For individuals preparing for the FINRA Securities Industry Essentials® (SIE®) Exam, it is crucial to have a clear understanding of SEC Rule 144, which regulates the sale of restricted and control securities. This article focuses on giving you a foundational grasp of these regulatory requirements, facilitating your preparation for success in both the exam and as a seasoned industry professional.
Detailed Explanations
What is SEC Rule 144?
SEC Rule 144 provides a safe harbor under the Securities Act of 1933 for sellers of restricted or control securities. This rule permits the public resale of these securities without registration under certain conditions, mitigating the usual regulatory burdens associated with such transactions.
- Restricted Securities: These are securities acquired in unregistered, private sales from the issuing company or from an affiliate of the issuer.
- Control Securities: These refer to securities held by an affiliate of the issuing company, such as an executive or a board member.
Holding Period Requirements
When dealing with restricted securities, SEC Rule 144 mandates a predefined holding period before selling. Let’s look at the specifics:
- For Public Companies: A minimum holding period of six months.
- For Non-Public Companies: A minimum holding period of one year.
The holding period begins from the date the securities were fully paid for.
Volume Limitations
Control securities are subject to volume limitations that restrict the number of shares or the aggregate market value that can be sold. These limitations cover the following:
- Equity Securities: During any three-month period, an affiliate may sell the greater of 1% of the total outstanding shares of the same class or the average weekly reported trading volume during the four weeks preceding the sale.
To visualize how volume limitation computations work, consider the following example:
| Period |
Total Outstanding Shares |
Weekly Trading Volume |
Maximum Permissible Sale |
| January |
1,000,000 |
15,000 |
10,000 (1% of total) vs. 15,000 (avg. trading vol.) |
| February |
1,000,000 |
12,500 |
10,000 vs. 12,500 |
In this scenario, the greater volume among the calculations would be applicable and permissible for sale.
Real-Life Examples
Imagine a company executive (an affiliate) who acquired 50,000 shares through private sales—making these shares restricted. By adhering to SEC Rule 144, this person must hold these shares for six months and, when selling, is limited in volume per the rule’s calculation methods.
Visual Aids
Visual aids like flowcharts and graphs can significantly assist in understanding complex rules such as SEC Rule 144:
graph TD;
A[Affiliate Plans to Sell Restricted Securities] --> B[Holding Period Requirement Met?];
B -->|Yes| C[Check Volume Limitations];
C --> D{Greater of Volume Formulas};
D --> E[Proceed with Sale if Limits Aren't Exceeded];
B -->|No| F[Continue to Hold Until Requirements are Met];
Summary Points
- SEC Rule 144 governs the sale of restricted and control stock.
- A holding period is required for restricted securities (6 months for public companies, 12 months for non-public).
- Control securities are subject to volume limitations in their sale.
- Compliance ensures no registration requirement under these regulations.
Glossary
- Restricted Securities: Securities acquired in unregistered private sales.
- Control Securities: Shares owned by company affiliates.
- Affiliate: A person in a relationship of control with the issuing company.
- Securities Act of 1933: Legislation providing for the registration of securities sales.
Additional Resources
- Books: “Securities Regulation: Examples and Explanations” by Stephen J. Choi
- Online Resources: SEC.gov for rule updates and extensive directives on securities transactions.
- Websites: FINRA for more educational articles and industry updates.
Quizzes
Prepare yourself through this interactive quiz session that covers the highlights and critical aspects of this chapter.
### What are restricted securities?
- [x] Securities acquired in unregistered private sales.
- [ ] Securities that have not been sold for over two years.
- [ ] Government bonds held by foreign entities.
- [ ] Municipal bonds issued in non-public sales.
> **Explanation:** Restricted securities are typically acquired in a manner not requiring registration under the Securities Act of 1933, often through private transactions.
### Which of the following statements is correct regarding control securities?
- [x] They are subject to volume limits on public sales.
- [ ] They can be sold publicly without restrictions.
- [x] They are often owned by company insiders.
- [ ] They are primarily bonds.
> **Explanation:** Control securities are typically held by insiders and are restricted by volume limitations when sold publicly, unlike unrestricted shares.
### What is the minimum holding period for restricted securities in a public company?
- [x] Six months.
- [ ] One year.
- [ ] Three months.
- [ ] Immediate sale with no restrictions.
> **Explanation:** For public company securities, Rule 144 requires a minimum six-month holding period after purchase before the securities can be publicly sold.
### What is the maximum sale limit for control securities each quarter?
- [x] The greater of 1% of total outstanding shares or the last four weeks' average weekly trading volume.
- [ ] 5% of outstanding shares.
- [ ] Up to 10% of shareholder’s total holdings.
- [ ] Four times the highest trading volume recorded in the prior month.
> **Explanation:** Rule 144 specifies either 1% of total outstanding shares or the average of the prior four weeks' trading volume, whichever is greater.
### Which of the following is performed during a volume limitation assessment?
- [x] Calculation using trading volume averages.
- [ ] Insight gathering on shareholder intentions.
- [x] Consideration of shares outstanding.
- [ ] Review of dividend yields.
> **Explanation:** Volume limitation eligibility is determined by calculating the greater of 1% shares outstanding or an average weekly trading volume assessment.
### What role does SEC Rule 144 primarily target?
- [x] It regulates the sale of restricted and control securities.
- [ ] It enforces tax reporting under the Securities Act of 1933.
- [ ] It governs transaction fees on all stock sales.
- [ ] It adjusts dividend payout schedules.
> **Explanation:** Rule 144 specifically addresses transactions involving the sale of restricted and control securities per regulations bound by the Securities Act of 1933.
### Who can be considered an affiliate of a company?
- [x] An executive officer.
- [ ] A retail customer.
- [x] A board member.
- [ ] A municipal bondholder.
> **Explanation:** Affiliates include people in positions of control like executives and board members; this affects the type of securities they handle in relation to Rule 144.
### Which document can reaffirm the status of a restricted security?
- [x] An opinion letter from an attorney.
- [ ] A dividend declaration notice.
- [ ] An SEC ledger book.
- [ ] A corporate project's commencement report.
> **Explanation:** A legal opinion might be needed to identify security statuses, especially when evaluating eligibility for sale under Rule 144 provisions.
### Where can one check the details of SEC Rule 144?
- [x] On the SEC's official website.
- [ ] In local retail banks.
- [ ] At bondholder meetings.
- [ ] On animal preservation websites.
> **Explanation:** The SEC's official site provides exhaustive details and regulations on Rule 144, offering critical compliance guidelines for professionals.
### True or False: Control securities are exempt from both volume and holding period limitations under SEC Rule 144.
- [x] False
- [ ] True
> **Explanation:** False. Control securities are subject to volume restrictions under Rule 144, though not holding periods as it applies to affiliates already owning fully paid securities without the restricted label.
Study the provided materials and take the quizzes to reinforce your understanding as you prepare for the Securities Industry Essentials Examination. These insights not only guide you in passing the exam but also in navigating real-world securities transactions effectively.