuitable transaction.

A) a sale exempt from the registration and advertising provisions of the USA. An agent who sells shares of any security to an insurance company is engaged in an exempt transaction that is not bound by the advertising and registration requirements of the USA. Any sale to certain institutional customers, such as banks and insurance companies, is an exempt transaction. Neither exempt securities nor exempt transactions must adhere to the registration and advertising provisions of the USA. This is an exempt transaction due to the nature of the purchaser, not the type of security being sold. LO 8.d

In the Howey decision, the U.S. Supreme Court held that in order for an investment contract to be considered a security, it must represent A) an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others. B) an investment of money in a common enterprise with the expectation of profit from the efforts of the investor. C) personal interest in a business. D) debt in a publicly traded corporation whose managers are engaged in commercial activity.

A) an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others. In the Howey decision, the U.S. Supreme Court held that a security must represent an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others. LO 8.a

All of the following must be specified in the state registration statement of the security except A) the total amount of the security that will be offered in each state. B) all other states where the security is currently registered or will be registered. C) a stop order from any other state that affects the offering of the security within that state. D) the total amount of the security that will be offered in this state.

A) the total amount of the security that will be offered in each state. It is not necessary to list the total amount of the security to be offered in all states. However, for filing fee purposes, the amount to be sold in this state must be disclosed. LO 8.f

An exemption from state registration and filing of advertising materials exists for which of these securities? I New York City municipal revenue bonds II Montreal bonds guaranteed by the province of Quebec III Preferred stock of the National Bank, N.A., a member of the Federal Reserve System IV Preferred stock of Local County Bank, organized and regulated solely by the banking laws of the state of Illinois A) IV only B) I, II, III, and IV C) I only D) I and III

B) I, II, III, and IV Any security issued by a bank that is federally regulated is exempt under the USA. State banks are exempt if regulated by that state. Municipal bonds are exempt if issued by a municipality in the United States or Canada. LO 8.c

Following the publication of a tombstone advertisement relating to an issue undergoing registration with SEC, an agent of a broker-dealer receives a call from a client who expresses the desire to purchase 100 shares at the best available price. The agent is permitted to A) submit a pending order. B) send a preliminary prospectus. C) send published articles about the issuer. D) send in-house research.

B) send a preliminary prospectus. During the cooling-off period of an initial public offering, an agent may respond to an inquiry by providing the customer with a preliminary prospectus. No other advertising or research may be sent. LO 8.e

ABC Furniture Company wishes to raise capital by issuing some securities in its home state. The CEO of the company feels that registration with the Administrator is unnecessary because the issue is exempt. Should ABC be ordered to appear at a hearing, the burden of proving its issue is exempt is on A) the hearing panel. B) the company. C) the Administrator. D) the CEO.

B) the company. In any case where there is a question as to the legality of a specific exemption, the burden of proof is always on the party requesting the exemption. LO 8.d

Under the Uniform Securities Act, bonds issued by which of the following are nonexempt securities? A) Canadian province of Ontario B) Canadian national government C) ABC, Inc., of Canada, a distributor of beverages in the United States and other countries D) Canadian city of Montreal

C) ABC, Inc., of Canada, a distributor of beverages in the United States and other countries Government bonds issued by nations with which the U.S. maintains diplomatic relations, such as Canada, are exempt securities under the USA. In addition, securities issued by Canadian political subdivisions are also exempt from registration. For example, the province of Ontario and the city of Montreal are Canadian political subdivisions and therefore exempt. No exemption from the USA is available for corporate securities issued in countries with which the U.S. has diplomatic relations. LO 8.c

Which of the following transactions is not exempt from the registration requirements of the Uniform Securities Act? A) An isolated nonissuer transaction B) Transactions between an issuer and an underwriter or among underwriters C) Solicited transactions in a nonexempt security D) Transactions by an executor, administrator, sheriff, or receiver in bankruptcy

C) Solicited transactions in a nonexempt security Solicited transactions in a nonexempt security are not exempt transactions. The Uniform Securities Act specifically exempts transactions by an executor, administrator, sheriff, or receiver in bankruptcy from the registration requirements of the act. The same is true for an isolated nonissuer transaction and transactions between an issuer and an underwriter or among underwriters. LO 8.d

Under the Regulation D, Rule 506(b) private placement offering exemption, which of the following statements is true? A) The rule allows general solicitations but no advertising. B) The issue may be sold to an unlimited number of nonaccredited investors. C) The issuer can use an online questionnaire to qualify potential investors. D) The exemption is forfeited if there are any sales to nonaccredited investors.

C) The issuer can use an online questionnaire to qualify potential investors. Rule 506(b) permits a maximum of 35 nonaccredited investors and an unlimited number of accredited investors. The questionnaire is used by the issuer to determine the status of the potential investor. It is Rule 506(c) that permits general solicitation and advertising and requires that all investors be accredited. LO 8.d

All of the following are exempt transactions under the Uniform Securities Act except A) a sale of common stock by an administrator of an estate, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator. B) a securities transaction by an executor. C) initial sale of shares to in-state residents of a local manufacturing company. D) a rescission offer, sale, or purchase.

C) initial sale of shares to in-state residents of a local manufacturing company. An initial sale of shares to in-state residents is an intrastate initial public offering and must be registered with the state securities Administrator. A securities transaction by an executor; a sale of common stock by an administrator of an estate, sheriff, marshal, receiver, trustee in bankruptcy, guardian, or conservator; or a rescission offer, sale, or purchase are exempt transactions. LO 8.d

Which of the following statements regarding a red herring is not true? A) Additional information may be added to a red herring at a later date. B) A red herring is used to accept indications of interest from investors. C) The final offering price does not appear in a red herring. D) An agent may accept funds to be placed in escrow until the effective date if the request to do so is made by a potential purchaser.

D) An agent may accept funds to be placed in escrow until the effective date if the request to do so is made by a potential purchaser. An agent is not permitted to accept funds from potential purchasers of a new issue before the effective date. LO 8.c

The U.S. Supreme Court case resulting in the decision that an investment contract is a security is the A) Golub case. B) Steiner case. C) Muller case. D) Howey case.

D) Howey case. It was the Howey case in 1946 where the decision ruled that an investment contract meeting the four prongs is a security: (1) an investment of money, (2) into a common enterprise, (3) with the expectation of profit, and (4) due to the managerial efforts of others. LO 8.a

hich 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 a nonissuer transaction. C) It is a nonexempt transaction. D) It is an exempt transaction.

D) It is an exempt transaction. 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

All of the following are exempt from state registration under the Uniform Securities Act except A) debt securities issued by or guaranteed by an insurance company licensed to do business in this state. B) bonds issued by a bank that is a member of the Federal Reserve System. C) variable annuities or other variable insurance products offered by an insurance company authorized to do business in the state. D) securities issued by a nonprofit organization.

C) variable annuities or other variable insurance products offered by an insurance company authorized to do business in the state. A variable annuity (or other variable insurance product) offered by an insurance company is a nonexempt security under the Uniform Securities Act. Securities issued by or guaranteed by an insurance company are covered by extensive state insurance regulations and are exempt from state securities registration. Securities issued by banks are exempt because banks are covered by extensive state and federal banking regulations. LO 8.c

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, II, and III B) I only C) II and III D) II only

A) I, II, and III 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 are issuers of securities? I ABC Manufacturing Corporation borrows in the capital markets by selling bonds every few months. II Dot.Com, Inc., in an initial public offering, sells all its securities to the public within a few minutes after the shares go public. III XYZ Corp., in an initial public offering, fails to sell any shares to the public because it is not an attractive investment. IV YYY Corp., with 1 million shares outstanding, sells additional shares to the public in a primary offering. A) I, II, III, and IV B) III and IV C) I, II, and IV D) I only

A) I, II, III, and IV ABC Manufacturing Corp. is an issuer raising debt capital, whereas Dot.Com, Inc., is an issuer raising equity capital. YYY Corp. is an issuer raising equity capital by selling additional new shares in a public primary offering. XYZ Corp. is an issuer despite its failure to sell any shares. The USA defines an issuer as a person that issues or proposes to issue a security. It is not necessary that an issuer actually issue the shares it proposes to issue. LO 8.b

Which of the following are exempt securities under the Uniform Securities Act? I A security issued by a bank II A Canadian government bond III A security listed on the NYSE IV A security issued by a charitable or other nonprofit organization A) I, II, III, and IV B) I only C) II and IV D) I and III

A) I, II, III, and IV The securities exempt from the registration requirements of the Uniform Securities Act include securities issued by the U.S. or Canadian government or any state, province, or political subdivision; securities issued or guaranteed by any foreign government with which the United States has diplomatic relations; securities issued by banks, savings and loans, insurance companies, and credit unions; securities issued or guaranteed by common carriers and public utilities (e.g., railroads); securities listed on national exchanges (e.g., NYSE, Nasdaq); securities issued by nonprofit, religious, or charitable organizations; commercial paper; investment contracts issued in connection with employee benefit plans; and any securities issued by cooperatives or associations. LO 8.c

The primary purpose of the securities registration requirements of the Uniform Securities Act is to ensure that proper disclosure is made available to potential investors. However, not all securities are required to register. Which of the following qualify for an exemption from registration under the act? A) Commercial paper with no more than nine months to maturity that is in one of the three highest ratings by a nationally recognized rating agency and in a minimum denomination of $10,000 B) Common stock issued by life insurance companies authorized to conduct insurance sales in that state C) Equipment trust certificates issued by railroads whose rates are not subject to regulation by a state or federal agency D) Bonds that are obligations of the People's Republic of North Korea

B) Common stock issued by life insurance companies authorized to conduct insurance sales in that state A security issued by a life insurance company issuing stock in a state in which the company is authorized to conduct its insurance business is exempt from registration. Railroads under the jurisdiction of other state or federal regulators carry an exemption from state securities registration for their equipment trust certificates. However, if the railroad is not regulated (the case here), the exemption does not apply. The commercial paper would qualify if the denomination was $50,000 instead of $10,000. The exemption for foreign government securities applies only to those countries with which the United States maintains diplomatic relations. At the time of this writing, North Korea is on a very short list of countries that do not qualify. LO 8.c

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) II and III B) II only C) I only D) I, II, and III

D) I, II, and III 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 are exempt securities under the Uniform Securities Act? I Common stock, not listed on any regulated exchange, purchased by an open-end investment company registered under the Investment Company Act of 1940 II Preferred stock issued by an insurance company authorized to do business in this state III Municipal bonds issued by Toronto, Ontario IV Private placements A) I and II B) I and III C) II, III, and IV D) II and III

D) II and III Common stock not listed on any regulated exchange and purchased by an open-end investment company is an exempt transaction, but that common stock is not an exempt security. Securities issued by insurance companies and Canadian municipal securities are exempt from registration under the USA. Any security that represents an interest in, or debt of, or is guaranteed by an insurance company organized under the laws of any state and authorized to do business in this state is exempt. Qualifying private placements are exempt transactions, not exempt securities. LO 8.c

The Equity Protective Life Insurance Company (EPLIC) is authorized to do business in State K. As such, which of the following securities would be exempt from registration with the State K Administrator? A) Variable life insurance policies issued by EPLIC B) Fixed index annuities issued by EPLIC C) Variable annuities issued by EPLIC with a guaranteed income rider D) The issuance of three million shares of the company's $100 par value preferred stock

D) The issuance of three million shares of the company's $100 par value preferred stock When an insurance company is authorized to do business (sell its policies) in a state, any securities it issues (such as stock or bonds) are exempt from registration under the Uniform Securities Act. That exemption does not apply to products sold by the insurance company; it applies solely to securities issued for the purpose of raising capital. Aren't fixed index annuities exempt from registration? Well, they are excluded from the definition of a security, and the question specifically asks about securities being exempt. LO 8.c

Which of the following transactions is not included in the definition of exempt transaction under Section 402(b) of the Uniform Securities Act? A) Transactions between issuers and underwriters B) Isolated nonissuer transactions C) Unsolicited nonissuer transactions effected through a broker-dealer D) The sale of Treasury bills to an individual client

D) The sale of Treasury bills to an individual client Even though the Treasury bill is an exempt security, the sale to an individual is not an exempt transaction. Isolated nonissuer transactions, unsolicited transactions effected through a broker-dealer, and transactions between issuers and underwriters are exempt transactions under the provisions of the USA. LO 8.d

Under the Uniform Securities Act, all of the following are included in the definition of the term exempt transaction except A) a sale of securities to a bank. B) a sale of nonexempt securities to a broker-dealer. C) a sale of unregistered nonexempt securities in an unsolicited transaction. D) a sale of securities to an individual investor with a net worth of more than $5 million.

D) a sale of securities to an individual investor with a net worth of more than $5 million. Unless there was something specified in the question or the answer choice to indicate that the transaction met one of several specific conditions, (isolated nonissuer, fiduciary, unsolicited, and so forth), sales to individuals, regardless of their wealth, are not exempt transactions. If the transaction is truly unsolicited (and the Administrator has the power to verify that), it is an exempt transaction. Transactions with financial institutions such as banks, savings and loans, and insurance companies are exempt. Although not specifically a financial institution, the USA also considers sales to broker-dealers to be exempt transactions. LO 8.d

When a security is being registered under coordination, all of the following are required except A) prompt filing with the Administrator of any amendments filed with the SEC. B) payment of the appropriate fee. C) a description of the proposed use of the proceeds of the underwriting. D) filing with the Administrator of a statement of the maximum and minimum proposed offering prices and maximum underwriting discounts or commissions concurrently with the filing of the registration statement with the SEC.

D) filing with the Administrator of a statement of the maximum and minimum proposed offering prices and maximum underwriting discounts or commissions concurrently with the filing of the registration statement with the SEC. The statement of the maximum and minimum proposed offering prices and the maximum underwriting compensation must be filed at least two full business days before the effective date, not with the initial filing. LO 8.g

When a security is being registered under coordination, all of the following are required except A) a description of the proposed use of the proceeds of the underwriting. B) prompt filing with the administrator of any amendments filed with the SEC. C) none of these are exceptions. D) filing with the administrator a statement of the maximum and minimum proposed offering price and maximum underwriting discounts or commissions concurrently with the filing of the registration statement with the SEC.

D) filing with the administrator a statement of the maximum and minimum proposed offering price and maximum underwriting discounts or commissions concurrently with the filing of the registration statement with the SEC. The statement of the maximum and minimum proposed offering prices and the maximum underwriting compensation must be filed at least two full business days before the effective date, not with the initial filing. LO 8.e

Which of the following would be considered an issuer transaction as defined in the Uniform Securities Act? A) GEMCO, traded on the Nasdaq Stock Market, sells 5,000 shares of its stock to LMN Securities Co., a registered market maker in GEMCO stock. The stock was donated to GEMCO by a former officer of the firm. B) In its capacity as a market maker, LMN Securities Co. sells 200 shares of GEMCO common stock to the corporate treasurer of GEMCO, buying for the company's investment account. C) Ken, the largest shareholder in ABC Corporation, sells 100,000 shares in a registered secondary transaction. D) Barb, the largest shareholder in XYZ Corporation, purchases an additional 50,000 shares on the NYSE.

A) GEMCO, traded on the Nasdaq Stock Market, sells 5,000 shares of its stock to LMN Securities Co., a registered market maker in GEMCO stock. The stock was donated to GEMCO by a former officer of the firm. An issuer transaction is one in which the issuer receives the proceeds of the sale. When GEMCO sold those donated shares to the market maker, the proceeds were received by the issuer (GEMCO). When stockholders sell their shares, they are the ones who receive the money, not the issuer. Purchases are never considered issuer transactions because the money is going out, not coming in. LO 8.b

Under the Uniform Securities Act, which of the following types of transactions can be entered into legally with unregistered, nonexempt securities? A) Private placement offered to more than 50 institutional purchasers in the state B) Public offering of stock in a new corporation C) Solicited transactions with individual clients located within the state D) Rights offering to existing shareholders with underwriting compensation of $0.05 per share to the soliciting broker-dealers

A) Private placement offered to more than 50 institutional purchasers in the state Private placements involve the sale of nonexempt securities to investors without the need for registration. There is no numerical limit to the number of offers that may be made to institutional buyers. However, offers to noninstitutional buyers are limited to a maximum of 10 in any 12-month period. Rights offerings are only exempt if there is no compensation, and only unsolicited orders are exempt transactions. LO 8.d

Which of the following transactions is not exempt from the registration requirements of the Uniform Securities Act? A) Solicited transactions in a nonexempt security B) Transactions between an issuer and an underwriter or among underwriters C) Transactions by an executor, administrator, sheriff, or receiver in bankruptcy D) An isolated nonissuer transaction

A) Solicited transactions in a nonexempt security Solicited transactions in a nonexempt security are not exempt transactions. The Uniform Securities Act specifically exempts transactions by an executor, administrator, sheriff, or receiver in bankruptcy from the registration requirements of the act. The same is true for an isolated nonissuer transaction and transactions between an issuer and an underwriter or among underwriters. LO 8.d

A transactional exemption would be offered when a sale is made by A) a sheriff. B) an attorney as an incidental part of her legal practice. C) a broker-dealer. D) an investment adviser.

A) a sheriff. Among the list of exempt transactions are sales made by a sheriff or marshal. It is possible that the attorney could be acting in the role of a fiduciary, and if so, the transaction would be exempt. From a test-taking standpoint, if you have to read something into an answer to make it correct, as we just did with the attorney, don't do it; go for the straightforward choice. LO 8.d

Under the Uniform Securities Act, a private placement is considered an exempt transaction if A) the number of noninstitutional offers is limited to a maximum of 10 in any 12-month period. B) the security is rated in the top three grades by a recognized rating agency. C) no payment is made with any purchase. D) the sale is unsolicited.

A) the number of noninstitutional offers is limited to a maximum of 10 in any 12-month period. The transaction exemption available to private placements requires that no more than 10 offers be made in any 12-month period to noninstitutional (retail) purchasers. Whether individual or institutional, payment is made, but commissions may be paid only on institutional sales. LO 8.d

Which of these may not be required of a federal covered security? I Paying a filing fee II Providing a consent to service of process III Submitting copies of any information filed with the SEC IV Using a state-sanctioned legend on the offering documents A) I, II, and III B) IV only C) II and III D) I and II

B) IV only Federal covered securities may be required to pay a filing fee, provide a consent to service of process, and submit copies of any and all documentation filed with the SEC, if requested. However, requiring a legend or other similar statement is beyond the jurisdiction of the state on a federal covered security. LO 8.g

Which of the following is an example of a nonissuer transaction? A) Primary issue of corporate stock B) Secondary offering by an institutional seller C) Preemptive rights offering D) Private placement by an issuer

B) Secondary offering by an institutional seller Investors or shareholders routinely receive the proceeds from a secondary transaction. About the only time a secondary offering is an issuer transaction is if the issuer were reselling treasury stock because the proceeds go to the issuer. LO 8.b

When the Uniform Securities Act (USA) refers to unsolicited orders, which of the following is true? A) If the order ticket is appropriately marked, the Administrator may not challenge a broker-dealer's assertion that the order was unsolicited. B) Unsolicited orders are defined as exempt transactions under the USA. C) Under certain conditions, an Administrator may prohibit a broker-dealer registered in the state from accepting any unsolicited orders. D) A client may not purchase, at her own initiative, securities trading in the secondary market if the agent is otherwise prohibited from soliciting the order.

B) Unsolicited orders are defined as exempt transactions under the USA. Customers have the right to buy or sell whatever they may desire. The issue becomes who initiates the trade. An unsolicited transaction may be executed by an agent if it is the client who asks for the trade. The trade ticket should be marked as unsolicited. The state securities Administrator has the right to seek verification from the client that the trade was, in fact, unsolicited. The security involved in the trade can be one that is nonexempt and unregistered in the state. LO 8.d

A private company can become a public company through A) a private placement. B) a special purpose acquisition company. C) a liquidation. D) a buyout.

B) a special purpose acquisition company. An SPAC raises money through an IPO. It then takes that money and purchases one or more private companies. The effect of this is that the formerly privately held company is now publicly traded through the shares of the SPAC. Private placements allow a private company to raise capital but not take it public. Buyouts can result in a public company going private. When a company liquidates, it no longer exists. LO 8.b

Under the provisions of the Uniform Securities Act, all of the following transactions are exempt except A) transactions in preorganization certificates if no commission is paid, no subscriber makes any payment, and the number of subscribers does not exceed 10. B) a transaction pursuant to an offer directed by the issuer to no more than 10 individual investors in the state within a 12-month period, as long as no payment is made. C) liquidation of a security pledged as collateral for a loan. D) transactions by executors.

B) a transaction pursuant to an offer directed by the issuer to no more than 10 individual investors in the state within a 12-month period, as long as no payment is made. A transaction pursuant to an offer by an issuer to no more than 10 noninstitutional persons in the state would qualify as a private placement and would be exempt. However, unlike a preorganization certificate, the subscribers do pay for their purchases. All the other transactions are exempt. LO 8.d

XYZ Corporation is registering a new issue of common stock. A final prospectus must be delivered within the statutory time limits to A) any person who has submitted an indication of interest. B) any person who purchases shares of the issue. C) any person who is employed by the issuer. D) any person solicited by a registered agent.

B) any person who purchases shares of the issue. Under both the Securities Act of 1933 and the Uniform Securities Act, a prospectus must be given to any purchaser of a new issue of common stock. Under federal law, the time limit is no later than completion of the trade. Under state law, the prospectus has to be delivered prior to the sale, not the offer. Those solicited by an agent will generally received the red herring (preliminary) prospectus, not the final prospectus. And those who receive the red herring may submit an indication of interest. Those turning in an indication of interest are required to receive a final (effective) prospectus only if they decide to purchase. LO 8.c

Which of the following is not an accredited investor? A) Any organization not formed for the purpose of purchasing securities with a net worth in excess of $5 million B) An individual whose income was greater than $200,000 in each of the two most recent years with a reasonable expectation of reaching that level again this year C) A registered open-end investment company with net assets of $600,000 D) An individual with a net worth, including the value of her primary residence, that is greater than $1 million

D) An individual with a net worth, including the value of her primary residence, that is greater than $1 million An accredited investor can take different forms: an individual with a net worth, excluding the value of the principal residence, greater than $1 million (the $1 million can be joint with spouse); an individual whose yearly income for the past two years exceeded $200,000 ($300,000 joint with spouse) with a reasonable expectation of earning that amount this year; and any organization not formed for the purpose of purchasing the securities being offered with a net worth in excess of $5 million. In addition, any registered investment company, bank, or insurance company, regardless of size, is included in the definition of accredited investor in SEC's Rule 501. LO 8.d

Under the Uniform Securities Act, the definition of issuer includes A) an officer or director of a company traded at the NYSE. B) a market maker for publicly traded securities. C) a specialist on the floor of an exchange. D) a person proposing to issue a security.

D) a person proposing to issue a security. An issuer is any person who issues or proposes to issue any security for sale to the public. Stock exchange specialists, company directors, and market makers do not issue securities and therefore are not issuers. LO 8.b

XYZ Corp. will issue a new security and distribute it through a public offering. Under the Securities Act of 1933, which of the following is not required to be included in XYZ's registration statement? A) The name and address of XYZ's director of HR B) The identity of the underwriter C) An estimate of the proceeds that will be raised through the offering and how that money will be used D) The name and address of an individual who owns 11% of XYZ's stock

A) The name and address of XYZ's director of HR A registration statement must contain the identity of owners of more than 10% of the issuer's stock, an estimate of the proceeds and a description of the use to which they will be put, and the identity of the underwriter, among many other things. It must also identify all the issuer's officers and members of the board of directors, their holdings of the issuer's securities, and their salaries. Because the description of the HR manager does not indicate that the individual is an officer or member of the board of directors (director in the title simply means manager of the department), this employee need not be identified in the registration statement. LO 8.c

An agent is registered in State X but not in State Y. The agent sells a resident of State X a new State Y municipal revenue bond. If the bond is not registered for sale in State X, which of the following statements is true? A) The sale was illegal because municipal revenue bonds are not exempt securities. B) The sale was legal because the bond is not required to be registered for sale in State X. C) The sale was illegal because the bond is not registered for sale in State X. D) The sale was legal because the sale took place in State X to a resident of that state.

B) The sale was legal because the bond is not required to be registered for sale in State X. Any municipal bond is considered an exempt security under the Uniform Securities Act. Therefore, the sale of an exempt unregistered security by a properly registered agent is perfectly legal. If you selected the choice that the sale was legal because it took place in State X to a resident of that state, you are missing the point. The question is focused on the security, not the agent. In addition, that choice implies that the sale of any unregistered security, exempt or nonexempt, made by a properly registered agent is legal, and that is not so in the case of those obligated to register. LO 8.c

Which of the following statements made by an investment adviser would violate the antifraud provisions of the Uniform Securities Act? A) "We require any associated person determining general investment advice to be a CFA." B) "We believe that fundamental analysis is the best way to select stocks for our clients." C) "We have over $40 billion in assets under management representing both institutional and retail clients." D) "Our fees are nonnegotiable" when Form ADV Part 2A clearly indicates otherwise.

D) "Our fees are nonnegotiable" when Form ADV Part 2A clearly indicates otherwise. Stating an untruth would be considered fraud. If Form ADV Part 2 says that the fees are negotiable, you can't state that they are not. An adviser may certainly state which method of analysis he thinks is best. A firm can also set whatever standards it wishes, even though none are required by the regulatory bodies. As far as bragging about the amount of AUM, if you've got them, it is okay to flaunt them. LO 8.g

Which of the following is an exempt security under the Uniform Securities Act? A) Common stock traded on the London Stock Exchange B) Shares of a U.S.-based insurance company not authorized to sell policies in that particular state C) Commercial paper maturing in 12 months D) Negotiable certificates of deposit with $100,000 denominations

D) Negotiable certificates of deposit with $100,000 denominations A negotiable certificate of deposit issued by a bank is an exempt security. Insurance company shares are nonexempt if the issuer is not authorized to do business in that particular state. Although debt securities issued by the United Kingdom are exempt, corporate securities issued by British companies are not. Commercial paper loses its exemption if the maturity is longer than 270 days. LO 8.c

When a stock is listed on the New York Stock Exchange, it is A) certain to pay dividends. B) guaranteed to appreciate in value. C) approved for sale in the state of New York. D) exempt from state registration requirements.

D) exempt from state registration requirements. Securities listed on the New York Stock Exchange (NYSE), NYSE American LLC (formerly known as the American Stock Exchange [AMEX]), or Nasdaq Stock Market are federal covered securities and do not need registration in any state under the Uniform Securities Act. LO 8.c

Under the Uniform Securities Act, the least active review of registration documentation is performed by state Administrators before which of the following becomes effective? A) Application B) Coordination C) Qualification D) Notice filing

D) Notice filing Under the NSMIA, the Administrator may request copies of the documents filed with the SEC by federal covered securities but does not review them because of lack of jurisdiction. There is greater review of the information filed in a registration by coordination, but because the primary responsibility falls upon the SEC, the states sometimes just spot-check the documents. However, registration by qualification or application for professional licensing becomes effective only after an active review of registration information and upon order of the Administrator. LO 8.g

XYZ Brick Company wishes to raise capital by issuing some securities in its home state. The CEO of the company feels that registration with the administrator is unnecessary because the issue is exempt. Should XYZ be served with a court order, the burden of proving its issue is exempt is on the A) administrator. B) company. C) CEO. D) court.

B) company. In any case where there is a question as to the legality of a specific exemption, the burden of proof is always on the party requesting the exemption (the company, not the CEO). LO 8.c

A customer requests information on a new mutual fund and asks her agent to circle the important information in the prospectus and information he thinks will be of special interest to her. This is permitted A) if approved by a principal. B) without restriction. C) under no circumstances. D) if accompanied by an unmarked prospectus.

C) under no circumstances. The prospectus is a legal document and may not be altered. LO 8.e

Under the Uniform Securities Act, which of the following statements is true regarding the Administrator's power to deny or revoke an exemption? A) In a proceeding to revoke an exemption, it is assumed that the exemption applies and the Administrator must prove that it does not apply. B) An order revoking an exemption may be issued without prior notice to the persons affected. C) The Administrator may not revoke the exemption of securities issued by a nonprofit corporation. D) The revocation may apply to a period prior to the date on which the revocation order was issued.

B) An order revoking an exemption may be issued without prior notice to the persons affected. An order revoking an exemption, sometimes called a summary order, may be made effective without prior notice. The injured party may request a hearing in writing, which must be granted within 15 business days of receipt of the request. No denials or revocations may be made on a retroactive basis. The Administrator does have the power to revoke the exemption granted to securities issued by nonprofit entities. In any proceeding, the burden of proving an exemption is on the person claiming it, not the Administrator. LO 8.c

When making a sales presentation to a prospective client, an agent of a broker-dealer would not be exempt from the antifraud provisions of the Uniform Securities Act if the product being offered was a A) forex contract. B) fixed annuity. C) futures contract. D) federal covered security.

D) federal covered security. The antifraud provisions of the Uniform Securities Act apply whenever an offer or sale is made of a security. The only one of these choices that is a security is the federal covered security. Although federal covered securities are exempt from the registration requirements of the act, they are not exempt from the antifraud statutes. LO 8.g