16.3 Exempt Securities

Certain securities are exempt from state registration requirements due to their nature or the issuer's characteristics. Understanding these exemptions is critical for the Series 65 exam.

Critical Principle

Exempt from registration does NOT mean exempt from antifraud provisions.

All securities - whether exempt or not - remain subject to:

- State antifraud provisions

- Federal antifraud provisions

- General fraud laws

Government Securities

Federal Government Securities

Treasury Securities: T-bills, T-notes, T-bonds, TIPS

Agency Securities: GNMA, FNMA, FHLMC

STRIPS: Separately traded registered interest and principal

Government-Guaranteed: Securities with U.S. government backing

All federal government securities are exempt from state registration.

State and Municipal Securities

General Obligation Bonds: Backed by taxing power

Revenue Bonds: Backed by project income

State Agency Securities: State authority obligations

Municipal Notes: TANs, RANs, BANs

Municipal securities are exempt from both federal and state registration.

Foreign Government Securities

Diplomatic Relations: U.S. must have diplomatic relations with issuing government

Exempt Status: Exempt from state registration

Examples: Canadian provincial bonds, sovereign debt

Financial Institution Securities

Bank-Issued Securities

National Banks: Exempt (federally chartered)

State-Chartered Banks: Exempt if organized under state law

Savings Institutions: Generally exempt

Trust Companies: Exempt if state-supervised

Insurance Company Securities

Separate Regulation: Subject to state insurance regulation

Exempt from USA: Not securities under most circumstances

Variable Products: May be securities AND insurance

Other Exempt Securities

Nonprofit Organizations

Religious Organizations: Organized for religious purposes

Educational Institutions: Schools, colleges, universities

Charitable Organizations: 501(c)(3) organizations

Fraternal Organizations: Benefit members only

Commercial Paper

Maturity: 9 months or less (270 days)

Minimum Denomination: $50,000

Investment Grade: Must be rated in top 3 categories

Not Advertised: Not offered to general public

Other Categories

Public Utilities: Regulated by utility commissions

Railroad Securities: Subject to federal regulation

Employee Benefit Plans: ERISA-qualified plans

Cooperative Securities: Agricultural cooperatives

Federal Covered Securities

Under NSMIA, certain securities are "federal covered" and exempt from state registration:

Categories of Federal Covered Securities

Exchange-Listed: Securities listed on NYSE, NASDAQ, NYSE American

Registered Investment Companies: Mutual funds, ETFs, closed-end funds

Qualified Purchaser Sales: Sales only to qualified purchasers

Rule 506 Offerings: Regulation D private placements

Regulation A Tier 2: Offerings up to $75 million

State Authority

Authority Retained: Antifraud enforcement; Notice filing/fees; Investigation

Authority Preempted: Registration requirements; Merit review; Substantive review of offering

On the Exam: Even though federal covered securities are exempt from state registration, states can still require notice filing, collect fees, and enforce antifraud provisions.

Exempt Securities Summary Table

U.S. Government: Federal Registration - Exempt; State Registration - Exempt

Municipal Bonds: Federal Registration - Exempt; State Registration - Exempt

Bank Securities: Federal Registration - Exempt; State Registration - Exempt

Insurance Products: Federal Registration - Usually exempt; State Registration - Usually exempt

Exchange-Listed: Federal Registration - Required; State Registration - Notice filing only

Mutual Funds: Federal Registration - Required; State Registration - Notice filing only

Commercial Paper: Federal Registration - Exempt; State Registration - Exempt

Key Takeaways

1. Exempt from registration does not equal exempt from antifraud provisions

2. Federal government and municipal securities are exempt from all registration

3. Bank-issued and insurance company securities are generally exempt

4. Commercial paper must meet specific requirements (270 days or less, $50,000+, investment grade)

5. Federal covered securities require only notice filing at state level

6. States retain antifraud authority over all securities