1.5 Exclusions from Definitions
Key Takeaways
Exclusions mean the definition does not apply at all.
Banks are excluded from BD and IA definitions; holding companies are not.
LATE professionals are excluded only if advice is incidental.
Broker-dealers are excluded from IA only without special compensation.
Out-of-state BDs can be excluded when dealing only with institutions.
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?
Yes, because they effect transactions with State B clients
Yes, because all broker-dealers must register in every state
No, because they have no place of business in State B and deal only with institutional investors
No, because institutional investors are exempt from all regulations
Which of the following professionals would be EXCLUDED from the investment adviser definition under the USA?
An accountant who provides investment portfolio management as her primary service
An attorney who occasionally discusses investments with estate planning clients
A financial planner who holds himself out as an investment adviser
An engineer who charges separate fees for investment recommendations
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?
Yes, because all broker-dealers are excluded from the IA definition
Yes, because the advice is incidental to their brokerage business
No, because they receive special compensation for the advice
No, because broker-dealers cannot provide investment advice
Which of the following would qualify for the publisher exclusion from the investment adviser definition?
A free newsletter emailed only to existing brokerage clients
A tip sheet sold only to premium subscribers
The Wall Street Journal
A research report prepared for a specific institutional client
Sections you finish are checked off in the contents.