Exempt Securities

Each exemption below is keyed to the identity or nature of the issuer, not to how the security is later traded. Watch for the specific condition attached to each category. The exam tests the exception as often as it tests the rule.

Which Government Securities Are Exempt?

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.

Are Canadian and Other Foreign Government Securities Exempt?

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 carry no diplomatic-relations test. 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. One condition reaches every security in this category, Canada included: it must be recognized as a valid obligation by the issuer or guarantor. A repudiated obligation is not exempt, so "always exempt" overstates even the Canadian case.

Which Financial Institution Securities Are Exempt?

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

Important limitation for bank, savings and loan, and insurance company securities:

• The exemption applies only if the security represents an interest in, a debt of, or is guaranteed by that institution itself. This condition governs the bank, savings institution and trust company clause, the savings and loan clause, and the insurance company clause. It does not apply to the credit union clause
• 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

What Insurance Company Securities Are Exempt (and What Is Not)?

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 USA's definition of a security); 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."

When Are Railroad, Utility, and Holding Company Securities Exempt?

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 of the United States or any state (note: Canada does not appear in this clause, only in (D))
• (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.

Are Exchange-Listed Securities Still Exempt Under This Provision?

Any security listed or approved for listing upon notice of issuance 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 the Securities Act of 1933's federal-covered-securities preemption, which provides even stronger preemption of state authority.

Which Nonprofit Organization Securities Are Exempt?

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.

What Conditions Exempt 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. The $50,000 denomination and top-3 rating are state-law additions, not federal ones. The federal commercial paper exemption caps maturity at 9 months (270 days) and requires the proceeds fund current transactions, but states no minimum denomination. This state exemption is modeled on the federal one and keeps the 9-month maturity test, but adds the $50,000 minimum and the rating requirement on top of it.

When Are Employee Benefit Plan Securities Exempt?

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
• For a plan that was closed when the Act took effect and is later reopened: notification 30 days before the plan reopens

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

What Should You Check on Exam Day?

• Match each security to its condition, not just its category. A bank's own stock is exempt; certificates a bank issues merely as a conduit are not.
• Insurance means the company's own stock and bonds, never its variable products. Variable annuities and variable life must be registered.
• Canadian government securities skip the diplomatic-relations test that other foreign governments face, but every entry in this category still needs a valid, unrepudiated obligation.
• Commercial paper needs all three conditions at once: 9 months or less, $50,000 minimum denomination, and a top-3 NRSRO rating.
• Employee benefit plan securities are exempt only with 30 days' prior written notice to the Administrator, not merely because they are benefit-plan securities.