In the previous two chapters, you saw how a security can be registered with the state administrator. This chapter and the next cover the exemptions that let issuers and other parties avoid the securities registration process.
This chapter focuses on exempt securities. These are exempt from registration regardless of the circumstances or the transaction. They are:
Each exempt security description begins with a direct quote from the Uniform Securities Act (USA). For the Series 63, the detailed characteristics aren’t the focus. What matters is whether the security is exempt from registration requirements.
Any security (including a revenue obligation) issued or guaranteed by the United States, any state, any political subdivision of a state, or any agency or corporate or other instrumentality of one or more of the foregoing
Any security issued or guaranteed by a US government entity is exempt. It helps to think of these securities in three broad layers:
Federally issued securities most often refer to Treasury securities, such as Treasury bills, Treasury notes, Treasury bonds, and STRIPS.
Agency securities are issued or guaranteed by certain US agencies. The most commonly cited are Ginnie Mae, Fannie Mae, and Freddie Mac. These agencies support home ownership largely through mortgage-backed securities.
Municipal securities are issued by states, cities, and other local governments. Common examples include general obligation bonds and revenue bonds.
Any security issued or guaranteed by Canada, any Canadian province, any political subdivision of any such province, any agency or corporate or other instrumentality of one or more of the foregoing
Canadian government securities are exempt in the same broad way as US government securities. Federal (national), provincial, city, and local government securities all avoid registration.
Any other foreign government with which the United States currently maintains diplomatic relations, if the security is recognized as a valid obligation by the issuer or guarantor
For foreign governments other than Canada, the exemption is limited to the national (federal) government.
For example, a bond issued by the French government would be exempt, but a bond issued by the city of Paris would not be exempt. The USA ties this exemption to diplomatic relations, which the US maintains with countries (national governments), not local governments. The US must also currently have diplomatic relations with that foreign government.
Any security issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state
Any security issued by and representing an interest in or a debt of, or guaranteed by, any federal savings and loan association, or any building and loan or similar association organized under the laws of any state and authorized to do business in this State
Any security issued or guaranteed by any federal credit union or any credit union, industrial loan association, or similar association organized and supervised under the laws of this state;
Banks (and many entities that function like banks) are treated as exempt or excluded in several parts of the USA. Their securities are also considered exempt from registration.
For example, suppose a bank is organized and regulated only in Kentucky. If that bank offers its securities in another state where it isn’t authorized to do business, the exemption wouldn’t apply there. A sale of its securities in Kentucky would be exempt.
Let’s summarize the “banking” entities that qualify for this exemption:
Keep in mind this exemption does not apply to bank holding companies, which you saw in an earlier chapter.
Any security issued by and representing an interest in or a debt of, or guaranteed by, any insurance company organized under the laws of any state and authorized to do business in this state; [but this exemption does not apply to an annuity contract, investment contract, or similar security under which the promised payments are not fixed in dollars but are substantially dependent upon the investment results of a segregated fund or account invested in securities]
Insurance company securities are generally exempt, except for variable contracts. You don’t need the product details for the exam, but you do need to recognize the common non-exempt variable products:
A practical shortcut: if it’s an insurance product with the word “variable” in the name, it’s not exempt.
Otherwise, insurance company securities are exempt as long as the insurance company is authorized to do business in that state (the same state-authorization concept you saw with banks).
Any security issued or guaranteed by any railroad, other common carrier, public utility, or holding company
The first version of the USA was written in the 1930s, when railroads (a type of common carrier) were especially prominent. That’s why they’re specifically named.
This exemption also covers securities issued by public utility companies (for example, a local electric provider).
You previously covered federal-covered securities. These securities are subject to notice filing in each state where they’re offered. Even though there may be filing requirements, federal-covered securities are exempt from full state registration.
As a reminder, the three categories of federal-covered securities are:
Any security issued by any person organized and operated not for private profit but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes, or as a chamber of commerce or trade or professional association
Securities issued by many types of non-profits - including churches, universities, and charities - are exempt from registration.
However, the USA allows the state administrator to remove this exemption if fraud or other suspicious activity is suspected. This matters because the North American Securities Administrators Association (NASAA) has seen numerous instances of affinity fraud over the years.
A promissory note, draft, bill of exchange or bankers’ acceptance that evidences an obligation to pay cash within 9 months after the date of issuance, exclusive of days of grace, is issued in denominations of at least $50,000, and receives a rating in one of the 3 highest rating categories from a nationally recognized statistical rating organization; or a renewal of such an obligation that is likewise limited, or a guarantee of such an obligation or of a renewal;
Promissory notes (often called commercial paper) are short-term corporate debt obligations. They’re typically issued at a discount, pay no interest during the life of the security (zero coupon), and mature at par.
To qualify as an exempt security under the USA, the promissory note must meet all three requirements:
Organizations like Moody’s and S&P Global Ratings (formerly Standard & Poors) commonly provide ratings on these securities.
*If you previously studied for the SIE, Series 6, or Series 7, you may remember that the federal exemption for commercial paper focuses on the 9-month (technically 270-day) maturity requirement. Under the USA, there are additional state-level requirements: the $50,000 minimum denomination and the minimum rating requirement. Test questions often target this difference, so make sure you’re using all three USA requirements.
Any investment contract issued in connection with an employees’ stock purchase, savings, pension, profit-sharing, or similar benefit plan
Many companies offer securities and other investment plans to employees without registering those offerings. A key reason this exemption exists is that these offerings aren’t available to the general public.
As with non-profit securities, the USA allows the state administrator to remove this exemption if fraud or other suspicious activity is suspected.
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