Exempt Securities

Now that you understand the exemption framework, let's look at the specific securities that are exempt from registration under Section 402(a) of the Uniform Securities Act (USA). Each exemption is based on the identity or nature of the issuer. The exemption travels with the security regardless of who is selling it or how.

Government Securities

Any security (including a revenue obligation) issued or guaranteed by:

• The United States government
• Any state
• Any political subdivision of a state (counties, cities, municipalities)
• Any agency or instrumentality of any of the above
• Any certificate of deposit for any of the above

This exemption covers:

• U.S. Treasury securities (bills, notes, bonds)
• Municipal bonds (both general obligation and revenue bonds)
• Government agency securities (e.g., Ginnie Mae)

The parenthetical "including a revenue obligation" makes clear that both general obligation bonds and revenue bonds are exempt.

Canadian and Foreign Government Securities

Any security issued or guaranteed by:

• Canada, any Canadian province, any political subdivision of a Canadian province
• Any agency or instrumentality of the above
• Any other foreign government with which the U.S. currently maintains diplomatic relations

Key conditions:

• The security must be recognized as a valid obligation by the issuer or guarantor
• A foreign government security is exempt only if the U.S. maintains diplomatic relations with that government
• If diplomatic relations are severed, the exemption is lost

Exam Tip: Gotchas

Canadian government securities are specifically called out and are always exempt. Other foreign government securities are exempt only if the U.S. currently maintains diplomatic relations with that country. If a question involves a foreign government security, check whether diplomatic relations exist.

Financial Institution Securities

Securities issued by regulated financial institutions are exempt because these entities are already heavily supervised.

Important limitation for bank securities:

• The exemption applies only if the security represents an interest in, a debt of, or is guaranteed by the bank itself
• A bank's own stock or bonds are exempt
• Certificates of deposit issued by a bank representing deposits at that bank are exempt
• If a bank merely acts as a conduit (e.g., a bank acting as a depository issues certificates for a reorganization committee), those certificates do NOT represent an interest in the bank and are NOT exempt

Insurance Company Securities

Any security issued by and representing an interest in or a debt of, or guaranteed by, any insurance company organized under state law and authorized to do business in the state.

Critical exception: This exemption does NOT apply to:

• Variable annuities
• Variable life insurance
• Any similar security where payments depend on investment results of a segregated fund

The distinction:

• Fixed annuities and traditional insurance policies are not securities at all (excluded from the definition in Section 401(l)); they don't need this exemption
• Insurance company stocks and bonds are securities that ARE exempt under this provision
• Variable products ARE securities but are NOT exempt; they must be registered

Exam Tip: Gotchas

The insurance company exemption covers the company's own stock and bonds, NOT its variable products. A variable annuity is a security that must be registered. The exemption explicitly excludes securities "under which the promised payments are not fixed in dollars."

Railroad, Public Utility, and Holding Company Securities

Any security issued or guaranteed by a railroad, common carrier, public utility, or holding company is exempt if the entity meets any one of these conditions:

• (A) Subject to the jurisdiction of the Interstate Commerce Commission
• (B) A registered holding company under the Public Utility Holding Company Act of 1935 (or a subsidiary)
• (C) Regulated in respect of its rates and charges by a governmental authority
• (D) Regulated in respect of the issuance or guarantee of the security by a governmental authority of the U.S., any state, Canada, or any Canadian province

The rationale: these entities are already heavily regulated by another government authority, so requiring state securities registration would be redundant.

Exchange-Listed Securities

Any security listed or approved for listing on certain designated stock exchanges is exempt. Also exempt:

• Any other security of the same issuer that is of senior or substantially equal rank
• Any security called for by subscription rights or warrants so listed
• Any warrant or right to purchase or subscribe to any of the foregoing

Important: This exemption has been largely superseded by the National Securities Markets Improvement Act (NSMIA). Exchange-listed securities are now federal covered securities under Section 18(b)(1) of the Securities Act of 1933, which provides even stronger preemption of state authority.

Nonprofit Organization Securities

Any security issued by a person organized and operated not for private profit exclusively for:

• Religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes
• Chambers of commerce, trade associations, or professional associations

The issuer must be organized and operated NOT for private profit. If the organization has a profit motive, this exemption does not apply.

Exam Tip: Gotchas

Nonprofit securities are exempt from registration, but they are NOT exempt from antifraud provisions. A church that sells bonds to raise money for a new building does not need to register those bonds, but it cannot make fraudulent misrepresentations about the offering.

Commercial Paper

A promissory note, draft, bill of exchange, or bankers' acceptance is exempt if ALL three conditions are met:

Also exempt: a renewal that meets the same conditions, or a guarantee of such an obligation.

All three conditions must be satisfied - if any one fails, the exemption is lost.

Exam Tip: Gotchas

A 6-month note for $10,000 is NOT exempt (fails the $50,000 minimum). A 12-month note for $100,000 is NOT exempt (exceeds 9 months). All three conditions (maturity, denomination, and rating) must be met simultaneously.

Employee Benefit Plan Securities

Any investment contract issued in connection with an employee stock purchase, savings, pension, profit-sharing, or similar benefit plan is exempt if:

• The Administrator is notified in writing 30 days before the inception of the plan
• For plans already in effect when the Act takes effect: notification within 60 days thereafter

The key requirement is prior written notification to the Administrator. The exemption is conditioned on giving this notice.