Exempt & excluded

Exams focused on laws and regulations test the rules you must follow. Just as important, they test when those rules don’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, but they’re exceptions 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 the ambulance is traveling 30 miles per hour over the posted limit, it generally wouldn’t be pulled over or penalized under the speed limit law because the law provides an exception. In that situation, the ambulance is exempt from the speed limit.

Bringing it back to finance, Treasury bonds are considered exempt securities. Treasury bonds are securities: investors buy them expecting a return, and they can potentially lose money on them. However, securities laws exempt them from registration at both the federal and state level (we’ll learn more about this later). This allows the Department of the Treasury to sell Treasury bonds without filing registration and 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.

An exclusion exists when the person or circumstance is not covered by the law in the first place. In other words, the law doesn’t apply because the law was written to regulate something else.

Let’s revisit speed limits. 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 again: fixed annuities are considered excluded securities*. Fixed annuities are insurance products that are not subject to market value fluctuations and, as a result, are not considered securities. Like Treasury bonds, they are not required to be registered or regulated under securities laws. However, they avoid these rules for a different reason.

• Treasury bonds avoid registration because the regulations explicitly exempt them.
• Fixed annuities avoid registration because they aren’t securities, so they’re excluded from securities laws.

*For now, all you need to know is that a fixed annuity is an insurance product that is not 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 the rule - and you’ll also want to know when the rule doesn’t apply. Test questions may focus on the exceptions (exemptions and exclusions) and 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.