Common Mistakes to Avoid
Watch out for these exam traps that candidates frequently miss on Regulation of Securities and Issuers questions:
Confusing exempt securities vs exempt transactions
Forgetting government securities are typically exempt
Not understanding Reg D private placement rules
Sample Practice Questions
Which of the following securities is exempt from state registration requirements?
A is correct. Commercial paper with a maturity of 270 days or less and denominations of at least $50,000 is an exempt security. The 180-day maturity meets this requirement, making it exempt from registration based on what the security is.
B (Bank holding company securities) is incorrect because while direct bank securities are exempt, bank holding company securities are NOT exempt. C (Limited partnership interests) is incorrect because these are not exempt securities and typically require registration unless sold through an exempt transaction. D (Local manufacturing stock) is incorrect because corporate stock is generally not exempt and requires registration unless it qualifies for an exemption.
Understanding exempt securities is crucial for the Series 65 exam. Remember the key distinction: exempt securities are based on WHAT the security IS (nouns), not how it's sold. Government securities, municipal bonds, and short-term commercial paper are always exempt. This question tests the common mistake of confusing bank securities (exempt) with bank holding company securities (not exempt). Exam tip: if you see "bank holding company," it's NOT exempt.
An investor calls her broker-dealer and requests to purchase shares of a speculative penny stock. This transaction would be considered:
B is correct. When a customer initiates a purchase request without solicitation from the broker-dealer, this is an unsolicited transaction, which is an exempt transaction. The exemption is based on HOW the security is sold, not what it is.
A (Exempt security) is incorrect because penny stocks are not exempt securities. The security itself still requires registration; only the transaction is exempt. C (Federal covered security) is incorrect because penny stocks are not federal covered securities. D (Violation of suitability) is incorrect because unsolicited transactions are permissible even if the investment might not otherwise be suitable, as long as the customer initiated the trade.
This addresses the #1 common mistake: confusing exempt securities versus exempt transactions. Exempt securities are nouns (what it IS), while exempt transactions are verbs (HOW it's sold). An unsolicited order exempts the transaction from registration requirements, but the security itself may not be exempt. The exam frequently tests this distinction with scenarios where unsuitable securities are purchased through unsolicited orders. Remember: unsolicited transactions are exempt even if the security isn't. See also: suitability.
All of the following are exempt securities under the Uniform Securities Act EXCEPT
D is correct. REITs are corporations that invest in real estate, and their securities must be registered unless sold through an exempt transaction. REIT shares are not exempt securities.
A (US Treasury bonds) is incorrect because all US government securities are exempt based on federal backing. B (Municipal bonds) is incorrect because securities issued by state and local governments are exempt. C (Canadian government bonds) is incorrect because Canadian government securities are exempt under reciprocity agreements between the US and Canada.
This tests your knowledge of which securities are automatically exempt. The exam loves testing government securities (federal, state, local, and Canadian) because they're always exempt. REITs, despite investing in real estate, issue securities that require registration. This connects to the common mistake of forgetting that government securities are typically exempt. Memory trick: exempt securities include governments (US, state, Canadian), banks, nonprofits, utilities, and short-term commercial paper.
Under Regulation D Rule 506(b), a private placement may be sold to:
C is correct. Regulation D Rule 506(b) allows sales to an unlimited number of accredited investors plus up to 35 sophisticated (but non-accredited) investors. Sophisticated means they have knowledge and experience to evaluate the investment.
D (Non-accredited investors) is incorrect because while the number is correct (35), the term must be "sophisticated" investors, not just any non-accredited investor. They must have the ability to evaluate the investment's merits and risks. A (Only accredited) is incorrect because this describes Rule 506(c), not 506(b). B (Up to 10 non-institutional) is incorrect because this describes the state-level private placement exemption, not federal Regulation D.
Regulation D questions appear frequently on the Series 65 exam. The key distinction between 506(b) and 506(c) is critical: 506(b) allows 35 sophisticated non-accredited investors but NO general solicitation, while 506(c) allows general solicitation but only to verified accredited investors. This addresses the common mistake of not understanding Reg D private placement rules. Study tip: think "506(b) = 35 sophisticated, no ads" and "506(c) = accredited only, can advertise."
Which of the following individuals would qualify as an accredited investor?
D is correct. Individuals who hold Series 7, Series 65, or Series 82 licenses in good standing qualify as accredited investors based on their professional credentials, regardless of their income or net worth.
A ($1.2M net worth with $500K residence) is incorrect because net worth must exclude the primary residence, leaving only $700,000, which is below the $1,000,000 threshold. B ($280,000 joint income) is incorrect because while the income is close, it doesn't meet the $300,000 joint income requirement for the past two years. C ($180,000 income, $900,000 net worth) is incorrect because the individual needs either $200,000 income OR $1,000,000 net worth excluding primary residence. This person meets neither threshold.
Accredited investor definitions are tested heavily on the exam because they determine who can participate in private placements. The income test requires $200,000 individual or $300,000 joint for the past two years with expectation of the same going forward. The net worth test requires $1,000,000 EXCLUDING primary residence. The license-based qualification (Series 7, 65, or 82) was added more recently and is a common exam trap for those using outdated study materials.
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Access Free BetaA mutual fund is preparing to offer new shares to the public. Which of the following statements is TRUE regarding registration requirements?
A is correct. Mutual funds are federal covered securities because they are SEC-registered investment company securities. While they must register with the SEC, they only need to submit notice filings (not full registration) with the states and pay state fees.
D (Register with states) is incorrect because federal covered securities are exempt from state registration requirements, though notice filing is still required. B (Exempt from all registration) is incorrect because mutual funds must register with the SEC under the Investment Company Act of 1940. C (Only states with offices) is incorrect because notice filing requirements apply to all states where the fund will be sold, not just where it has offices.
Federal covered securities are an important exam topic that tests your understanding of federal preemption. SEC-registered investment company securities (mutual funds, ETFs) are federal covered and exempt from state registration, but states retain the right to require notice filings and collect fees. States also retain antifraud enforcement authority. This concept appears in scenarios about fund distribution and compliance requirements.
An investment adviser sells unregistered securities to a client through a private placement exemption. Which of the following statements is TRUE?
B is correct. There are NO exemptions from antifraud provisions. Even when securities or transactions are exempt from registration requirements, they are always subject to antifraud rules under both state and federal law.
A (Exempt from antifraud) is incorrect because this is never true. Antifraud provisions apply to all securities and transactions without exception. C (Only if value declines) is incorrect because antifraud rules apply at all times, regardless of investment performance. D (Only state antifraud) is incorrect because both state and federal antifraud provisions apply to all securities transactions.
This is a critical concept that appears on virtually every Series 65 exam. Many candidates incorrectly assume that exempt securities or exempt transactions are also exempt from antifraud rules. Remember this absolute rule: antifraud provisions ALWAYS apply. There are no exceptions, exemptions, or special circumstances. Whether it's an exempt security, exempt transaction, federal covered security, or private placement, antifraud rules still govern the sale. This protects investors even in transactions that don't require registration.
Under the Howey Test, which of the following would most likely be considered a security?
B is correct. A limited partnership interest meets all four elements of the Howey Test: (1) investment of money, (2) common enterprise (pooled funds), (3) expectation of profits, and (4) profits solely from efforts of others (the general partner manages the properties).
A (Fixed annuity) is incorrect because fixed annuities are not considered securities. The insurance company bears the investment risk, not the investor. Variable annuities are securities, but fixed annuities are not. C (Bank CD) is incorrect because bank CDs and savings accounts are not securities; they're banking products regulated separately. D (Direct ownership rental) is incorrect because direct real estate ownership fails the "efforts of others" test since the owner manages the property.
The Howey Test defines what constitutes a security and appears regularly on the exam. All four elements must be present: investment of money, common enterprise, expectation of profits, and profits from efforts of others. Limited partnerships are securities because investors rely on the general partner's efforts. General partnership interests are NOT securities because general partners actively manage. This distinction helps you identify which products require securities registration and which fall under other regulatory schemes.
The Securities Act of 1933 primarily regulates:
C is correct. The Securities Act of 1933 (the "Paper Act" or "Prospectus Act") regulates the primary market, focusing on new issues of securities. It requires registration of new securities offerings and mandates prospectus delivery to investors.
A (Secondary market) is incorrect because secondary market trading is regulated by the Securities Exchange Act of 1934, not the 1933 Act. B (Broker-dealers and agents) is incorrect because these are also regulated by the 1934 Act, which created the SEC and established registration requirements for market participants. D (Investment advisers) is incorrect because investment advisers are regulated by the Investment Advisers Act of 1940.
Understanding the difference between the 1933 and 1934 Acts is fundamental to securities regulation. Memory aid: 1933 = "Paper Act" (prospectus/new issues/primary market) and 1934 = "People and Places Act" (broker-dealers, exchanges, SEC creation/secondary market). The exam often presents scenarios where you must identify which law applies. Questions about IPOs and prospectus delivery reference the 1933 Act, while questions about trading and broker-dealer conduct reference the 1934 Act.
A state Administrator is reviewing a private placement that will be offered to 8 institutional investors and 12 retail investors within the state over a 12-month period. For this offering to qualify as an exempt transaction under state law:
A is correct. Under state law, private placement exemptions typically require that the offering be made to no more than 10 non-institutional investors in a 12-month period with no commissions paid. Since there are 12 retail investors (exceeding the 10-person limit), the only way this could still qualify is if no commissions are paid, though this scenario would likely not qualify for the exemption.
B (Accredited investors only) is incorrect because state private placement exemptions don't necessarily require accredited investor status, just a limit on the number of non-institutional investors. C (Federal covered) is incorrect because the question asks about state law exemptions, not federal covered status. D (Notice within 10 days) is incorrect because while some states may require notice filings, this is not the defining requirement for the private placement exemption.
State private placement exemptions have different requirements than federal Regulation D. State law typically limits offerings to 10 or fewer non-institutional investors in 12 months with no commission payments. Federal Reg D 506(b) allows up to 35 sophisticated investors. Don't confuse these two different private placement frameworks. The exam tests whether you understand that state and federal exemptions have different rules and both may apply to a transaction depending on circumstances.
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