3.5 Exempt Securities and Transactions
Key Takeaways
Exempt securities are always exempt; exempt transactions apply per sale.
Anti-fraud rules apply to all securities and transactions.
Government and bank securities are exempt; holding companies are not.
Unsolicited orders and institutional transactions are exempt.
Private placements are limited to 10 non-institutional offerees.
Not all securities must be registered. The Uniform Securities Act provides exemptions for certain securities and certain transactions. Understanding these exemptions is crucial for the Series 63 exam.
Exempt Securities vs. Exempt Transactions
| Type | What's Exempt | Registration Required? |
|---|---|---|
| Exempt Security | The security itself | Never—regardless of how sold |
| Exempt Transaction | The specific transaction | Never for that transaction—but security may need registration for other sales |
Critical Point: Both exempt securities and exempt transactions remain subject to anti-fraud provisions. Exemption from registration is NOT exemption from fraud liability.
Exempt Securities
The following securities are exempt from registration regardless of how they're sold:
Government Securities
| Security | Exempt? |
|---|---|
| U.S. Government | Yes (Treasury bills, notes, bonds, STRIPS) |
| U.S. Agency | Yes (Ginnie Mae, Fannie Mae, Freddie Mac) |
| State/Municipal | Yes (any state, territory, or municipal issuer) |
| Canadian Government | Yes (federal, provincial, municipal) |
| Foreign National Government | Yes (with U.S. diplomatic relations) |
| Foreign Municipal | No (Paris city bonds NOT exempt) |
Bank Securities
| Issuer | Exempt? |
|---|---|
| National banks | Yes |
| State-chartered banks | Yes (if authorized in the state) |
| Federal savings associations | Yes |
| Credit unions | Yes |
| Bank holding companies | No |
Exam Tip: Bank securities are exempt, but bank HOLDING COMPANY securities are NOT exempt. This is frequently tested.
Other Exempt Securities
| Security | Exempt? |
|---|---|
| Insurance company securities | Yes (issued by authorized insurers) |
| Public utility securities | Yes (if regulated) |
| Railroad securities | Yes (ICC regulated) |
| Commercial paper | Yes (if rated in top 3 categories, $50,000+ denomination, 9 months or less maturity) |
| Nonprofit organization securities | Yes (religious, educational, charitable) |
Commercial Paper Requirements
To qualify as exempt commercial paper:
| Requirement | Condition |
|---|---|
| Rating | Top 3 categories by recognized rating agency |
| Denomination | $50,000 or more |
| Maturity | 9 months (270 days) or less |
| Purpose | Current transactions (working capital) |
Exempt Transactions
Even if a security is NOT exempt, certain transactions may be exempt from registration:
Isolated Non-Issuer Transactions
| Element | Requirement |
|---|---|
| Isolated | Not regular, repeated activity |
| Non-issuer | Seller is not the issuer |
| Example | Individual selling personal holdings |
Example: You inherited 100 shares of XYZ Corp stock. You sell them through a broker-dealer. This is an isolated non-issuer transaction—you're not the issuer, and you don't regularly sell securities.
Unsolicited Orders
| Element | Requirement |
|---|---|
| Customer-initiated | Customer requests the transaction |
| No solicitation | Broker-dealer did NOT recommend |
| Any security | Applies to all securities |
Key Rule: Unsolicited customer orders are always exempt—regardless of the type of security involved. The broker-dealer cannot have solicited or recommended the transaction.
Transactions with Institutions
All transactions with institutional investors are exempt:
| Institution | Exempt? |
|---|---|
| Banks | Yes |
| Savings institutions | Yes |
| Trust companies | Yes |
| Insurance companies | Yes |
| Investment companies | Yes |
| Pension plans ($1M+ assets) | Yes |
| Broker-dealers | Yes |
| Other institutional buyers | Yes |
Rationale: Institutional investors are sophisticated and don't need the same protections as retail investors.
Fiduciary Transactions
Transactions by fiduciaries are exempt:
| Fiduciary | Exempt? |
|---|---|
| Executor of an estate | Yes |
| Administrator of an estate | Yes |
| Sheriff (court-ordered sale) | Yes |
| Trustee in bankruptcy | Yes |
| Guardian | Yes |
| Conservator | Yes |
| Custodian for a minor | No |
Exam Tip: Custodians for minors (UTMA/UGMA) are NOT fiduciaries for this exemption. This is frequently tested.
Private Placement Exemption
Limited offerings to a small number of investors:
| Requirement | Condition |
|---|---|
| Number of Offerees | No more than 10 non-institutional investors in 12 months |
| Investment Intent | Buyers purchasing for investment (not resale) |
| Commissions | No commissions paid on sales to non-institutional buyers |
| No Advertising | No general solicitation or advertising |
Transactions with Existing Security Holders
| Transaction | Exempt? |
|---|---|
| Stock dividends | Yes (no additional consideration) |
| Stock splits | Yes |
| Rights offerings to existing holders | Yes |
| Conversion (no additional payment) | Yes |
Underwriter Transactions
| Transaction | Exempt? |
|---|---|
| Between issuer and underwriter | Yes |
| Among underwriters | Yes |
| Between underwriter and dealer | Yes |
Pre-Organization Certificates
| Requirement | Condition |
|---|---|
| Number | No more than 10 subscribers |
| No payment | No payment made by subscribers |
| Purpose | Indicate intent to organize business |
Summary Table: Common Exemptions
| Category | Examples | Exempt? |
|---|---|---|
| U.S. Government | Treasuries, agencies | Yes |
| Municipal | State and local bonds | Yes |
| Canadian | All levels of government | Yes |
| Banks | National and state banks | Yes |
| Bank Holding Companies | Holding company stock | No |
| Unsolicited Orders | Customer-initiated trades | Yes |
| Institutional | Sales to banks, insurers | Yes |
| Fiduciary | Executor, trustee | Yes |
| Custodian for Minor | UTMA/UGMA custodian | No |
| Private Placement | ≤10 non-institutional, 12 months | Yes |
Key Takeaways
- Exempt securities are exempt regardless of how sold
- Exempt transactions are exempt regardless of the security
- Anti-fraud provisions apply to ALL securities and transactions
- Government securities (U.S., state, municipal, Canadian, foreign national) are exempt
- Bank securities are exempt; bank holding company securities are NOT
- Unsolicited orders are always exempt
- Institutional transactions are exempt
- Fiduciary transactions are exempt (except custodians for minors)
- Private placements: ≤10 non-institutional offerees, 12 months, no commissions
Which of the following securities is NOT exempt from registration under the USA?
U.S. Treasury bonds
Securities issued by a Canadian province
Securities issued by a bank holding company
Municipal bonds issued by the state of California
An investor calls their broker-dealer and requests to purchase shares of a speculative penny stock. The broker-dealer did not recommend or solicit this transaction. Is registration of this security required for this transaction?
Yes, penny stocks always require registration
Yes, because the investor is a retail customer
No, unsolicited customer orders are exempt transactions
No, because penny stocks are exempt securities
The executor of an estate sells securities from the estate to settle debts. Is this transaction exempt from registration?
No, because the securities belong to the estate
No, unless the securities are government bonds
Yes, fiduciary transactions are exempt
Yes, but only if the sale is court-ordered
To qualify for the private placement exemption under the USA, how many non-institutional investors may receive offers in a 12-month period?
5 or fewer
10 or fewer
25 or fewer
35 or fewer
A custodian under the Uniform Transfers to Minors Act (UTMA) sells securities from a minor's account. Is this transaction exempt as a fiduciary transaction?
Yes, custodians are fiduciaries
Yes, because the minor cannot sell securities directly
No, custodians for minors are NOT considered fiduciaries for this exemption
No, unless the custodian is also the minor's parent
Sections you finish are checked off in the contents.