Exempt securities and transactions

Exempt securities — USA §402(a)

§402(a) is a status list: if the security is on it, the security itself is exempt from state registration — and that status travels with it forever. Once exempt, always exempt, in every transaction. Here's the full list. Read it once for coverage, then come back for the traps flagged underneath:

• U.S. government and agency securities — Treasury bills, notes, bonds, savings bonds, securities issued or guaranteed by federal agencies (Ginnie Mae, FHA, etc.)
• Canadian government and Canadian provincial securities — under reciprocity arrangements
• Foreign government securities — from countries with which the U.S. maintains diplomatic relations, subject to the administrator's authority to exclude specific issuers by order
• Municipal securities — bonds and notes issued by states, counties, cities, school districts, special districts, and other political subdivisions, including revenue bonds and general obligation bonds
• Bank, savings institution, and trust company securities — securities issued by banks, savings and loan associations, and trust companies under federal or state banking supervision (excluding bank holding companies, whose securities are NOT exempt)
• Insurance company securities — securities issued by federally- or state-chartered insurance companies, excluding variable annuities and variable life insurance (which ARE securities)
• Federally-regulated public utility securities — securities of public utilities under the jurisdiction of the FERC or a state public utility commission
• Railroad securities — securities issued by common carriers regulated by the Surface Transportation Board (formerly the ICC)
• Securities of nonprofit organizations — religious, educational, charitable, fraternal, social, or reformatory organizations not organized for pecuniary profit
• Commercial paper — promissory notes with maturity of 9 months or less, in denominations of $50,000 or more, rated in the top 3 categories by a nationally-recognized statistical rating organization (NRSRO), and used for working capital
• Securities of investment contracts issued in connection with employee benefit plans — ERISA-qualified plan securities (specific conditions apply)
• Federal covered securities — treated separately (covered two blocks down)

Two traps hiding in that list: "bank securities" means the bank itself — a bank holding company's stock is NOT a bank security under the §402(a) exemption. And insurance company stock is exempt, but the variable annuities and variable life contracts the insurer sells are NOT — those are separate-account securities subject to registration like anything else.

Exempt Securities vs. Exempt Transactions

This is one of the most critical distinctions on the entire exam:

Exempt transactions — USA §402(b)

§402(b) works the other axis: it exempts particular transactions, regardless of what's being sold. And the exemption is one-shot — it covers the specific transaction described and nothing after it. Future transactions in the same security have to find their own exemption. These are the ones the exam actually tests:

Most heavily tested exempt transactions:

• Isolated non-issuer transactions — an occasional secondary-market sale by an individual who is not the issuer or an underwriter. The classic "selling Grandma's stock" scenario.
• Non-issuer transactions in publicly-quoted securities — secondary-market sales of securities that have published market quotations and at least three independent market makers
• Institutional investor transactions — sales to banks, savings institutions, trust companies, insurance companies, investment companies, broker-dealers, pension or profit-sharing plans with $1M+ in assets, and other large institutional purchasers (the BD itself qualifies as an institutional purchaser)
• Private placements / limited offerings — offers directed to no more than 10 non-institutional persons in the state during any 12-month period, with no general solicitation, no commissions to non-institutional buyers, and a reasonable basis to believe non-institutional buyers are purchasing for investment
• Pre-organization certificates — offers and sales of pre-organization subscriptions to no more than 10 subscribers, with no payment received before incorporation and no commission paid for soliciting
• Existing security-holder transactions — offers and sales to existing security holders of the issuer, including conversions, dividends, and rights offerings, where no commission is paid
• Unsolicited customer orders — transactions effected by a broker-dealer pursuant to an unsolicited order received from a customer
• Fiduciary transactions — sales by executors, administrators, receivers, trustees in bankruptcy, sheriffs, marshals, conservators, and guardians
• Manual exemption transactions — non-issuer sales in securities listed in widely-recognized securities manuals

Master the 10-person counting rule: the private-placement cap counts offerees, not just purchasers — no more than 10 non-institutional persons in the state in any 12-month period. Institutional investors never count against the 10; they ride the separate institutional-investor exemption regardless of number. So "10 retail offerees plus an unlimited number of institutions" still satisfies the rule.

Federal covered securities — USA §401(c2) and NSMIA

In 1996, the National Securities Markets Improvement Act (NSMIA) redrew the state–federal map: for the securities in its defined categories, states cannot require registration at all. These are federal covered securities. The states keep exactly two levers — notice filings with fees, and antifraud enforcement — and the exam loves testing which lever is which.

The categories of federal covered securities under USA §401(c2) / NSMIA:

• Securities listed on a national securities exchange — NYSE, Nasdaq Global Select, Nasdaq Global Market, NYSE American, and other exchanges with rules approved by the SEC. Securities of equal or senior rank to a listed security are also covered.
• Securities of registered investment companies — mutual funds, closed-end funds, and unit investment trusts registered under the Investment Company Act of 1940
• Securities sold to "qualified purchasers" — high-net-worth individuals and large institutions meeting SEC-defined thresholds
• Securities sold pursuant to certain SEC exemptions — including Rule 506 of Regulation D private placements (but NOT Rule 504 or Rule 505)

What states CAN still do with federal covered securities:

• Require notice filings — a simple state-level filing showing that the issuer has filed federally; the state cannot review the merits
• Charge filing fees — reasonable state fees may be imposed
• Enforce anti-fraud rules — NSMIA preempts state registration, not state anti-fraud authority
• Suspend transactions in cases of fraud — under state anti-fraud authority

What states CANNOT do:

• Require substantive registration of a federal covered security — no merit review, no qualification process, no coordination
• Impose registration requirements more restrictive than the federal rules — states cannot add disclosure or due-diligence requirements beyond what the SEC requires

So for a federal covered security, the state registration path is the notice filing under USA §307 — never coordination or qualification. Both of those are next lesson's territory.