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Flashcards in State Regulations (Registration of Securities under the Act) Deck (31):
1

Securities traded in which of the following marketplaces would be excluded from the definition of federal covered securities?

A) Toronto Stock Exchange
B) Chicago Stock Exchange
C) Nasdaq Stock Market
D) New York Stock Exchange

A) Toronto Stock Exchange

Federal covered securities include those on exchanges registered with the SEC, such as the NYSE, the CHX, and the Nasdaq Stock Market as well as investment companies registered under the Investment Company Act of 1940.

2

As referred to in the NSMIA, the term "covered security" would apply to

1. preferred stock in the XYZ Corporation whose common stock is listed on the NYSE
2. common stock in ABCD, Inc., a stock traded in the Pink Sheets
3. Springfield, Illinois, municipal bonds sold to a resident of Springfield, Illinois
4. Springfield, Illinois, municipal bonds sold to a resident of Springfield, Missouri

1. preferred stock in the XYZ Corporation whose common stock is listed on the NYSE
4. Springfield, Illinois, municipal bonds sold to a resident of Springfield, Missouri

Any security equal or senior to one listed on the NYSE is a covered security. Municipal bonds are a covered security except in their state of issuance. Pink Sheet and OTC Bulletin Board securities are not considered covered.

3

The National Securities Markets Improvement Act of 1996 (NSMIA) affects federal and state laws in that:

A) state law preempts federal law.
B) federal laws and state laws remain the same.
C) federal securities laws preempt state laws.
D) the Uniform Securities Act supersedes the Investment Advisers Act of 1940.

C) federal securities laws preempt state laws.

The NSMIA defines the functions and respective responsibilities of the SEC and state Administrators. State law does not preempt federal law, and the NSMIA requires states to adapt their securities laws to comply with the standards required by the NSMIA.

4

The National Securities Markets Improvement Act of 1996 (NSMIA), which amended the Uniform Securities Act, pre-empts state registration of federal covered securities. Under the NSMIA, all of the following are federal covered securities EXCEPT:

A) warrants trading on the OTC Bulletin Board offered by a company whose common stock trades on the Nasdaq Stock Market.
B) municipal securities of an issuer within the state of issuance.
C) securities issued by unit investment trusts registered under the Investment Company Act of 1940.
D) securities offered pursuant to the provisions of Rule 506 of Regulation D under the Securities Act of 1933.

B) municipal securities of an issuer within the state of issuance.

The NSMIA is designed to eliminate dual registration or regulation of securities. Because these municipal securities are issued in the state in which they are offered, there is no federal authority to regulate them. They are not federal covered securities and can be regulated by the state in which they are offered (although they are exempt from registration under the USA). Securities issued by any investment company registered under the Investment Company Act of 1940 are federal covered. Securities offered pursuant to the provisions of Rule 506 of Regulation D under the Securities Act of 1933 are federal covered. Rule 506 is the exemption from registration for the private offering of securities to a limited number of investors, often called private placements. Finally, if the common stock of an issuer is traded on the Nasdaq Stock Market, then any security equal to it (rights and warrants) or senior to it (preferred stock and debt securities), is also federal covered.

5

Under the National Securities Markets Improvement Act of 1996, which of the following statements describe federal covered securities?

1. A security registered under the USA.
2. A security registered under the Investment Company Act of 1940.
3. A security of a company traded on the Nasdaq Stock Market.
4. A security issued by the U.S. government.

2. A security registered under the Investment Company Act of 1940.
3. A security of a company traded on the Nasdaq Stock Market.
4. A security issued by the U.S. government.

A federal covered security has a federally imposed exemption from state registration so selecting a choice that includes registering under the USA cannot be correct. The list includes most securities exempt from registration under the federal Securities Act of 1933 (those issued by the U.S. government and state and local governments). In addition, it includes a number of securities registered with the SEC, primarily those traded on the exchanges and Nasdaq as well as investment companies registered under the Investment Company Act of 1940.

6

Which of the following are included in the definition of federal covered security?

1. ABC common stock, domiciled in Delaware, listed on the NYSE, and sold to a resident of Delaware.
2. ABC common stock, domiciled in Delaware, listed on the NYSE, and sold to a resident of Maryland.
3. City of Portland, Maine, GO bond sold to a resident of Augusta, Maine.
4. City of Portland, Maine, GO bond sold to a resident of Augusta, Georgia.

1. ABC common stock, domiciled in Delaware, listed on the NYSE, and sold to a resident of Delaware.
2. ABC common stock, domiciled in Delaware, listed on the NYSE, and sold to a resident of Maryland.
4. City of Portland, Maine, GO bond sold to a resident of Augusta, Georgia.

Any security listed on the NYSE, regardless of the corporation's or the customer's state of domicile, is a federal covered security. Municipal bonds, exempt securities under the Securities Act of 1933, are also federal covered securities with one significant exception: if the issuer is a political entity in this state and it is sold to a resident of this state, it is not considered a federal covered security in this state.

7

Which of the following are federal covered securities?

1. A security quoted on the Nasdaq Stock Market.
2. Shares of an investment company registered under the Investment Company Act of 1940.
3. An offering in a security exempt from registration under the Securities Act of 1933.
4. A security that has a federally imposed exemption from state securities registration.

1. A security quoted on the Nasdaq Stock Market.
2. Shares of an investment company registered under the Investment Company Act of 1940.
3. An offering in a security exempt from registration under the Securities Act of 1933.
4. A security that has a federally imposed exemption from state securities registration.

Any Nasdaq security, shares of a registered investment company, an offering in a security exempt from registration under the Securities Act of 1933, a security that has a federally imposed exemption from state securities registration, and a security traded on a regulated exchange are all federal covered securities.

8

Under the USA, it is unlawful for a person to offer or sell a security in a state unless the security is:

1. a federal covered security.
2. exempt from registration under the USA.
3. registered in the state
4. sold in an exempt transaction

1. a federal covered security.
2. exempt from registration under the USA.
3. registered in the state
4. sold in an exempt transaction

It is unlawful to sell a security in a state unless the security is registered in that state, exempt from registration under the USA, sold in an exempt transaction, or is a federal covered security.

9

Under the Uniform Securities Act, before a corporation can issue a security in a state, that security must be:

A) registered in one other state and with the SEC.
B) exempt from registration in other states in which it is issued.
C) registered with the SEC and in the state of issue.
D) registered in the state or exempt from registration in the state.

D) registered in the state or exempt from registration in the state.

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.

10

Under the Uniform Securities Act, a non-exempt transaction may take place in the state only if:

A) it is between institutions.
B) the security is registered, exempt, or federal covered.
C) the security is sold in an exempt transaction.
D) it is offered privately to no more than 10 individuals in any 12 month period.

B) the security is registered, exempt, or federal covered.

We are told that the transaction is not exempt. Therefore, unless the security is exempt (or federal covered), the only way to have a legal sale is for it to be registered.

11

Which of the following securities of Synergy, Inc., (an issuer whose stock trades on the Nasdaq Stock Market), does NOT have an exemption from registration with the state?

A) Synergy's oil and gas limited partnership units (Synergy, Inc., is the general partner).
B) Synergy, Inc., preferred stock.
C) Synergy, Inc., senior bonds.
D) Synergy, Inc., debentures.

A) Synergy's oil and gas limited partnership units (Synergy, Inc., is the general partner).

Synergy's oil and gas limited partnerships are not issued by Synergy, Inc.; Synergy is only the general partner. The oil and gas partnerships are issued by separate legal entities; they do not have the blue-sky exemptions. They must be registered in the states in which they are sold, unless they have some other exemption. Any security equal or senior in claim to an exempted common stock is exempted as well. The company's preferred stock, senior bonds, and debentures all have blue-sky exemptions from state registration because the company's common stock is traded on the Nasdaq Stock Market.

12

Federal covered securities, as defined under the Uniform Securities Act:

1. must be registered with the SEC before they can be offered in the state.
2. must be registered in the state before they can be offered within the state.
3. include shares of an investment company registered with the SEC under the Investment Company Act of 1940.

3. include shares of an investment company registered with the SEC under the Investment Company Act of 1940.

While many federal covered securities are registered with the SEC, the term also includes those exempt from registration, such as government and municipal bonds. Although these investment company securities are not required to be separately registered in each state, the state may still require a notice filing, including a consent to service of process and payment of fees, for these offerings.

13

If required by the Administrator, a stock traded on the Nasdaq Capital Market would most likely use which of these?

A) Notice filing.
B) Coordination.
C) Qualification.
D) Criminalization.

A) Notice filing.

Stocks listed on any of the three tiers of the Nasdaq Stock Market are federal covered securities and, as such, can only be required to notice file.

14

An agent can purchase a security for a customer's account, when the security is not registered in that state, under which of the following circumstances?

1. If the security is an exempt security.
2. If the security is a warrant to purchase stock that is NYSE listed.

1. If the security is an exempt security.
2. If the security is a warrant to purchase stock that is NYSE listed.

A security must be registered in any state in which a transaction occurs unless the security or transaction is exempt. Exempt securities include government securities, municipal securities, and securities issued by nonprofit organizations. Stocks listed for trading on a national securities exchange such as the NYSE, usually referred to as federal covered securities, or those equal to them, such as rights and warrants, are also exempt from the registration requirements of the state.

15

Which of the following statements is NOT true?

A) Federal covered securities include those registered under the Investment Company Act of 1940.
B) Federal covered securities include securities listed on national exchanges.
C) Transaction exemptions must be established before each transaction.
D) Exempt securities must reestablish their exemptions at least annually.

D) Exempt securities must reestablish their exemptions at least annually.

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 2 or more of these exemptions. The term "federal covered securities" includes registered investment companies as well as securities listed on national exchanges.

16

Under the National Securities Markets Improvement Act of 1996, the federal covered security exemption from state registration includes:

1. securities issued by investment companies registered under the Investment Company Act of 1940.
2. securities traded on the Nasdaq Stock Market.
3. securities traded on the New York Stock Exchange.
4. securities traded on the American Stock Exchange.

1. securities issued by investment companies registered under the Investment Company Act of 1940.
2. securities traded on the Nasdaq Stock Market.
3. securities traded on the New York Stock Exchange.
4. securities traded on the American Stock Exchange.

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

17

Common stock of KAPCO, Inc. trades on the NYSE. Which of the following securities would not be exempt from registration under the USA?

A) KAPCO noncumulative preferred stock.
B) Stock rights to acquire KAPCO common stock.
C) KAPCO, Inc. subordinated debentures, traded on the "Pink Sheets".
D) Limited partnership interests in a shopping center with KAPCO, Inc. as the general partner.

D) Limited partnership interests in a shopping center with KAPCO, Inc. as the general partner.

When an issuer's stock is listed on the NYSE, any security it issues that is equal to or senior to that stock is a federal covered security and exempt from registration with any state. When that issuer acts as a general partner in a real estate offering, it is not their security that is being sold so the exemption does not apply.

18

Under the USA, an exemption from registration is available to common stock listed on the:

1. Montreal Stock Exchange.
2. New York Stock Exchange.
3. American Stock Exchange.
4. Nasdaq Stock Market.

2. New York Stock Exchange.
3. American Stock Exchange.
4. Nasdaq Stock Market.

The federal covered security exemption applies to stocks listed on the major stock exchanges in the U.S. Included in that is any stock on Nasdaq.

19

Which of the following securities are federal covered and exempt from state registration?

1. Bonds of an issuer whose common stock is listed on the NYSE.
2. Bonds of an issuer whose common stock is listed on the AMEX.
3. Stock traded on Nasdaq.
4. Registered investment company securities.

1. Bonds of an issuer whose common stock is listed on the NYSE.
2. Bonds of an issuer whose common stock is listed on the AMEX.
3. Stock traded on Nasdaq.
4. Registered investment company securities.

All securities of an issuer whose common stock is listed on any national exchange or any tier of the Nasdaq Stock Market are exempt from state registration, including any securities of the same issuer senior to such securities. All registered investment company securities are also exempt from state registration.

20

Under which of the following conditions may an agent sell an unregistered nonexempt security?

A) When the broker/dealer employing the agent has no office in the state.
B) If the order was unsolicited.
C) Never.
D) Only to a noninstitutional client.

B) If the order was unsolicited.

Agents may accept unsolicited orders from clients, institutional or not, in unregistered nonexempt securities. If the transaction is with an institutional client, it can be solicited. In the case of unsolicited orders, the Administrator may demand written acknowledgement from the client that, in fact, the order was unsolicited.

21

An agent in this state would be acting illegally if he sold:

A) revenue bonds of Illinois in Florida that were not registered in Florida.
B) securities guaranteed by a federal credit union organized under the laws of the state.
C) nonexempt securities properly registered in a neighboring state but not registered in this state.
D) federal covered securities not registered in the state.

C) nonexempt securities properly registered in a neighboring state but not registered in this state.

An agent cannot sell securities in a state unless they are registered or exempt from state registration. Federal covered securities, tax-exempt municipal bonds, and securities guaranteed by a federal credit union organized in the state are all exempt from registration.

22

Which of the following practices is considered unethical under the Uniform Securities Act?

A) Soliciting orders for unregistered, nonexempt securities.
B) Claiming an agent is registered and authorized to conduct business in the state in which he practices.
C) Not disclosing to a client within 48 hours of entering into an advisory contract that the adviser's brother was recently convicted of a securities-related felony.
D) Accepting indications of interest in securities that are in the process of registering with the SEC.

A) Soliciting orders for unregistered, nonexempt securities.

It is unlawful under the USA for an agent 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. An adviser is not under any legal obligation to disclose that his brother was convicted of a securities-related felony. The adviser, however, must disclose within 48 hours of entering into the contract if he has been convicted of a securities-related felony within the last 10 years. 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.

23

Lucy, an agent of XYZ Securities, works out of an office in Ohio. She calls her client Clark, an individual investor and a resident of Kansas, and recommends that Clark purchase 500 shares of Perfect Pasta, Inc. common stock. Lucy read a report that Perfect Pasta plans to introduce a low carbohydrate pasta into the marketplace. Perfect Pasta, Inc. common stock is neither exchange traded nor traded on Nasdaq. At the time Lucy makes the recommendation, the stock is not registered with the Securities Departments of Ohio or Kansas. Which of the following statements best reflects this transaction?

A) Lucy has violated the USA because she solicited an order in an unregistered, nonexempt security.
B) Lucy has not violated the USA because the transaction with Clark is an exempt transaction.
C) Lucy has violated the USA because Perfect Pasta, Inc. failed to register its stock with the Securities Department in Ohio.
D) Lucy has violated the USA because Perfect Pasta, Inc. failed to register its stock with the Securities Departments in both Kansas and Ohio.

A) Lucy has violated the USA because she solicited an order in an unregistered, nonexempt security.

The agent violated the USA by engaging in the prohibited practice of soliciting transactions in an unregistered, nonexempt security.

24

Under the registration provisions of the Uniform Securities Act, it is unlawful for an agent in the state to sell XYZ securities unless:

A) XYZ is a federal covered security.
B) XYZ is a nonregistered, nonexempt security.
C) the agent is a nonregistered, nonexempt person.
D) both the agent and XYZ are nonexempt and nonregistered.

A) XYZ is a federal covered security.

If XYZ is a federal covered security it is not required to register with the state. Nonexempt securities and nonexempt persons must be registered to be sold (securities) or to do business (persons).

25

Under the Uniform Securities Act, it is legal for a investment adviser representative to tell a client that:

A) a registered security may lawfully be sold in that state.
B) an exempt security is not required to be registered because it is safer than a nonexempt security.
C) her qualifications have been found satisfactory by the Administrator.
D) a registered security has been approved for sale in the state by the Administrator.

A) a registered security may lawfully be sold in that state.

An IAR may indicate that a security is registered or is exempt from registration; all of the other statements are prohibited.

26

In which of the following instances would an investment adviser representative be exempt from the antifraud rules of the Uniform Securities Act?

A) The IAR is also an agent of a broker/dealer and, in that capacity, makes a recommendation to a nonadvisory client.
B) Since the IAR understands how nervous a particular client is, he never admits a loss in the account to that client.
C) In an effort to avoid possible conflicts of interest, the IAR only does personal trades through an account set up with a fictitious name.
D) The IAR makes a presentation at a seminar where the only topic discussed is fixed annuities.

D) The IAR makes a presentation at a seminar where the only topic discussed is fixed annuities.

Since fixed annuities are not securities, a presentation dealing solely with that topic is not covered under the antifraud statutes of the USA.

27

Under the USA, it is unlawful to sell a:

A) security of a commercial bank not registered in the state.
B) nonexempt, nonregistered security issued by a foreign corporation from a country with which the US government maintains diplomatic relations.
C) security registered in the state under the USA but not registered in any other state.
D) federal covered security not registered in the state.

B) nonexempt, nonregistered security issued by a foreign corporation from a country with which the US government maintains diplomatic relations.

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.

28

The National Securities Markets Improvement Act of 1996 (NSMIA) created a new definition known as a covered security. In general, these securities do not have to register on a state level. If XYZ common stock is listed for trading on the NYSE, which of the following XYZ securities are considered covered?

1. XYZ participating preferred stock
2. XYZ first mortgage bonds
3. Warrants to purchase XYZ common stock
4. Rights issued in advance of an offering of additional XYZ common stock

1. XYZ participating preferred stock
2. XYZ first mortgage bonds
3. Warrants to purchase XYZ common stock
4. Rights issued in advance of an offering of additional XYZ common stock

Common stock listed on the New York Stock Exchange is a covered security as defined in the NSMIA. Furthermore, any security equal to or senior to that common stock is considered to be covered as well. Warrants and rights are equal to the common stock and the preferred stock and mortgage bonds are senior to the common stock.

29

Which one of the following would NOT be considered a fraudulent or prohibited business practice?

A) Submitting a trade order for a potential client who has promised that the new account would be opened tomorrow.
B) Attempting to solicit a trade in unregistered exempt securities with an individual client.
C) Larger than ordinary commissions without prior disclosure to the client.
D) Omitting a material fact because the agent felt the client would not understand the information involved.

B) Attempting to solicit a trade in unregistered exempt securities with an individual client.

Even though the security is unregistered, because it is exempt, no registration is required. Material information must be disclosed, even if the client doesn't understand its meaning. No trades can take place until an account is opened, and although there are circumstances that permit larger than ordinary commissions, that fact must be disclosed to the client.

30

Which of the following activities would be prohibited for an agent?

1. Executing a transaction in a discretionary account.
2. Charging a larger than average commission on certain transactions.
3. Soliciting sales of a security not yet registered

3. Soliciting sales of a security not yet registered

An agent is prohibited from soliciting sales of a security that has not been registered. An agent is not prohibited from executing a transaction in an account over which he has been granted discretionary authority. An agent may also charge higher than average commissions on certain transactions typically involving low market volume securities and penny stocks among others.

31

As defined in the NSMIA, federal covered securities would include

1. open-end investment companies registered under the Investment Company Act of 1940
2. closed-end investment companies registered under the Investment Company Act of 1940 that trade on the OTC Bulletin Board
3. bonds listed on the OTC-Link where the company's common stock trades on Nasdaq
4. Bonds issued by the Province of Ontario

1. open-end investment companies registered under the Investment Company Act of 1940
2. closed-end investment companies registered under the Investment Company Act of 1940 that trade on the OTC Bulletin Board
3. bonds listed on the OTC-Link where the company's common stock trades on Nasdaq

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 municipal securities are not federal covered (although under the Uniform Securities Act they are exempt securities).

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