Series 63

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Securities - Which Investments Are Not Securities?

Earlier when we cited that long list of the items that the law specified as securities, we promised to give you a shorter, simpler list of items that are not securities. This is a little easier to handle:

  1. Fixed Insurance, endowment or annuities policies
  2. Retirement plans
  3. Commodities or futures contracts
  4. Condominiums - when used as personal residences

Let's now take a closer look at these investments one at a time.

  1. Fixed insurance, endowment or annuities policies are excluded from the definition of securities. Let's quote from the USA on this subject;
    A security, "does not include an insurance or endowment policy or annuity contract under which an insurance company promises to pay a fixed [or variable] sum of money either in a lump sum or periodically for life or other specified period."

    There's quite a discussion in the Official Comments section accompanying the Act about those brackets around the word "variable". The final conclusion is summed up by the following comment.

    "In the view of the North American Securities Administrators Association variable products should be exempted from registration, not excluded from the definition of securities..."

    The Comments continue with the following:


    "One of the goals of this Act is to align state and federal law. The United States Supreme Court ruled that a variable annuity is a security... More recently, it has been confirmed that variable insurance products are "covered securities" as defined in the National Securities Markets Improvement Act of 1996 (NSMIA)..."

    So, what's the difference? Part of the answer goes to the fact that variable insurance and variable life products are structured with separate accounts that are, for practical purposes, investment company products - primarily mutual funds. There are a number of regulatory bodies that govern investment companies and the logic is identical to that which we observed before in NSMIA; there is no need for another level of regulation for a federal covered security. And, under NSMIA, investment company securities are federal covered securities.

  2. Retirement plans are not securities. The 2002 USA says that the term "security" does not include:

    "... an interest in a contributory or noncontributory pension or welfare plan subject to the Employee Retirement Income Security Act of 1974..."

    The language is virtually identical to the 1956 USA. Your 401(k), Keogh or IRA may be supported by securities, but the retirement plan itself is not a security.
    Be aware that the Series 63 exam may try to play tricks with this idea.

  3. Commodities or futures contracts are not securities. The last section of the three-part test we looked at earlier is missing in the case of a futures contract. There is no dependence on the management of an outside party in a commodities contract - a commodities futures contract is a two-party contract that calls for the delivery of some tangible commodity, such as gold, corn, soybeans, etc. to the holder of the futures contract.

    Be aware however, if the term option is added to a commodities or futures contract, then the instrument becomes a security. This may seem to be trivial, but it may be instrumental to answering a question correctly.

    A commodities futures contract is not a security, but an option on that contract is considered a security - the performance is now dependent on the activities of a third party.

    Regarding other types of futures contracts, those that depend on the performance of a stock, for example, the Securities and Exchange Act of 1934 has been amended in recent years to address this subject:

    "No provision of any State law regarding the offer, sale or distribution of securities shall apply to any transaction in a security futures product..."


    This portion of the federal law preempts the states from regulating securities such as options contracts, e.g.: calls, puts, straddles, spreads etc.


  4. Condominiums are not securities when they are a person's residence. When, however, as is often the case, the condominium is a part of a rental pool arrangement - as in a condominium limited partnership - they may be considered securities.
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