Exempt & excluded

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Exams focused on laws and regulations establish rules that must be followed. While it’s
important to be aware of those rules, it’s equally important to know when they don’t apply. You
can safely assume the law does not apply when something is exempt or excluded. In a nutshell,
exemptions and exclusions are exceptions to various rules and regulations. Although both are
exceptions, they’re exceptions for different reasons.
An exemption exists if the law explicitly states the rules don’t apply to a person or
circumstance. For example, let’s focus on road speed limits, which apply to automobiles on the
road. Ambulances would be considered exempt from the speed limit if their lights were flashing,
assumptively rushing to help someone in need. Even if an ambulance was going 30 miles per
hour over the speed limit, they wouldn’t be pulled over or subject to any legal penalties.
Therefore, ambulances are exempt from road speed limit laws.
Bringing it back to finance, Treasury bonds are considered exempt securities. If you’ve studied
for the SIE or Series 7, you probably remember this aspect of securities laws*. Treasury bonds
are securities; investors purchase them with the assumption of return and can potentially lose
money on them. However, securities laws exempt them from registration, both at
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 disclosure paperwork with the SEC.
*If this is the first you’re hearing about Treasury securities being exempt from registration, don’t
worry about it! We’ll learn more about the specifics later in this material.
An exclusion exists if the person or circumstance cited in the law is not subject to those rules.
Or, another way of saying the law doesn’t apply, and therefore an exception exists. Let’s revisit
speed limits again. If a cheetah was running down the road and breaking the speed limit, it
obviously wouldn’t be subject to the law. The speed limit wouldn’t apply because they’re meant
to regulate cars, trucks, and other road vehicles, not animals. Therefore, the cheetah is excluded
from speed limit laws.
Back to finance again; fixed annuities are considered excluded securities*. Fixed annuities are
insurance products not subject to market value fluctuations and consequently are not
considered securities. Like Treasury bonds, they are not required to be registered or regulated.
However, they avoid these rules for a different reason. Treasury bonds avoid securities laws
because regulations explicitly state they are not subject to those rules, while fixed annuities
avoid securities laws because they’re not considered securities.
*For now, all you need to know is a fixed annuity is an insurance product that is not subject to
securities laws or regulations.
As you make your way through the rest of this material, you’ll learn about various sets of
regulations and rules. It’s important to know the law, but it’s also important to know when it
doesn’t apply. Test questions could not only focus on the exceptions - exemptions and
exclusions - but also the differences between the two. 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?
(spoiler)
Answer: D) Fixed annuities
All Treasury (US Government) securities, including Treasury bills, Treasury bonds, and STRIPS,
are exempt from registration requirements. Although they are securities, which are typically
subject to securities laws and regulations, applicable rules and regulations (which we’ll learn
more about later) explicitly state US Government securities are not subject to registration
requirements (an exemption).
Fixed annuities are not subject to registration requirements either, but for a different reason
than US Government securities. They do not meet the definition of a security and therefore
are excluded from securities laws.
We’ll dive deeper into securities in the next chapter, which should clear up any confusion about
our discussion of exempt securities or products excluded from securities laws.
Key points
Exemption
 Regulations do not apply because of ongoing legal exception
Exclusion
 Regulations do not apply because the item or entity is not the subject of the law
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