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A covered security is exempt from certain state regulations under United States federal law. These securities are traded nationally and exemption streamlines the trading process to make it easier and more efficient to exercise trades, facilitating healthy market conditions. For a security to qualify, it needs to meet some specific criteria, to ensure that securities subject to more regulation aren’t inadvertently included in this category. The criteria used to determine if something qualifies as a covered security are subject to update by acts of legislation in the event needs change over time and legislators choose to respond.
The decision to create a covered security category for regulatory purposes was made in 1996 as part of the National Securities Market Improvement Act. This legislation amended the Securities Act of 1933, a landmark piece of legislation passed in response to concerns about US financial markets and the Great Depression. Changing the original legislation provided room for new financial products and modes of doing business that were no longer adequately covered under the 1933 law.
These securities are traded on a national stock exchange overseen by the Securities and Exchange Commission (SEC). In addition, securities considered equal or in seniority to those that are considered covered under this standard also meet the requirements, as do those issued by certain investment companies, and those bought by qualified purchasers. This term is defined by the SEC, allowing streamlined trades for institutional and certain other investors who are able to assess risk and take on more complex financial products than average investors.
Covered securities are not subject to state registration requirements, although federal law still holds. This can make it easier to trade a covered security on a national level, as investors primarily need to concern themselves with federal regulations. At a brokerage or investment firm, legal staff members may take care of these issues on behalf of the company, allowing traders to focus on actually executing trades. Individuals need to make sure they adhere to the laws pertaining to trading activity to avoid fines or other problems.
If investors are not sure about whether something is a covered security, they can check the documentation. This is also of concern to issuers, who may handle their securities differently depending on their status. Securities exempt from state regulations may be more freely traded and marketed, as long as the company conforms with national requirements designed to protect investors and the public.
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