Unit 8 Series 65
Sales made under the provisions of Rule 506(b) of Regulation D must be reported on A) Form 506. B) Form D. C) Form 13F. D) Form U4.
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 B
Which of the following is not a security? A) Variable annuity B) Participating whole life insurance that pays annual dividends C) Corporate debt D) Corporate equity
Whole life insurance policies, even those that pay dividends, are not securities; variable life and variable annuities are. Corporate equity is stock, and corporate debt is bonds and debentures. LO 8.a B
Under the Uniform Securities Act, what is the requirement for a private placement to be considered an exempt transaction? A) It is directed to no more than 15 noninstitutional persons in 12 consecutive months. B) It is directed to no more than 15 noninstitutional persons in 9 consecutive months. C) It is directed to no more than 10 noninstitutional persons in 12 consecutive months. D) It is directed to no more than 10 noninstitutional persons in 9 consecutive months.
A private placement is considered an exempt transaction when the offer is directed to no more than 10 noninstitutional (retail) persons in a 12-consecutive-month period. Furthermore, purchasers must agree that they are purchasing for investment purposes only, not for immediate resale. No such holding or numerical restrictions apply to institutional buyers of a private placement. LO 8.d
Under the Uniform Securities Act, before a corporation can issue a security in a state, that security must be A) registered with the SEC and in the state of issue. B) exempt from registration in other states in which it is issued. C) registered in the state or exempt from registration in the state. D) registered in one other state and with the SEC.
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. LO 8.c C
Alpha Electronics Company wishes to raise capital by issuing some securities in its home state. They have been advised by their legal counsel that registration with the Administrator is unnecessary because the issue is exempt. Should Alpha be served with an order, the burden of proving its issue is exempt is on A) the Administrator. B) the court. C) the lawyers. D) 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 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 exemption is forfeited if there are any sales to nonaccredited investors. C) The issuer can use an online questionnaire to qualify potential investors. D) The issue may be sold to an unlimited number of nonaccredited 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 C
The Uniform Securities Act would consider which of the following insurance products to be a security? A) Fixed annuity B) Modified endowment life insurance C) Mortgage life insurance D) 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 D
Which of the following transactions would be included in the USA's definition of exempt transaction? A banker liquidating stock pledged as collateral for a loan that has gone into default An offer to purchase a new stock made to 5 individuals and 15 institutional investors in this state during the past 12 months An isolated nonissuer transaction The sale of preorganization certificates to 10 individuals with no commission being paid A) II and III B) III and IV C) I, II, III, and IV D) I and II
All of these are included in the USA's definition of an exempt transaction. Sales made by a bona fide pledgee are exempt. Even though the number of offerees in the private placement exceeds 10, that limitation does not apply to institutional investors. A preorganization certificate may be sold to as many as 10 persons, while a private placement may not be offered to more than 10 (not counting institutional investors). LO 8.d C
Included in the Uniform Security Act's definition of an exempt transaction would be any transaction by any of the following except A) a guardian. B) a trustee in bankruptcy. C) a trustee of an irrevocable trust. D) a marshal.
Although the term trustee is found in the list of persons engaged in exempt transactions, the USA limits it to trustees in bankruptcy. LO 8.d C
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 coordination. B) will most likely occur by qualification. C) will most likely occur by notice filing. D) is not required because of the de minimis test.
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 B
Under the Uniform Securities Act (USA), it is unlawful to sell A) a federal covered security not registered in the state. B) a security registered in the state under the USA but not registered in any other state. C) a nonexempt, nonregistered security issued by a foreign corporation from a country with which the U.S. government maintains diplomatic relations. D) a security of a commercial bank not registered in the state.
Nonexempt, nonregistered securities cannot be lawfully sold in a state unless in an exempt transaction (and nothing in the question indicates that is the case). The fact that they are issued by a foreign corporation is irrelevant; nonexempt securities must be registered. A federal covered security need not be registered in a state. Securities issued by banks, not bank holding companies, are always exempt securities. LO 8.c C
All of the following are exempt securities under the Uniform Securities Act except A) securities issued by the Canadian government. B) securities issued by a federal savings and loan association. C) securities issued by a bank holding company. D) securities issued by a Canadian province.
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 C
Under the NSMIA, state securities Administrators retain authority to A) impose state registration requirements on all investment advisers. B) enforce antifraud provisions. C) regulate the securities registration and offering process for registered investment companies. D) forward all filing fees received from issuers, broker-dealers, and agents to the SEC.
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
Under the Uniform Securities Act, which of the following statements about federal covered securities is not true? A) Federal covered securities include securities sold under Regulation D of the Securities Act of 1933. B) A security issued by an investment company registered under the Investment Company Act of 1940 is a federal covered security. C) Federal covered securities must be registered with the states. D) The issuer of a federal covered security may be required to pay fees to the states.
Federal covered securities are not required to be registered with the states, but issuers of federal covered securities may be required to pay fees to the states (notice filing). Private placements (Regulation D) and investment companies both describe types of federal covered securities. LO 8.c C
Which of the following securities are exempt from registration at the state level? Bonds issued by the American Red Cross U.S. Treasury bonds American Advisers Unit Investment Trust Common stock in AAA Commercial Bank, member of the FDIC A) II and III B) I, II, and III C) I and II D) I, II, III, and IV
Securities offered by nonprofit organizations, the U.S. government, or investment companies registered under the Investment Company Act of 1940, as well as securities issued by commercial banks, are exempt from registration with the states under the Uniform Securities Act and the NSMIA. LO 8.c D
Under the Securities Act of 1933, the definition of prospectus includes which of these? An offer of a security made orally A tombstone advertisement for a security An offer of a security made in a personal letter A) I, II, and III B) I and III C) II and III D) III only
A prospectus is a communication made in writing or by radio or TV that offers a security for sale. An oral offer would therefore not be a prospectus. Tombstone advertisements are specifically excluded from the definition of prospectus. If such a letter were not preceded or accompanied by an official prospectus that contained all the required information, the sender of the letter would have violated the Securities Act of 1933. D
Federal covered securities, as defined under the Uniform Securities Act, A) must be registered with the SEC before they can be offered in the state B) must be registered in the state before they can be offered within 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
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 C
Which of the following is responsible for the administration of the Uniform Securities Act in a state? A) Securities and Exchange Commission B) Executive department C) State judiciary system D) The Administrator
On this exam, the chief state regulator is the administrator. The securities and exchange commission is the federal agency, not state agency, that oversees and regulates securities on a national level. LO 8.a
A closed-end investment company is registered under the Investment Company Act of 1940. Its shares trade on the Nasdaq Stock Market. To qualify their shares for sale in the state, they would probably use A) qualification. B) coordination. C) notice filing. D) supplementation.
Regardless of where shares of this closed-end investment company trade, like all investment companies registered under the Investment Company Act of 1940, it is a federal covered security. The company is basically exempt from state registration and is only required to follow a procedure known as notice filing. LO 8.g C
Under the provisions of the Uniform Securities Act, securities exempt from registration requirements include which of these? Securities issued by the U.S. government Securities issued by a building and loan association organized under the laws of any state and authorized to do business in this state Bonds issued by an insurance company organized under the laws of any state and authorized to do business in this state A) I, II, and III B) II and III C) I only D) I and II
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 A
As defined in the NSMIA, which of these are federal covered securities? 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, II, and III B) III and IV C) I and II D) I, II, III, and IV
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 government and municipal securities are not federal covered (although, under the Uniform Securities Act, they are exempt securities). LO 8.c A
Which of the following are exempt from registration under the Uniform Securities Act? Preferred stock issued by ZXZ Corporation, whose common stock is traded on the NYSE Common stock issued by a national bank Equipment trust certificates issued by a railroad company regulated by a state or federal agency A debenture traded in the over-the-counter market issued by a corporation whose common stock trades on the NYSE
All the securities listed are exempt from registration under the Uniform Securities Act. Preferred stock issued by corporations whose common stock trades on the NYSE is a federal covered security and is exempt from registration with the states. The same is true for a debenture of a company registered on the NYSE, even though the debenture is traded over the counter. The issuers of equipment trust certificates (railroads) are regulated by other agencies, and issuers of bank securities (commercial banks) are regulated by the Federal Reserve and Office of the Comptroller of Currency (OCC); their securities are exempt from registration by the states. The National Securities Markets Improvement Act of 1996 (NSMIA) prohibits dual regulation of securities. LO 8.c D
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 small investor. D) a public investor.
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 B
With regard to the Uniform Securities Act, which of the following statements regarding the omission of a material fact by an agent is not true? A) It is a violation even if the client failed to make a transaction. B) It is a violation even if material facts were unknowingly omitted. C) It is not a violation if the security is exempt from registration under the Uniform Securities Act. D) It is a violation because it is an unethical or fraudulent practice
Deliberate omission of material facts is a fraudulent practice under the Uniform Securities Act, whether securities are exempt or nonexempt or even if the transaction was exempt. If done unknowingly, then it is an unethical business practice (fraud requires deliberate action) and is still a violation. LO 8.g C
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 agent sells U.S. treasury bonds to an individual client. D) An executor liquidates the estate's portfolio.
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 C
Which of the following statements is not true? A) Federal covered securities include those registered under the Investment Company Act of 1940. B) Exempt securities must reestablish their exemptions at least annually. C) Federal covered securities include securities listed on national exchanges. D) Transaction exemptions must be established before each transaction.
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 two or more of these exemptions. The term federal covered securities includes registered investment companies as well as securities listed on national exchanges. LO 8.c B
All of the following are exempt from state registration requirements except A) a Canadian government bond. B) a closed-end investment company registered under the Investment Company Act of 1940 but not traded on a recognized stock exchange. C) a registered open-end investment company whose portfolio consists exclusively of Georgia municipal bonds. D) stock issued by a Canadian company that provides actuarial services to insurance companies.
Securities issued by Canadian governmental entities, such as the federal government or the provincial governments and their municipalities, are exempt from registration under the USA in the same fashion as U.S. government and municipal securities. However, Canadian corporate issuers do not enjoy an exemption unless qualifying under special conditions, such as being listed on the NYSE or Nasdaq and, therefore, are a federal covered security. Investment companies registered under the Investment Company Act of 1940, regardless of where they trade, are exempt from registration because they are federal covered securities. D
Which of the following statements relating to the general securities registration provisions of Section 305 of the Uniform Securities Act is mostaccurate? A) The registration is valid for one year from the effective date. B) The registration is valid for one year from the effective date, unless the underwriter or issuer still has some unsold shares. C) The registration statement may be amended to increase the number of shares in the offering, as long as the share price is not raised by more than 10%. D) The registration is valid until the next December 31.
Every registration statement is effective for one year from its effective date, or any longer period during which the security is being offered or distributed by any underwriter or broker-dealer who is still offering part of an unsold allotment or subscription taken by him as a participant in the distribution. Furthermore, a registration statement may be amended after its effective date so as to increase the securities specified to be offered and sold, if the public offering price and the underwriters' discounts and commissions are not changed from the respective amounts of which the Administrator was informed. B
Under the Securities Act of 1933, exempt transactions include which of these? Private transactions not involving the issuer or a broker-dealer Issuer transactions that do not involve a public offering Sales or offers limited to accredited investors A) I and III B) I, II, and III C) I and II D) I only
If offerings are not made to the public, registration can generally be avoided. The purpose of the Securities Act of 1933 was to protect the public in a new issue. The private offering exemption is used when the offering is made to 35 or fewer nonaccredited purchasers within a 12-month period and no general solicitation (advertising) is used (506(b)). In addition to private offerings, offers and sales limited to accredited investors are also exempt, but they may have public solicitation, (506(c)). LO 8.d B
Parsimonious Planning Associates (PPA), an investment adviser with over $250 million in assets under management, is accused of violating the antifraud provisions of the Uniform Securities Act. Which of the following statements is true? A) No investigation may take place until the charges are proven true. B) The Administrator of the state where PPA's principal office is located is the only person authorized to investigate the charge. C) The Administrator of the state where the alleged fraud occurred may investigate the charge. D) Because PPA is a federal covered adviser, only the SEC has the jurisdiction to investigate the charge.
Once an investment adviser's AUM reaches $110 million, registration with the SEC is required. That makes PPA a federal covered adviser. Although covered advisers are exempt from the jurisdiction of the state for most things, one area in which they are not is when the antifraud provisions of the USA are breached. In that case, jurisdiction will usually rest with the Administrator of the state where the alleged fraudulent activity took place. In some states, the Administrator will refer the charges to the Administrator of the state where the investment adviser's principal office is located, but that is not mandatory. Because the violation is of the USA, the SEC has no jurisdiction. Without an investigation, how can the charges be proven true (or false)? LO 8.g C
Under the Uniform Securities Act, which of the following types of transactions can be entered into legally with unregistered, nonexempt securities? A) Solicited transactions with individual clients located within the state B) Private placement offered to more than 50 institutional purchasers in the state C) Rights offering to existing shareholders with underwriting compensation of $0.05 per share to the soliciting broker-dealers D) Public offering of stock in a new corporation
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 are exempt securities under the Uniform Securities Act? A security issued by a bank A Canadian government bond A security listed on the NYSE A security issued by a charitable or other nonprofit organization A) I and III B) II and IV C) I, II, III, and IV D) I only
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 C
Under which of the following circumstances will a private placement fail to qualify for exemption from registration under the Uniform Securities Act? A) The offer is directed to only five individuals during any 12-month period. B) A bank holding company purchases the offering for trading purposes rather than investment purposes. C) The seller reasonably believes that individual purchasers are buying for investment purposes rather than immediate resale. D) A modest commission is paid to the agents who sell the offering to noninstitutional clients.
A private placement will lose its exemption if those who sell the offering are paid commissions on sales to noninstitutional clients. For a private placement to be exempt, the offer cannot be directed to more than 10 persons during a 12-month period. In the case of noninstitutional buyers, the seller must reasonably believe (nice to have it in writing, but not required) they are purchasing the offering for investment purposes only. Institutional purchasers do not have to purchase the offering for investment purposes. LO 8.d D
Under the Securities Act of 1933, the definition of an issuer would include which of these? A government entity issuing exempt securities A corporation issuing securities in an exempt transaction An antiques dealer selling items from a collection of rare books A) III only B) I and II C) I, II, and III D) II and III
An issuer is a person who issues a security, whether or not the security is exempt. In the question, the antiques dealer is issuing collectibles, not securities. LO 8.b B
A client of a broker-dealer calls his agent and submits an order to purchase 1,000 shares of a Chilean silver mining company. As the order ticket is being prepared, the agent notices that this is a nonexempt, unregistered stock. The agent should A) continue to process the order because this is an exempt security. B) continue to process the order because this is an exempt transaction. C) inform the client that no orders for this stock may be accepted until it is properly registered in the state. D) wait for firm approval before processing the order.
Because the client initiated the process, this is an unsolicited order. As such, it is included in the USA's definition of exempt transaction. Even when the security is nonexempt, registration is not required when the transaction is exempt. Therefore, this order may be taken as placed. LO 8.g B
A manufacturing company is in the process of registering a securities issue with the SEC. In order to make the shares available for sale in this state, the method of registration that would most likely be used is A) notice filing. B) qualification. C) notification. D) coordination.
Coordination is the method used for nonexempt companies that are registering with the SEC. Qualification is for intrastate registration of those companies not registered with the SEC. Notice filing is the procedure whereby federal covered investment companies notify the states in which they want to issue shares and to whom they must pay a fee. LO 8.g D
Joan owns and operates a jewelry store, and she has contracted to purchase 5,000 Swiss watches, paying the watch manufacturer in Swiss francs three months from the date of contract. To protect (hedge) her currency risk, she purchases call options on Swiss francs. Which of the following statements best describes her transaction in the Swiss franc calls in light of the Uniform Securities Act (USA)? A) She has not engaged in a securities transaction because she purchased the options to hedge a business risk. B) She has engaged in a securities transaction because options on foreign currencies are considered to be securities under the USA. C) She has engaged in a prohibited transaction because American investors are generally prohibited from trading in foreign currencies under the USA. D) She has not engaged in a securities transaction because options on foreign currencies are not considered to be securities under the USA.
Options, regardless of the underlying asset, are considered securities under the USA. Therefore, Joan engaged in a securities transaction by purchasing call options on the Swiss franc. While there is no prohibition against American investors trading in foreign currency options or futures under the USA, acquiring the currency itself, rather than the option, would not have involved a securities transaction; currency is not a security. LO 8.a B
Under the Uniform Securities Act, which of the following is true regarding the registration of securities? A) State registration by coordination is available only if a federal registration statement has been filed under the Securities Act of 1933 in connection with the same offering. B) The Administrator may require that a prospectus be delivered to every purchaser of a registered security no sooner than the time at which the security is delivered. C) The effectiveness of a registration statement assures the accuracy of the information contained in the statement. D) Registration by coordination becomes effective on a date ordered by the Administrator.
Registration by coordination becomes effective simultaneously with the federal registration. A prospectus may be delivered at or prior to the time actual delivery of the security is made. The act prohibits any statement or implication that registration involves approval of facts by the administrator. The Federal registration statement is what the state registration is being coordinated with.
Securities issued by which of the following are exempt from the registration and disclosure requirements of the Uniform Securities Act (USA)? The United States or any territory A state or political subdivision of a state A common carrier (e.g., a railroad) regulated in respect to its rates and charges by the United States or a state Banks and savings institutions A) I, II, III, and IV B) II and IV C) I and II D) II and III
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 A
An interest in which of the following is a security under the Uniform Securities Act? Evidence of indebtedness Certificate of deposit for a security Oil and gas drilling program Cattle feeding program A) I only B) III only C) II and III D) I, II, III, and IV
The best strategy is to memorize the short list of things that are not securities rather than try to remember all of the things that are. An example of a certificate of deposit for a security is an ADR. Oil and gas drilling programs and cattle feeding programs are types of DPPs. A common example of an evidence of indebtedness is a bond or a debenture. LO 8.a D
An exemption from registration under the Securities Act of 1933 is available to securities that are A) offered to the public only when the total amount is more than $4 million. B) listed on national exchanges. C) sold only to persons residing in one state when the issuer is a resident doing business within that state. D) sold in more than one state by persons residing in those states.
These securities are eligible for the intrastate exemption afforded under Rule 147. They might have to register in that particular state, depending on whether they meet the exemption requirements in that state for that type of issue. Only under the NSMIA and the Uniform Securities Act do securities listed on a national stock exchange receive a registration exemption. LO 8.c C
Which of the following statements regarding state registration of securities is true? A) Notice filing is effective when ordered by the Administrator. B) Registration by coordination is effective on the 10th day after filing with the Administrator. C) Registration by coordination is effective concurrent with federal registration. D) Registration by qualification is effective after 30 days.
Coordination is the method used to register a security simultaneously under the Securities Act of 1933 and under the USA in a state. If the security's federal registration is pending and the Administrator has received all of the required material, the two registrations can be declared effective at the same time. LO 8.g C
Under the Uniform Securities Act, which of the following statements are true regarding private placements? They are offered to no more than 10 persons in a state in a 12-month period. They may be offered to an unlimited number of institutional investors. Institutional buyers need not be purchasing for investment. A) I, II, and III B) I and III C) II and III D) I and II
Private placements are transactions resulting from offers to no more than 10 noninstitutional persons (retail clients) in 12 months for investment purposes only. The offeror must be convinced that buyers are purchasing for investment. This means no immediate resale intentions are allowed on the buyer's part. No commissions may be paid, directly or indirectly, for these transactions. However, sales to institutional purchasers are exempt from the limitations regarding number of sales, resale restrictions, and commissions. They may, therefore, be offered to more than 10 persons. (Remember that the term person is defined very broadly in the act.) LO 8.d C
Under the Uniform Securities Act, securities issued by which of the following entities are included in the definition of issuers of exempt securities? State of Michigan City of Calgary, Alberta City of Birmingham, UK Kapco Leveraged Partners, an unregistered hedge fund whose adviser is registered with the SEC A) I, II, and III B) I and II C) I, II, and IV D) I, II, III, and IV
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 B
Which of the following would fall under the USA's definition of exempt transaction? A) An issuer sells a new issue to a broker-dealer. B) An agent accepts an order from a client after having sent a research report dealing with that security. C) A real estate partnership sells interests to the public with no commission charge. D) An investment adviser purchases securities from the issuer.
Transactions between issuers and broker-dealers (but not investment advisers) are exempt transactions. As long as the sale is to the public, regardless of commissions charged (or not charged), the transaction is nonexempt. Don't be lured into thinking that accepting an order from a client is unsolicited. That's not true in this case because it is the result of the research report. LO 8.d A
Which of the following is an issuer transaction? A) John sold the securities he had inherited from his father to his neighbor, Peter, at the market price without charging a commission. B) John purchased shares of XYZ Corporation in a transaction made in the over-the-counter market. C) John's father, a founder of XYZ Corporation, purchased shares of XYZ directly from the corporation subsequent to its founding without paying a commission. D) John inherited securities of XYZ Corporation from his father, who—as a founder to the company—received the shares directly from the company as a result of stock options.
An issuer transaction is one where the issuer of the securities receives the proceeds of the sale. John's father, although a founder of the company, purchased shares directly from the company. This transaction is an issuer transaction because the firm received the funds from the sale of the shares. In all the other instances, the firm—the original issuer of the securities—did not receive the proceeds of the transaction. These transactions are called nonissuer transactions. LO 8.b 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 a nonexempt transaction. C) It is an exempt transaction. D) It is a nonissuer transaction.
Any offer or sale to a bank, savings institution, trust company, investment company, or other financial institution, institutional buyer, or broker-dealer is an exempt transaction. Because the type of issuer (corporation, bank) was not stated, it is not known whether the security is exempt. LO 8.d
Which of the following practices is considered unlawful under the Securities Act of 1933? A) Claiming an agent is registered and authorized to conduct business in the state in which he practices B) Accepting unsolicited orders for unregistered, nonexempt securities from retail investors C) Accepting indications of interest in securities that are in the process of registering with the SEC D) Soliciting orders for unregistered, nonexempt securities from retail investors
It is unlawful under the Securities Act of 1933 for an agent (or broker-dealer) to solicit orders for securities that must be registered (nonexempt). An agent may indicate that he is registered to conduct business in a state, if that is true. The agent may not state that the Administrator has approved or endorsed a registration. If the order comes in from the customer and is unsolicited, then it is an exempt transaction where an order for the unregistered, nonexempt security may be accepted. An agent may accept indications of interest for securities during the registration process. The red herring prospectus is used during this period, and neither offers to sell nor orders to buy may be accepted prior to the effective date. D
Which of the following securities are not subject to state registration under the Uniform Securities Act? Equipment trust certificates issued by a railroad subject to federal regulation Preferred stock of a bank holding company listed on the New York Stock Exchange Subordinated convertible debentures issued by the Dominion Electric Company of Canada, a public utility regulated by the Canadian federal government Shares of a savings and loan association authorized to do business in the state A) I, II, and III B) II and III C) I, II, III, and IV D) I only
Securities exempt under the USA include bank issues, savings and loan issues, and common carriers or public utilities regulated by the U.S. or Canadian federal government. Securities issued by bank holding companies that trade on SEC-regulated exchanges are federal covered securities and are not subject to state registration. LO 8.c C
The first of the federal securities acts was the Securities Act of 1933. This act requires persons selling a new offering to their clients to A) deliver a preliminary (red herring) prospectus prior to the sale. B) deliver a copy of the registration statement no later than with confirmation of the sale. C) deliver an effective (final) prospectus no later than with confirmation of the sale. D) be properly registered prior to making the offer.
The Securities Act of 1933, sometimes referred to as the paper act, requires that an effective, or final, prospectus be delivered to all purchasers of a new offering no later than with confirmation of the sale. It is not required that purchasers receive a red herring prospectus, and only the SEC gets copies of the registration statement. Yes, they must be properly registered to make the offer (and sale), but that comes under the people act, (the Securities Exchange Act of 1934). LO 8.c C
A client of a broker-dealer calls his agent and submits an order to purchase 1,000 shares of a Peruvian copper mining company. As the order ticket is being prepared, the agent notices that this is a nonexempt unregistered stock. The agent should A) continue to process the order because this is an exempt security. B) wait for firm approval before processing the order. C) inform the client that no orders for this stock may be accepted until it is properly registered in the state. D) continue to process the order because this is an exempt transaction.
Transactions resulting from unsolicited orders are exempt under the USA. Therefore, this order may be taken as placed. LO 8.d D
Under the Uniform Securities Act, which of the following are exempt transactions? A transaction between an issuer and an underwriter An unsolicited customer order to buy an exempt security U.S. Treasury bonds Municipal securities A) I and II B) I and III C) II and IV D) III and IV
Transactions that occur between an issuer and underwriter and an unsolicited customer order to buy any security (exempt or nonexempt) are exempt transactions. It is important to remember that a transaction's exempt status generally depends on the trade's participants and/or type of trade, rather than on the security. U.S. Treasury bonds and municipal securities are exempt securities. The manner in which they are sold and to whom determines whether it is an exempt transaction. LO 8.d A
