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.
Viatical Settlements and Definition of Sale
Related Articles
  1. Professionals

    Internal Advisor Consultant: Job Description & Average Salary

    Learn about the internal advisor consultant position and the national average salary as well as the key skills, education and experience needed.
  2. Professionals

    Career Advice: Stockbroker Vs. Insurance Agent

    Compare and contrast careers as a stockbroker and insurance agent. Understand the skills and attributes required for success in each career.
  3. Professionals

    Series 63 Exam Prep: The Broker-Dealer

    Before you take the series 63, you need to understand jurisdiction and how it affects broker-dealers.
  4. FA

    The Basics of The Series 79 Exam

    Passing the Series 79 exam is usually necessary for anyone who wants to work in investment banking.
  5. Your Clients

    Events in 2016 That'll Alter Your Retirement Plans

    Retirement savers who are trying to see what lies ahead can expect these changes affecting their retirement plans in 2016.
  6. Term

    What is the Series 66?

    The Series 66 exam is one of two tests required to register as both a securities agent and an investment advisor.
  7. Professionals

    Internal Advisor Consultant: Career Path & Qualifications

    Discover more about the responsibilities of an internal advisor consultant, the average salary he can expect and the qualifications he will need for the job.
  8. Your Practice

    How Likely is a New Fiduciary Rule in 2016?

    New fiduciary standards for advisors working with retirement accounts are on the horizon. Will they become reality in 2016?
  9. Professionals

    Breaking Down Financial Securities Licenses

    Find out which exam you need to begin your career as an investment professional.
  10. Brokers

    Duck These Illegal Sales Tactics Used By Brokers

    Many unscrupulous brokers employ illegal swindling tactics to sell bad securities. Here are sales strategies that should indicate red flags to investors.
RELATED TERMS
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  2. Series 6

    A securities license entitling the holder to register as a limited ...
  3. Comprehensive Automated Risk Data ...

    The Comprehensive Automated Risk Data System (CARDS) is an initiative ...
  4. Corporate Financing Committee

    A regulatory group that reviews documentation that is submitted ...
  5. Division Of Reserve Bank Operations ...

    An entity under the Federal Reserve System that manages certain ...
  6. Series 79

    A examination to ensure a candidate is qualified to become a ...
RELATED FAQS
  1. My 120-day Series 63 exam window is about to close, but I need more time to study. ...

    Extensions are available on rare occasions. Candidates should apply for an extension with the North American Securities Administrators ... Read Full Answer >>
  2. Do I have to be a U.S. citizen to sit for the Series 63 exam?

    United States citizenship is not required for Series 63 test-takers. Candidates may take the exam inside or outside the U.S. ... Read Full Answer >>
  3. Is there a limit on the number of times I can re-take the Series 63 exam?

    There is no limit to the number of times a candidate may retake the Series 63 exam. The North American Securities Administrators ... Read Full Answer >>
  4. How long must I wait after failing the Series 63 exam before I can take it again?

    Waiting periods are in place for candidates who wish to retake the Series 63 exam. Between retakes, the waiting period is ... Read Full Answer >>
  5. Are waivers granted to the 180-day waiting period to re-take the Series 63 exam?

    Candidates retaking the Series 63 exam must wait for 30 days after failing it on the first or second attempt. After failing ... Read Full Answer >>
  6. If I failed the Series 66, does the waiting period apply if I want to take the Series ...

    The waiting period only applies to retaking the same North American Securities Administrators Association (NASAA) exam. Candidates ... Read Full Answer >>
  7. Does NASAA or anyone else give out the series 63 exam questions?

    Outside of the proctored exam, no access to Series 63 exam questions is offered. Providing access to questions would invalidate ... Read Full Answer >>
  8. Are series 63 exams given outside of the United States?

    Series 63 exams are offered at authorized testing centers around the world. The exam does not require U.S. citizenship. Test ... Read Full Answer >>
  9. How often, and how, is a series 63 exam updated?

    Series 63 exams draw questions from a test bank based on state regulations, the Uniform Securities Act and North American ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center