1.1. Securities and Non-Securities

Prior to the Great Depression, the securities markets were largely unregulated, and people who invested in securities often did so with little knowledge of what they were investing in. Reliable information was scarce. The situation was made worse by the common practice of buying on margin (debt), often by investors who couldn’t afford to take large losses. Uninformed investing and debt-financed speculation built a house of cards that came crashing down in 1929. In the 1930s, the Roosevelt administration and a reform-minded Congress responded with a wave of legislation to regulate the financial industries. The following major pieces of legislation would change the securities markets forever.

But before we learn about the rules related to securities, let’s define the word security. At its most basic level, a security represents a claim on an asset. The U.S. Supreme Court added detail to that definition when, with “The Howey Decision,” it came up with four characteristics that define a security. The decision states that a security involves (1) an investment of money that (2) involves a common enterprise (3) in which the investors expect to make a profit, and (4) the profits will be derived from the efforts of someone other than the investor. This definition will help you to determine whether a particular example on the exam is a security or not.

Specific examples of securities include:

• Stock (preferred or common shares, treasury stock)

• Bonds (corporate or government)

• Mutual funds (regardless of what it invests in)

• Options (puts, calls, etc.)

• Oil and gas partnerships

• Certificates of deposit for a security (American Depository Receipts (ADRs) and Global Depository Receipts (GDRs))

• Voting trust certificate

• Warrants or Rights for a security

• Pass-through certificates (mortgage-backed securities, collateralized mortgage obligations (CMOs))

• Investment con