Financial Industry Regulatory Authority (FINRA) Practice Exam

Which security is exempt from registration under the Securities Act of 1933?

1. Common stock

2. Municipal bonds

3. Investment company shares

4. Corporate debt securities

The correct answer is: Municipal bonds

Municipal bonds are exempt from registration under the Securities Act of 1933 because they are issued by state and local governments. The rationale for this exemption is that these entities are generally considered to have a lower risk of default compared to corporate issuers, and they serve public interest by financing projects beneficial to the community, such as schools and infrastructure. Other securities, such as common stock, investment company shares, and corporate debt securities, typically require registration unless they qualify for a specific exemption under the Act. These securities are seen as having a greater potential for risk and therefore are subject to more stringent disclosure requirements to protect investors. In contrast, municipal bonds have a unique status due to the nature of their issuers and the benefits they provide, enabling them to avoid the registration process.