Exempt & excluded

Exams focused on laws and regulations test the rules that must be followed. Knowing the rules matters, but so does knowing when a rule doesn’t apply. In most cases, you can assume a law doesn’t apply when something is exempt or excluded.

Both exemptions and exclusions are exceptions to rules and regulations, but they exist for different reasons.

An exemption exists when the law explicitly says the rules don’t apply to a particular person, product, or situation. For example, road speed limits apply to automobiles on the road. An ambulance may be exempt from the speed limit when its lights are flashing and it’s responding to an emergency. Even if it’s traveling 30 miles per hour over the posted limit, it generally wouldn’t be pulled over or penalized for speeding because the law provides an explicit exception. In that situation, the ambulance is exempt from the speed limit.

Bringing it back to finance, Treasury bonds are considered exempt securities. If you’ve studied for the SIE, Series 6, or Series 7, you may remember this point from securities laws*. Treasury bonds are securities: investors buy them expecting a return, and they can potentially lose money on them. Even so, securities laws exempt them from registration at both the federal and state level (we’ll cover this in more detail later). This exemption allows the Department of the Treasury to sell Treasury bonds without filing disclosure paperwork with the SEC.

*If this is the first time you’re hearing that Treasury securities are exempt from registration, don’t worry about it. We’ll cover the specifics later in this material. Also, the Series 63 seldom asks questions about the characteristics of securities.

An exclusion exists when the person, product, or circumstance isn’t the kind of thing the law is meant to regulate. In other words, the law doesn’t apply because the item isn’t even within the law’s scope.

Let’s use speed limits again. If a cheetah ran down the road faster than the posted speed limit, it obviously wouldn’t be subject to the law. Speed limits are meant to regulate cars, trucks, and other road vehicles - not animals. So, the cheetah is excluded from speed limit laws.

Back to finance: fixed annuities are considered excluded securities*. Fixed annuities are insurance products that aren’t subject to market value fluctuations, so they aren’t considered securities. Like Treasury bonds, they aren’t required to be registered or regulated under securities laws. The key difference is why:

• Treasury bonds avoid registration because the law explicitly says they don’t have to register (an exemption).
• Fixed annuities avoid registration because they aren’t securities in the first place (an exclusion).

*All you need to know is that a fixed annuity is an insurance product that isn’t subject to securities laws or regulations.

As you work through the rest of this material, you’ll see many sets of rules and regulations. You’ll want to know what the law requires - and when it doesn’t apply. Test questions may focus on exemptions and exclusions, and they may also test the difference between them. For example:

All of the following securities are eligible for exemptions from registration, EXCEPT:

A) Treasury bonds
B) Treasury bills
C) STRIPS
D) Fixed annuities

Can you figure it out?

We’ll dive deeper into securities in the next chapter, which should clear up any confusion about exempt securities or products excluded from securities laws.