Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What characterizes an exempt security?

1. A security that is automatically approved by the SEC

2. A security not required to be registered with the SEC

3. A security that guarantees high returns

4. A security that can only be traded in the primary market

The correct answer is: A security not required to be registered with the SEC

The correct choice highlights that an exempt security is defined as a security that is not required to be registered with the Securities and Exchange Commission (SEC). This exemption from registration is often granted to specific types of securities, such as government bonds, municipal bonds, and certain private placements. The premise behind this exemption is that these securities are deemed to carry lower risks or are sold to more sophisticated investors who do not require the same protections as the general public. By eliminating the need for registration, exempt securities benefit issuers by reducing the associated costs and regulatory burdens, thereby fostering market efficiency. Investors may be attracted to these securities for their potential advantages, such as favorable tax treatment or lower transaction costs. However, they should also be cautious, as the lack of registration means there might be less publicly available information regarding the investment’s performance and risks. Understanding this characteristic is crucial for anyone involved in securities and investments, as it shapes how the market functions and informs investment strategies.