A land deed can represent a securities investment, while an insurance contract promising lifelong payments can fall outside the definition.
When a customer brings you an unfamiliar product, identify the rights it creates before deciding which securities rules apply. A security is an investment instrument within the Act's definition, including ownership interests, debt obligations, and certain arrangements for sharing profits.
The Uniform Securities Act of 1956 casts a wide net. Its definition of securities includes familiar investments and documents representing interests in other investments. Use these groups to recognize the instruments named in §401(m):
- Debt instruments: Notes, bonds, debentures, and other evidence of indebtedness represent obligations to repay borrowed money. A promissory note records a repayment promise.
- Ownership interests: Stocks represent ownership in a corporation. Treasury stock consists of previously issued shares that the corporation reacquired. Transferable shares are ownership interests that holders can transfer to others.
- Profit-sharing and preorganization interests: Profit-sharing interests give investors participation in an enterprise's profits. Preorganization certificates or subscriptions document participation or commitments to invest before a business is fully organized.
Common mistakes
- Treating a nine-month promissory note as outside the definition of securities. Short maturity can matter to an exemption, but it is not a definition exclusion.
- Calling a variable annuity payment fixed because it arrives monthly. Only a promised dollar amount fits the exclusion.
- Treating a deed to one grove plot as proof that no security exists. Analyze the accompanying profit-sharing and management arrangement.
Bottom line
- Section 401(m) includes debt, ownership, profit-sharing, trust, resource participation, investment-contract, and related security interests.
- Fixed insurance, endowment, and annuity promises are excluded; variable annuities dependent on separate-account securities results are securities.
- Section 402(a)(5) exempts insurer-issued securities from registration, but its proviso denies that exemption to variable annuities.
- Howey investment contracts involve money, a common enterprise, expected profits, and the efforts of others.
Exam shortcut
First identify the question's target: the investment, the issuer, or the transaction. Eliminate answers that resolve a different target. For an unfamiliar product, underline the customer's rights and the source of expected returns. For insurance, inspect the payment amount's basis before considering its frequency. When a trust holds another company's securities, circle the specific instrument being sold. Then consult the governing duties for that instrument.
The full lesson (about 2,934 words, 20 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- E7
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