Exclusions

The overall cost of registration can be high (in terms of time and money), especially for larger financial firms with hundreds or thousands of employees. There are several ways an individual may avoid the agent registration process, even if operating like one. The exclusions discussed in this chapter exist when a person does not meet the legal definition of an agent, resulting in no registration requirements. There are five specific exclusions we’ll cover:

• Clerical roles
• Institution rule
• Vacation (snowbird) rule
• Representing an issuer during certain transactions
• Facilitating an employee benefit plan

Clerical roles

While it can be safely assumed most broker-dealer employees will be required to register as agents, clerical employees can generally avoid this process. There are many different words and roles used to describe a clerical-type job, including:

• Secretary (secretarial)
• Ministerial
• Administrative assistant
• Receptionist
• Clerk

When a broker-dealer employee does not operate as an agent, they can avoid registration as one. Let’s refresh ourselves with the legal definition of an agent:

If the employee is not facilitating securities trades, attempting to facilitate trades, or discussing the risks or benefits of securities, they are not operating as an agent. The functions of clerical personnel typically include:

• Answering phone calls or emails (general inquiries)
• Greeting clients at an office
• Setting appointments with agents
• Sending statements to customers
• Providing quotes on securities
• Providing account balances
• Filing client records

An employee may have a clerical-sounding position (e.g., secretary), but their title doesn’t automatically exclude them from registration. For example, let’s assume a secretary at a broker-dealer typically answers general questions and sets appointments for agents. An investor calls in to place a trade, but no registered agents are in the office. The secretary takes the order and executes it on behalf of the customer.

This action would be a violation of the Uniform Securities Act (USA). When a person acts as an agent, they must either be registered or have a legitimate reason for not being registered (one of the exclusions mentioned in this chapter). Once a clerical employee begins acting like an agent, they lose the clerical exclusion (if it walks like a duck and quacks like a duck, it’s a duck).

In addition to avoiding agent-specific functions, clerical employees may not be paid like an agent. Therefore, they cannot collect any compensation related to a securities transaction (e.g., a commission). However, they can be paid bonuses from overall business profits if the reward is not directly tied to any specific securities transaction(s).

Institution rule

In a previous chapter, we learned how broker-dealers have an institution exclusion. If a broker-dealer has no place of business in a state and only engages institutional investors, they are not required to register in that state.

There’s no mention of this exclusion applying to agents in the USA. This is a legal “gray area,” but most compliance officers and securities lawyers also apply this exclusion to agents. If the broker-dealer isn’t required to register, why would the state administrator force an agent to register? Therefore, it’s safe to assume an agent may avoid registration in a state if they maintain no office (in that state) and only engage institutional investors.

Vacation (snowbird) rule

The same sentiment as discussed above with the institution rule exists with the vacation (snowbird) rule. Broker-dealers can avoid registration if they maintain no place of business in a state and only engage existing customers temporarily in that state (non-residents).

Representing an issuer during certain transactions

While broker-dealers typically employ agents, they can also be employed by issuers. An individual representing (working for) an issuer can avoid registration as an agent if performing certain securities transactions. They can be summarized as transactions in:

• Certain exempt securities, and/or
• Certain exempt transactions

Certain exempt securities
An exempt security avoids registration based on what it is. For example, Treasury bonds (a type of US Government debt) are exempt from registration. Although they are securities, government securities are not subject to the registration process. We’ll learn about all the securities exemptions in a future chapter, but these are the ones that are prerequisites for this agent exclusion:

• Any security issued by a United States form of government, including:
  • Federal (Treasury)
  • Municipal (state, city, local)
  • Examples: Treasury bills, municipal bonds
• Any security issued by a Canadian form of government, including:
  • Federal
  • Municipal (province, city, local)
  • Examples: Government of Canada bonds
• Any security issued by a foreign government (only if the US maintains diplomatic relations)
  • Must be national (federal level)
    • Government of France bonds are exempt
    • Municipal bonds from Paris, France are not included
• Any security issued by a bank, savings institution, or trust company
  • Does not include:
    • Bank holding companies
    • Federal savings and loan associations
    • Building and loan associations
• Promissory notes (commercial paper)
  • Short-term, zero coupon debts
  • Must meet these three requirements:
    • 9 months or less to maturity
    • At least $50,000 denominations
    • One of the three highest ratings (from rating agencies like Moody’s
• Investment contracts issued in connection with an employer benefit plan
  • For example: employee stock options

If an employee of an issuer facilitates a securities transaction involving any of the above, they are excluded from the definition of an agent. For example, assume you work for the United States Department of the Treasury and sell Treasury securities (like Treasury bills, notes, and bonds) to the public. You are excluded from the definition of an agent and do not need to register with any state administrator.

Keep in mind this exclusion only applies to those representing an issuer. The same exclusion does not apply to employees of broker-dealers. For example, a broker-dealer employee that only facilitates trading in Treasury securities is not excluded and must register as an agent.

Certain exempt transactions
An exempt transaction results in a non-exempt security avoiding registration. For example, you may have learned about private placements (SEC’s Regulation D) on another licensing exam. An issuer can sell its non-exempt securities (e.g., stock) and avoid registration if they are only sold to a private audience (typically made up of wealthy individuals and institutions). If it’s kept away from the general public, registration requirements generally don’t exist.

There are many exempt transactions described in the USA. We’ll go further in-depth on each of these transactions later in this material, but here’s a summarized list of them:

• Isolated non-issuer transactions
• Unsolicited transactions
• Transactions between issuers and underwriters (investment banks)
• Certain fiduciary transactions, including:
  • Estate executors and/or administrators
  • Sheriffs and marshalls
  • Receivers (custodians)
  • Trustees in bankruptcy
  • Guardians
  • Conservators
• Bona-fide pledges
• Transactions with institutions
• Private placements
• Offer of preorganization certificates

For now, assume a person is excluded from the definition of an agent if they represent an issuer and perform any of the transactions listed above.

For example, let’s assume Deion works for a local shoe company. Deion helps the company sell stock to a small group of wealthy investors (a private placement). Although he’s facilitating a securities transaction, the law excludes Deion as an agent because he’s representing an issuer and facilitating an exempt transaction on their behalf. However, Deion would be required to register if he performed the same transaction (a private placement) as an employee of a broker-dealer.

Facilitating an employee benefit plan

Many companies offer their employees a type of benefit plan related to securities, including:

• Stock purchase plans
• Savings plans
• Pensions
• Profit-sharing plans

Most executives of publicly traded companies are offered stock options (a type of stock purchase plan) as a primary form of compensation. Stock options allow a purchase of stock at a fixed price (for example, the right to buy 10,000 shares at $50). If the executive does their job well and the company’s stock price rises, their option becomes valuable.

The company’s (issuer’s) employees will typically manage these plans. Human resources departments are often tasked with providing and administering these benefits plans. As long as these employees do not collect commission when doing their job, they are excluded from the definition of an agent and avoid registration requirements.

Let’s work through a quick example. Assume Sally works in the HR department of a publicly traded company. Part of her job is describing and providing stock option plans to the company’s directors. When a director wants to exercise their option, they contact Sally. In these circumstances, her job is to place stock in the directors’ accounts. She receives no commissions for her work, although she is paid a salary. In this scenario, Sally is excluded from the definition of an agent even though she’s performing a type of securities transaction.