Uniform Securities Act

An agent reviews four holdings a new client already owns. Under the Uniform Securities Act, which one is NOT a security?

1. A.Common stock of a privately held corporationThis is a security. Stock is a security whether or not the issuer is publicly traded.
2. B.A fixed annuity contract issued by an insurance companyCorrect - this is NOT a security. The insurer guarantees the return and bears the investment risk, making it an insurance product regulated by the state insurance department.
3. C.A variable annuity contract funded through a separate accountThis is a security. The contract owner bears the investment risk of the separate account's performance.
4. D.A certificate of interest in an oil and gas drilling programThis is a security. Fractional interests in oil, gas, or mining titles are expressly named in the definition.

Why: A fixed annuity is not a security. The insurance company guarantees a stated rate of return and bears the investment risk itself, so the purchaser is buying an insurance product rather than taking on investment risk. Fixed annuities are regulated by state insurance departments. By contrast, variable annuities are securities, because the contract owner bears the investment risk of a separate account. Stock and certificates of interest in an oil and gas program are both squarely within the definition. The clue is the word fixed. Review the topic on the definition of a security.

Cardiff Exploration sells investors written certificates each representing a fractional undivided interest in the royalties from an oil and gas lease the company operates. Investors take no part in drilling or operations. Under the Uniform Securities Act, these certificates are:

1. A.Securities only if Cardiff Exploration is itself registered with the SEC as a reporting companyWhether an instrument is a security has nothing to do with the issuer's SEC reporting status.
2. B.Not securities, because the certificates represent an interest in a physical commodity rather than in a companyThe definition covers interests in oil, gas, and mining titles and leases regardless of the underlying asset's physical nature.
3. C.Securities, because the definition expressly includes certificates of interest in an oil, gas, or mining title or leaseCorrect. The statute names these instruments, and the investors' passive role fits the pattern the definition targets.
4. D.Not securities, because royalty payments are contractual rights rather than investment returnsLabeling the payments contractual does not remove an instrument the statute expressly lists.

Why: The Act's definition of security expressly includes a certificate of interest or participation in an oil, gas, or mining title or lease, or in payments out of production under such a title or lease. Passive investors relying on the operator's efforts is the classic pattern.

Kesterly Materials completed a securities registration in State N that became effective on May 12. No amendment is filed, no stop order is entered, and the underwriter completes the distribution promptly. Under the Uniform Securities Act, the registration statement remains effective until:

1. A.One year from its effective dateCorrect. A securities registration statement under the Act is effective for one year from the date it became effective.
2. B.December 31 of the year in which it became effectiveThis is the annual expiration for persons such as broker-dealers and agents, not for a securities registration.
3. C.Ninety days from its effective dateThere is no ninety-day expiration for an effective securities registration under the Act.
4. D.Indefinitely, unless the Administrator revokes itRegistration statements expire on their own terms. Revocation is a separate remedy, not the only way effectiveness ends.

Why: Under the Uniform Securities Act a securities registration statement is effective for one year from its effective date, so Kesterly's runs until the following May 12. Registration statements for securities are dated from effectiveness; they do not follow the calendar-year cycle that governs the registrations of broker-dealers, agents, investment advisers, and investment adviser representatives.

Under the Uniform Securities Act, the term sale or sell includes:

1. A.Only advice about securitiesGiving advice for compensation is what defines investment adviser activity, a separate category entirely. A sale requires that the security itself change hands for value, which advice alone never accomplishes.
2. B.Any contract to dispose of a security for valueCorrect - disposition for value is a sale.
3. C.Only fully completed transfersThis is the strongest of the three, since a completed transfer plainly is a sale. The word only is what breaks it: the definition also captures the contract to dispose of a security, so the obligations attach when the parties agree rather than waiting for settlement.
4. D.Only giftsA gift generally lacks the element of value the definition requires, and more importantly the word only excludes ordinary paid transactions, which are the central case the term was written to cover.

Why: A sale is any contract or disposition of a security for value.