Exclusions from Definitions
Understanding who and what is excluded from key definitions is critical for the Series 63 exam. Remember: an exclusion means the person or entity doesn't meet the definition in the first place—they're completely outside the regulatory category.
Broker-Dealer Exclusions
The following are excluded from the broker-dealer definition and do NOT need to register as broker-dealers:
Persons Excluded from Broker-Dealer Definition
| Exclusion | Reasoning |
|---|---|
| Agents | Individuals who represent broker-dealers |
| Issuers | Entities selling their own securities (not in the business of selling others') |
| Banks and savings institutions | Separately regulated by banking authorities |
| Trust companies | Regulated as financial institutions |
| Persons with no place of business in the state | Who deal only with broker-dealers or institutional investors |
Out-of-State Broker-Dealer Exclusion
A broker-dealer with no place of business in the state is excluded if they only transact with:
- Other broker-dealers
- Institutional investors (banks, insurance companies, investment companies)
- The issuer of securities involved in the transaction
- Existing customers who are temporarily in the state
Exam Tip: The key phrase is "no place of business in the state." If the broker-dealer has an office in the state, they must register regardless of who they transact with.
Agent Exclusions
The following individuals are excluded from the agent definition:
Persons Excluded from Agent Definition
| Exclusion | Condition |
|---|---|
| Individuals representing issuers | In exempt transactions (no compensation based on transactions) |
| Clerical/administrative staff | Who do not effect securities transactions |
| Partners, officers, directors | If they don't effect transactions |
Issuer Transactions: Agent Exclusions
An individual representing an issuer is NOT an agent when selling:
| Transaction Type | Agent Registration Required? |
|---|---|
| Exempt securities (government, bank securities) | No |
| Exempt transactions | No |
| Securities to employees (no commission) | No |
| Securities to existing shareholders (no commission) | No |
| Transactions with financial institutions | No |
Key Point: The exclusion often depends on whether the individual receives transaction-based compensation. If paid a commission or bonus for each sale, they're likely an agent.
Investment Adviser Exclusions
The following are excluded from the investment adviser definition:
Persons Excluded from IA Definition
| Exclusion | Condition |
|---|---|
| Banks and bank holding companies | Including trust departments |
| Lawyers, accountants, engineers, teachers | If advice is solely incidental to their profession |
| Broker-dealers | If advice is solely incidental and no special compensation |
| Publishers | Of bona fide newspapers, magazines, or financial publications |
| Federal covered advisers | Registered with the SEC |
| Persons with no place of business in the state | Who advise 5 or fewer clients (de minimis rule) |
The "LATE" Professionals Exclusion
L-A-T-E = Lawyers, Accountants, Teachers, Engineers
These professionals are excluded from the IA definition ONLY if:
- Investment advice is solely incidental to their profession
- They do NOT hold themselves out as investment advisers
- They do NOT receive special compensation for investment advice
| Professional | Excluded? | Why/Why Not |
|---|---|---|
| CPA who occasionally mentions investments | Yes | Incidental to accounting practice |
| CPA who advertises investment planning services | No | Holding out as IA |
| Attorney managing client portfolios | No | Not incidental—primary service |
| Teacher giving investment lectures | Yes | Incidental to teaching |
Broker-Dealer Exclusion from IA Definition
A broker-dealer is excluded from the IA definition if:
- Investment advice is solely incidental to their brokerage business
- They receive no special compensation for the advice
Special Compensation: Any fee or other consideration beyond normal commissions paid specifically for investment advice.
Publisher Exclusion
Publishers are excluded if their publication is:
- Bona fide (legitimate, not a front for investment advice)
- Of general and regular circulation (not targeted to specific individuals)
- Paid circulation (readers pay for the publication)
| Publication | Excluded? |
|---|---|
| Wall Street Journal | Yes |
| Newsletter sent only to clients | No |
| Free tip sheet | No |
| Bloomberg financial news | Yes |
Investment Adviser Representative (IAR) Exclusions
The following may be excluded from IAR registration:
| Exclusion | Condition |
|---|---|
| Clerical/administrative staff | Who do not make recommendations or manage accounts |
| Persons doing only impersonal advice | No tailored recommendations |
Issuer Exclusions
There are no significant exclusions from the issuer definition. If an entity issues or proposes to issue a security, it is an issuer.
Summary: Registration Flow Chart
When analyzing whether someone must register, ask:
-
Do they meet the definition?
- If NO → Excluded, no registration needed
- If YES → Continue to step 2
-
Are they exempt from registration?
- If YES → Exempt, no registration needed (but anti-fraud rules apply)
- If NO → Must register
Key Takeaways
- Exclusions mean the person/entity doesn't meet the definition at all
- Banks are excluded from both broker-dealer and investment adviser definitions
- LATE professionals (Lawyers, Accountants, Teachers, Engineers) are excluded if advice is solely incidental
- Broker-dealers are excluded from the IA definition if advice is incidental with no special compensation
- Out-of-state broker-dealers dealing only with institutions may be excluded
- Publishers of bona fide publications are excluded from the IA definition
A broker-dealer headquartered in State A has no office in State B but occasionally executes trades for institutional clients located in State B. Must this broker-dealer register in State B?
Which of the following professionals would be EXCLUDED from the investment adviser definition under the USA?
A broker-dealer provides investment advice to its customers and charges an annual advisory fee in addition to commissions. Is the broker-dealer excluded from the investment adviser definition?
Which of the following would qualify for the publisher exclusion from the investment adviser definition?
2.1 Broker-Dealer Registration
Chapter 2: Registration of Persons