The official comment then says that:

"Except for federal covered securities, exempt securities, or securities offered or sold in exempt transactions,
no sale of a security may be made in this State before the security is registered."

Three Tests to Determine if an Investment Contract is a Security

if you need a review at this point, go back and take another look at the definition of a federal covered security. Remember, this term first came into securities law with the National Securities Markets Improvement Act (NSMIA) of 1996. It is only in the 2002 version of the USA and in NASAA documents that this law is taken into account.

There are three tests to determine when an investment contract is a security. They are:

• Is it an investment of money?
• Is it in a common enterprise?
• Are its profits to come solely from the efforts of others?

This definition comes directly from the language of a United States Supreme Court decision in the case of United States V.W.J. Howey Company in 1946. The words from the decision were; "The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others."

To demonstrate, let's apply these three tests to a security that we're all familiar with: common stock. The person who buys the stock is pooling his/her money with the investments of many other people - a common enterprise. The
investor obviously will only risk his/her capital in the expectation of a return on the investment - a profit. The investor may vote on the board of directors, but has no direct control over the management of the company in which the
money is invested, so he/she expects the profits to come from the efforts of others. These tests have proven that a
stock certificate is definitely "investment contract".

Which Investments Are Not Securities?

Earlier when we cited that long list of the items that the law specified as securities, we promised to give you a shorter, simpler list of items that are not securities. This is a little easier to handle:

• Fixed Insurance, endowment or annuities policies
• Retirement plans
• Commodities or futures contracts
• Condominiums - when used as personal residences

Let's now take a closer look at these investments one at a time.

Fixed insurance, endowment or annuities policies

Are excluded from the definition of securities. Let's quote from the USA on this subject;

A security, "does not include an insurance or endowment policy or annuity contract under which an insurance company promises to pay a fixed [or variable] sum of money either in a lump sum or periodically for life or other specified period."

There's quite a discussion in the Official Comments section accompanying the Act about those brackets around the
word "variable". The final conclusion is summed up by the following comment.

"In the view of the North American Securities Administrators Association variable products should be exempted from registration, not excluded from the definition of securities..."

The Comments continue with the following:

"One of the goals of this Act is to align state and federal law. The United States Supreme Court ruled that a variable annuity is a security... More recently, it has been confirmed that variable insurance products are "covered securities" as defined in the National Securities Markets Improvement Act of 1996 (NSMIA)..."

So, what's the difference? Part of the answer goes to the fact that variable insurance and variable life products are structured with separate accounts that are, for practical purposes, investment company products - primarily mutual funds. There are a number of regulatory bodies that govern investment companies and the logic is identical to that which we observed before in NSMIA; there is no need for another level of regulation for a federal covered security.
And, under NSMIA, investment company securities are federal covered securities.

Retirement plans

Are not securities. The 2002 USA says that the term "security" does not include:

"... an interest in a contributory or noncontributory pension or welfare plan subject to the Employee Retirement
Income Security Act of 1974..."

The language is virtually identical to the 1956 USA. Your 401(k), Keogh or IRA may be supported by securities, but the retirement plan itself is not a security. Be aware that the Series 63 exam may try to play tricks with this idea.

Commodities or futures contracts

Are not securities. The last section of the three-part test we looked at earlier is missing in the case of a futures contract. There is no dependence on the management of an outside party in a commodities contract - a commodities futures contract is a two-party contract that calls for the delivery of some tangible commodity, such as gold, corn, soybeans,
etc. to the holder of the futures contract. Be aware however, if the term option is added to a commodities or futures contract, then the instrument becomes a security. This may seem to be trivial, but it may be instrumental to answering
a question correctly. A commodities futures contract is not a security, but an option on that contract is considered a security - the performance is now dependent on the activities of a third party.

Regarding other types of futures contracts, those that depend on the performance of a stock, for example,
the Securities and Exchange Act of 1934 has been amended in recent years to address this subject:

"No provision of any State law regarding the offer, sale or distribution of securities shall apply to any transaction in a security futures product..."

This portion of the federal law preempts the states from regulating securities such as options contracts, e.g.: calls, puts, straddles, spreads etc. Condominiums are not securities when they are a person's residence. When, however, as is often the case, the condominium is a part of a rental pool arrangement - as in a condominium limited partnership - they may be considered securities.

►Viatical Settlements and Definition of Sale

Viatical Settlements

A viatical settlement is a type of investment contract arrangement whereby someone with a terminal disease sells his or her life insurance policy at a discount from its face value for ready cash. The buyer cashes in the full amount of the policy when the original owner dies. Viatical settlement contracts have not yet been strictly defined, by the USA, as securities. They have, however, been addressed - with some concern - by NASAA because of the potential for fraud.

Example:

Question: Bob owns a fancy set of ties, which he considers extremely valuable. He decides to sell the ties on eBay™, putting them up for auction starting at $10,000. Has he created a security by initiating an electronic auction?

Answer: No, because the purchaser of the ties will receive them directly, and no other third party (that we know of) benefited from the transaction, other than eBay™ charging a fee - which does NOT qualify it as a broker-dealer. Please remember the three-part "Howey Test": Investment in a common enterprise - the investor's money is at risk with others.

There is an expectation of a profit from the investment. The expected return is due to the management of a third party.

Sale

Let's review again the definition of "sale" above, which comes from the USA:

"Sale" includes every contract of sale, contract to sell, or disposition of, a security or interest in a security for value, and "offer to sell" includes every attempt or offer to dispose of, or solicitation of an offer to purchase, a security or interest
in a security for value. Both terms include:

a security given or delivered with, or as a bonus on account of, a purchase of securities or any other thing constituting part of the subject of the purchase and having been offered and sold for value;

A gift of assessable stock involving an offer and sale; and a sale or offer of a warrant or right to purchase or subscribe to another security of the same or another issuer and a sale or offer of a security that gives the holder a present or future right or privilege to convert the security into another security of the same or another issuer, including an offer of the other security.

Let's take this from the top: the law must define every term used. If one reads, "An agent who offers securities for sale must be registered...” we must be able to legally define agent, sell/sale/offer to sell and securities. The terms outlined in USA 2002 reaffirm the 1956 USA. If an investor, for example, buys a bond and with the bond, receives warrants ("...constituting part of the purchase...") from the company; the warrant is a part of the sale.

That term, a "...gift of assessable stock..." is more than a little out of tune with the times. Assessable stock has not been traded (or issued) in this country for more than 50 years! Assessable stock was issued at a discount from par value and the owner could be assessed by the company or its creditors for the difference between the purchase price and par. For example: if an investor in the early 1900's bought some assessable railroad stock with a par value of $50 per share but paid $5 per share, here's what could happen: if the company needed money, it could assess the stockholders for up to $45 per share! Today, all stock certificates state: "Full-paid and non-assessable". The drafters of the USA may be quite familiar with securities laws, but they are evidently not so up to date on the securities themselves. Just know that a "gift of assessable stock" is considered a sale.

If an agent sold a client a warrant, a right or an option on securities - as a transaction apart from the stock itself - it is the same as selling the securities themselves. Now, let's take a look at transactions/items which are not considered to be a sale. First, we'll list some of these and then explore them one-by-one.

• A pledge of securities as collateral for a loan
• A stock dividend
• Securities received in exchange as a result of reorganization or merger

This is not a complete list, but represents some of the major points of the law for purposes of the exam.

A pledge of securities as collateral for a loan is

The normal practice in an investor's margin account. The investor is borrowing money to buy stock, using the stock as collateral. The act of pledging the stock as collateral is known as "hypothecation". This term, in the exam, may be associated with the term "lien", since the securities pledged are collateral for the loan.

A stock dividend is not a sale because,

At the time of the payment of such a dividend, there is no transfer for value. Getting a stock dividend is much like
getting four $5 bills for a $20 dollar bill. When those people who own securities of company "A" receive stock from company "B" because of a merger or reorganization, the receipt of those securities by the stockholder doesn't represent a sale or a purchase of securities by the individuals.

►Other Definitions

Let's review a couple of definitions and note how they could appear on the exam. Again, the italicized lines are quotes from the USA.

Issuer

According to the USA: "Issuer" means a person that issues or proposes to issue a security..." By this definition, if a
business - or other person - has begun the process that will result in the sale of securities to the public, it is by law, already considered an "issuer."

Nonissuer Transaction

According to the USA: "Nonissuer transaction" ... means a transaction or distribution not directly or indirectly for
the benefit of the issuer." This is simple enough: if the company gets the money from a transaction; it is an issuer transaction. If the company does not get the money from a transaction - a secondary market trade - then it is
a non-issuer transaction.

Offer to Purchase

According to the USA: "Offer to purchase includes an attempt or offer to obtain, or solicitation of an offer to sell, a security or interest in a security for value."

Unlawful Sale

The USA clearly states that it is "unlawful for a person to offer or sell a security" in a state unless:

• "the security is a federal covered security;"
• "The security, transaction, or offer is exempted from registration;" and or
• "The security is registered under" the USA.

Initial Registration

Before an offer to sell a security can legally be made, a REGISTRANT (the issuer, insider, or the underwriting broker-dealer) must file a registration with the state Administrator. As we noted earlier, the general requirement is that
securities sold in the state must be registered with the state. Of course, there are exceptions to, and exemptions from, this rule. The USA states the following:

"It is unlawful for a person to offer or sell a security in this State unless:

• the security is a federal covered security;
• the security, transaction, or offer is exempted from registration; or
• the security is registered under this [Act]."

The official comment then says that:

"Except for federal covered securities, exempt securities, or securities offered or sold in exempt transactions,
no sale of a security may be made in this State before the security is registered."

Filing fees

Issuers are required to pay filing fees at both initial registration, and at annual re-registration. Filing fees vary from state to state. If a filing fee is not paid (or an issuer fails to comply with a notice from the state), the Administrator may issue a stop order "suspending the offer and sale of a federal covered security".

General filings

The registrant must supply general information to the Administrator regarding the securities including:

• The states where the securities will be solicited or offered.
• Number of securities to being issued.
• Any guidelines or judgments required by the SEC or other administrative or regulatory entity.

Registration Records

Along with the initial registration statement, offerings must be accompanied by (specifically from the USA):

• A copy of the latest form of prospectus filed under the Securities Act of 1933;

• A copy of the articles of incorporation and bylaws or their substantial equivalents currently in effect

• A copy of any agreement with or among underwriters

• A copy of any indenture or other instrument governing the issuance of the security to be registered

• Copies of any other information or any other records filed by the issuer under The Securities Act of 1933 requested by the Administrator

Effective Date

Once the Administrator accepts an offering, it is valid for one year after the date of approval (the effective date). Offerings may be renewed the following year, if the entire issue was not sold.

Effectiveness of Registration Statement

The USA states, "If the federal registration statement becomes effective before each of the conditions is satisfied or is waived by the Administrator, the registration statement is automatically effective ..." The conditions are that of registration records, above.

Periodic Reports

Issuers may be required to file reports "to keep the information or other record in the registration statement reasonably current and to disclose the progress of the offering." The Administrator cannot require reports to be filed more than quarterly.

Post Effective Amendments

A "registration statement may be amended after the effective date" to alter information, or to increase the number of securities to be offered. Of course, on amendment, an issuer may be required to pay a registration fee.

Form of Subscription

An offering may be required to "be sold only on a specified form of subscription or sale contract and that a signed or conformed copy of each contract be filed" with the Administrator.

Escrow and Impoundment

Escrow may be required if the offering is:

• issued within the last five years;
• "to be issued to a promoter for a consideration substantially less than the public offering price..."; or
• to be issued "to a person for a consideration other than cash ..."

Impoundment

Simply means that proceeds from the sale must be put in Escrow until "the issuer receives a specified amount from the sale of the security ..." This is normally in conditional offerings such as all or none, or mini-max.

Offering Outstanding

According to the USA, "Unless the Administrator determines otherwise, a registration statement cannot be withdrawn until one year after its effective date if any securities of the same class are outstanding ..."

Notice Filing

If an issuer deals in exempt securities, the person/entity is only required to file the federal forms with the state Administrator. Of course, all fees must be paid.

The article A New Uniform Securities Act by Richard B. Smith defines Notice Filing as:

"Notice filing under the 2002 Uniform Act is for federal covered securities other than listed securities. This filing consists of a consent to service of process, a filing fee, and (depending on the state securities Administrator's requirements) can include copies of material filed with the SEC. The 2002 Uniform Act provides a platform for eventually effectuating one-stop filing, whereby documents filed with the SEC can be electronically filed with states within which offerings are to be made."

Registration by Coordination

In the article A New Uniform Securities Act by Richard B. Smith, registration by coordination is outlined as follows:

"The objective of coordination is the simultaneous registration of the offering at the SEC and in the states where the offering is to be made. In order to facilitate coordinated registration, the state securities Administrator's association has implemented a system for coordinated review of these offerings by the states."

Under the USA, registration by coordination is for securities that are registered with the SEC, but are not federal covered securities. Securities that may fall under the category include those that do not meet the listing standards of exchanges and/or are upgrading.

Under registration by coordination, the issuer, offeror or broker-dealer underwriting the offering generally needs to supply the Administrator with a long "laundry list" of items regarding the security. Note that it is not necessary to try to memorize these, just recognize that the information to be provided to the Administrator is extensive.

The USA states that registration by coordination is for a "security for which a registration statement has been filed
under the Securities Act of 1933 in connection with the same offering ..." Along with a registration application, issuers must also file (directly from the USA):

• A copy of the latest form of prospectus filed under the Securities Act of 1933;

• A copy of the articles of incorporation and bylaws or their substantial equivalents currently in effect;

• A copy of any agreement with or among underwriters;

• A copy of any indenture or other instrument governing the issuance of the security to be registered;

• A specimen, copy or description of the security;

• Copies of any other information or any other records filed by the issuer under the Securities Act of 1933 requested by the Administrator;

An undertaking to forward each amendment to the federal prospectus, other than an amendment that delays the effective date of the registration statement, promptly after it is filed with the Securities and Exchange Commission.

A registration becomes effective subsequent to the federal registration, if:

• A stop order or proceeding is not pending;

• The registration statement has been on file for at least 20 days; or

• The registration statement has been on file for less than 20 days, due to a rule adopted or order issued under the USA.

If federal registration is met (before all the aforementioned conditions are met), the issuer is obligated to notify the Administrator immediately.

Lastly ...As a side note (though this will probably not be on the test), "the state securities Administrators association has implemented a system for coordinated review of such an offering by the states in which the offering is to be made."

Registration by Qualification

The type of registration that is treated by issuers as the last resort is registration by qualification. The 1956 USA states that:

"Registration permitted. Any security may be registered by qualification."

Simple enough, but then the USA has nearly five pages of data and documents and other information that the registration statement sent to the Administrator must contain. This section of the law is modeled on federal law (i.e., the Securities Act of 1933), and its requirements for information to be sent to the SEC as part of the registration statement.

In general, registration by qualification requires that the following information is submitted to the Administrator:

• For the Issuer and any significant subsidiary
• The issuer's name, address and form of organization
• The State or foreign jurisdiction and date of its organization
• The general character and location of its business
• A description of its physical properties and equipment
• A statement of the general competitive conditions in the industry or business in which it is or will be engaged.

For the directors, officer of the issuer and other person(s) having a similar status or performing similar functions:

• The person's name, address and principal occupation for the previous five years.

• The amount of securities of the issuer held by the person as of the 30th day before the filing of the registration statement.

• The amount of the securities covered by the registration statement to which the person has indicated an intention to subscribe.

• A description of any material interest of the person in any material transaction with the issuer or a significant subsidiary effected within the previous three years or proposed to be effected.

• The aggregate sum of the remuneration paid to those persons during the previous 12 months and what is estimated
to be paid during the next 12 months, (directly or indirectly), by the issuer and all predecessors, parents, subsidiaries
and affiliates of the issuer.

► Corporate Bonds

All above information for a person owning on record or owning beneficially, if known, 10% or more of the outstanding shares of any class of equity security of the issuer. With respect to a promoter, if the issuer was organized within the previous three years, all above information in items (in the first five bullet points) and any amount paid to the promoter within that period, or intended to be paid to the promoter, and the consideration for the payment. No wonder that this
is the method of last resort for companies seeking registration with a state. It is also no surprise that any potential registrant will take advantage of any exemption that the law permits.

A registration by qualification becomes effective, under the USA of 1956:

"A registration statement under this section becomes effective when the Administrator so orders."

The Administrator, of course, has the power to require additional documents and/or data and hold the registration statement until he or she is satisfied with the information provided.

Securities Exemptions

Before we begin this section, it is important to distinguish that there are two different types of exemptions,
according to the USA. The specific types of exemptions are:

Securities exempt from registration, and Transactions exempt from registration.

This may get a little confusing, as there can be both securities and transactions that are exempt, or either can
be exempt individually.

Keep in mind: a security that is not exempt must be registered. Additionally, all transactions that are exempt are
generally known to be exempt before the transaction ever takes place.

Previously we defined those items that are securities and those which are not. The Uniform Securities Act specifies several securities that are exempt from registration requirements and the filing of advertising materials. The law specifically emphasizes that they are not exempt from the anti-fraud provisions of the law. Here's a list of the most important securities exemptions, we'll then follow it up with explanations.

• Government Securities
• Financial Institution Securities
• Public Utility and Common Carrier Securities
• Insurance Company Securities
• Securities Listed on Stock Exchanges
• Not-for-Profit Enterprise Securities
• Commercial Paper
• Options or Warrants

Do these look familiar as exemptions? Sure, earlier, we made a list of exempt securities when we were defining the term, "agent". The statement was that, "If the agent represents issuers of exempt securities..." then the person did not have to register as an agent under the Uniform Securities Act. Those listed above are exempt securities. Now let's look at the logic that underlies this.

Government Securities

Securities issued by levels of government extending from local city municipal bonds through the U.S. government are exempt from regulation except for the anti-fraud laws. This exemption extends to those securities issued by the governments. There is a difference in the way that Canadian government securities and those of other nations are handled under the Uniform Securities Act:

Securities exempt from registration, and transactions exempt from registration.

The next three we can deal with - in one respect - as sharing some of the same characteristics that qualify for exemption.

Financial Institution Securities

Issued or guaranteed by domestic banks, savings and loan associations or credit unions

Public Utility and Common Carrier Securities

Issued or guaranteed by any railroad, common carrier, or utility which is regulated by the Interstate Commerce Commission or state Public Service Commission

Insurance Company Securities

Regulated by state insurance commissions. This does not include the variable products sold by the companies. The logic is that, if an institution is a highly-regulated entity, such as those above, the SEC has already examined their registration and they are also subject to additional oversight. Thus, there is no need for an additional level of regulation.

Securities Listed on Stock Exchanges

Previously, we have defined "federal covered securities" as those that comprise the stocks listed on the exchanges and the NASDAQ. The NSMIA (National Securities Markets Improvement Act) preempts what had been state registration requirements for covered securities. This amendment affects Section 18 of the 1933 Act, and essentially states that offerings of covered securities will be exempt from further registration requirements. This exemption is often called the "blue-chip exemption."

Not-for-Profit Enterprise Securities

Securities issued by persons organized and operated as non-profit or religious organizations are exempt from registration. NASAA has, in recent years been concerned about the potential abuse of this exemption and has worked to ensure that the Administrators have the necessary tools to prevent fraud.

Commercial Paper

Included in this category are instruments that may, on the exam, be called "promissory notes", "banker's acceptances"
or "time drafts". To qualify for an exemption these must meet three conditions:

• Securities issued by the Canadian government and by the municipal governments of Canada are exempt. This would include bonds issued by provinces and cities.

• Securities issued by the national governments of other countries with which the U.S. maintains diplomatic relations
are exempt but not those issued by foreign political entities below the national level.

For example: A city of Toronto municipal bond is exempt from registration under the Uniform Securities Act, but a
bond issued by the city of London, England would not be exempt.

The concept behind the commercial paper exemption is that, if such instruments are short-term, safe investment vehicles in a relatively high denomination, it is unlikely that the general public is at risk from fraud.

Options or Warrants

Within this category are put or call option contracts, warrants, subscription rights on warrants or an option
(or similar derivative security) whose underlying assets is a security (or index) consisting of foreign currency.
These securities qualify for exemption IF they meet the following criteria:

• The maturity cannot exceed 270 days (which is actually the standard)

• The denominations must be $50,000 or more

The instrument must qualify for a safety rating from a service, such as Standard & Poor's (S&P), in the top three categories. In the S&P ratings these are: AAA, AA, A.

Question: May a non-exempt security (one which should be registered) legally be traded in
a state where it is not registered?

Answer: Yes, if it is traded in an exempt transaction.

Exempt Transactions

The Uniform Securities Act specifies a number of transactions by which non-exempt securities may be legally traded without registration. The following is not a comprehensive list but touches on those most likely to be on the Series 63 exam.

Isolated Non-Issuer Transactions

The states define what "isolated" means on a local basis but it is specifically non-recurring. For example: An individual brought stock certificates for PDQ stock to Idaho when he moved from Tennessee. The stock is not registered in Idaho, but he may sell it to his neighbor and the transaction is exempt because the individual is not the issuer and the transaction is "isolated".

Non-Issuer Transactions in Outstanding Securities

This is often called the "manual exemption". If the security being traded is from an issuer that is currently up-to-date on all financial reporting with the SEC, is not experiencing financial difficulties, and is not a "blind pool", or "shell corporation", the transaction is exempt from registration. The securities involved in the transaction must have been in the hands of the public for at least 90 days.

Unsolicited Transactions

These transactions may be effected by, or through, a broker-dealer but are only exempt if they are truly unsolicited.
The broker-dealer may be required by the Administrator to provide proof - a statement by the customer, for example - demonstrating the nature of the transaction.

Fiduciary Transactions

These include sales by executors, Administrators, trustees, receivers, etc. For example, if an executor of an estate liquidates securities of a deceased person in accordance with the person's will, it is an exempt transaction.

Transactions with Financial Institutions

This includes sales to banks, savings institutions, and insurance companies. This exemption goes back to the ideas discussed earlier. The Uniform Securities Act does not place as much emphasis on the protection of institutions as
it does for individual investors.

Private Placement Transactions

Private placements, as the name implies, are not "public" offerings and are not examined as closely by the SEC
as a public offering. A private placement may be made to an unlimited number of accredited investors. However, If a private placement offering is to be exempt from registration under the Uniform Securities Act, there are additional requirements. Relating to offers to non accredited investors. Any offer to non accredited investors must follow these guidelines:

• No more than 10 offers may be made in a twelve-month period.
• No commissions may be paid, directly or indirectly.

The purchase is for the purpose of investment and not resale.Institutional and accredited investors are exempt purchasers for the purpose of these rules.

►Other Exempt Transactions

Federal Covered Securities Transactions

Earlier, we looked at these securities and noted that the federal law that created the term was NSMIA, in 1996.
Review the list again, and be sure to notice that investment companies registered under the Investment
Company Act of 1940 (e.g. mutual funds) are federal-covered securities.

Included as exempt transactions are:

Non-issuer transactions by a federal covered investment adviser

A non-issuer transaction by a federal-covered investment adviser with investments under management in excess of $100,000,000 acting under discretionary authority.

Security Exchange

A transaction where no, or partial, cash is exchanged. This type of transaction is only valid after a hearing and approval by the Administrator. Note: This is not likely to form a Series 63 question, and is provided for informational purposes.

►Transactions between Issuer and Underwriter

Secured Transactions

Transactions secured by a note, bond, mortgage or security agreement, if:

A general solicitation of the transaction is not made, or a commission or other remuneration is not made.

Fiduciary Transactions

A transaction by an executor, administrator of an estate, sheriff, marshal, receiver, trustee in bankruptcy, guardian or conservator.

Sale or offer of sale to:

• An institutional investor
• Federally covered investment adviser
• Any other person exempted by order of the Administrator

Sale by, or on behalf of, an issuer if:

• In a 12-month period, no more than 25 people purchase the security in the state registered.
• A general advertisement or solicitation is not connected to the offer.
• Commission is not paid.
• The issuer believes that purchasers' interest is purely for investment.

►Transactions to Existing Owners

Offer to sell, but not a sale...

Of a security that is not exempt from registration under the Securities Act of 1933, if:

• A registration has not been filed with the state, but is effective at a federal level,
• A solicitation of interest is provided or
• The Administrator has not issued a stop order.

►Transactions between issuers and security holders of another person

Rescission offers

Offers of rescission are defined under civil liabilities.

►Offer of sale to a person from another state.

Transactions of employee stock plans

Stock purchase, savings, option, profit-sharing, pension or other benefit plans for:

• Directors, general partners, trustees, officers, consultants and advisers

• Family members who acquire securities though gifts or domestic relations orders

• Former employees, who were providing services when the securities were offered Insurance agents,
who are exclusive agents of the issuer

Transactions involving:

• A stock dividend
• A judicially approved reorganization

Federal Covered Securities

Federal covered securities are exempt from State registration.

"Federal covered security" means a security that is, or upon completion of a transaction will be, a covered security
under Section 18(b) of the Securities Act of 1933..."

On its own, this isn't a very helpful definition (from the 2002 USA) for folks who aren't lawyers or securities law professionals. More useful are the official comments that are a part of that Law's documentation:

"The National Securities Markets Improvement Act of 1996, as subsequently amended, partially preempted state law in the securities offering and reporting areas... Section 18(b) of the Securities Act of 1933 applies to four types of "covered securities": Securities listed or authorized for listing on the New York Stock Exchange (NYSE), the American Stock Exchange (Amex); the Nasdaq stock market; ... securities issued by an investment company registered with the SEC (or one that has filed a registration statement under the Investment Company Act of 1940)"

Adding to this list, the Official Comments accompanying the USA of 2002 state that:

Under Rule 146 the SEC has designated as federal-covered securities under Section 18(b)(1) Tier I of the Pacific
Exchange; Tier I of the Philadelphia Stock Exchange; and The Chicago Board Options Exchange on condition that the relevant listing standards continue to be substantially similar to those of the New York, American, or Nasdaq stock markets..."

Okay, what does all of this really mean? (You don't have to know that rule number, or what Tier I represents,
by the way). The basic concept is that if the issuer of a security - the corporation - has achieved a level of financial strength and stability sufficient for listing on one of the exchanges or quotation in the NASDAQ system, there is
no need to have it examined by and registered again with the state. This is one of the major securities market simplification thrusts of NSMIA - the elimination of repetitive and duplicate registration.