In the previous two chapters, we discussed how a security can be registered with the state administrator. In this chapter and the next, we’ll cover the various exemptions that allow issuers and other interested parties to avoid the securities registration process.
This chapter focuses on exempt securities, which are exempt from registration regardless of the circumstance or transaction involved. They are:
The following descriptions of exempt securities will begin with a direct quote from the Uniform Securities Act (USA). The characteristics of each security are not important for the Series 63 exam. However, you need to know if a 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 by a government of the United States is considered exempt. Generally speaking, there are three layers of government securities to be aware of:
Federally-issued securities most often refer to Treasury securities. The most common to be mentioned are Treasury bills, Treasury notes, Treasury bonds, and STRIPS. There are several US agencies, but Ginnie Mae, Fannie Mae, and Freddie Mac are the most commonly cited agencies. Each is primarily focused on supporting home ownership for Americans through the issuance of mortgage-backed securities. Municipal securities are issued by states, cities, and local governments. The most common form of these securities are general obligation 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
Just like US government securities, Canadian government securities of any form are exempt from registration. 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
Unlike Canada, exemptions for other foreign governments are limited to those of 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 US maintains diplomatic relations with countries, not local governments. Additionally, the US must be on “good terms” (diplomatic relations) with those foreign governments.
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;
As we’ve seen several times throughout this material, banks (and most entities that sound like banks) are generally exempt or excluded from virtually every registration requirement. Their securities are additionally considered exempt from registration.
Any nationally regulated bank organization’s securities are exempt, but state regulated organizations must be authorized to do business in a state in order to sell exempt securities. For example, let’s assume a bank is organized and regulated only by the banking regulators in the state of Kentucky. If this bank offered their securities in any other state, the exemption would not apply. However, a sale of their securities in Kentucky would be exempt.
Let’s summarize all the “banking” entities that qualify for this exemption:
Keep in mind this exemption does not apply to bank holding companies, which we discussed 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 any variable contract offered. While you don’t need to know the specifics, these are the three non-exempt insurance company securities to be aware of:
Keep this one simple! If it’s an insurance product with the word ‘variable’ in the name, it’s not exempt. Every other insurance company security is exempt as long as that insurance company is authorized to do business in that state (same concept as we discussed 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, back when railroads (a type of common carrier) were very popular. That’s why they’re specifically mentioned in the law. Securities issued by public utility companies (e.g. your local electric provider) also fit into this exemption.
We previously discussed federal-covered securities, which are subject to notice filing in every state they’re offered in. It’s a bit of a confusing topic, but federal-covered securities are subject to some filing requirements, but ultimately are considered exempt from full-on state registration. As a reminder, here are the three categories of federal-covered securities:
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 non-profits of many forms, including those issued by churches, universities, and charities, are considered exempt from registration. However, the USA provides the state administrator with the ability to remove the exemption should they suspect fraud or any other “sketchy” situation. This is for good reason; the North American Securities Administrators Association (NASAA) has witnessed 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, also referred to as commercial paper are short term corporate debt obligations. These securities are issued at a discount, pay no interest during the life of the security (zero coupon), and mature at par. As long as a promissory note does not exceed 9 months to maturity, is issued in at least $50,000 denominations*, and is rated one of the three highest debt ratings* (e.g. AAA, AA, A). Organizations like Moody’s and S&P Global Ratings (formerly Standard & Poors) commonly provide ratings on these securities.
*If you studied previously for the SIE, Series 6, or 7, you already know about commercial paper. Federal exemptions only require these securities to be 9 months (technically 270 days) to maturity. There is no federal minimum denomination or debt rating minimum requirement. Many test takers forget the additional state requirements, and the test writers know this. Be sure to be aware of all three requirements for the exam.
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 their employees while avoiding registration. These offerings are not available to the general public, which is the primary reason for this exemption existing. Like non-profit securities, the USA provides the state administrator with the ability to strip this exemption should they suspect fraud or any other “sketchy” situation.
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