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Definition of Terms

INTRODUCTION

In order to successfully complete the Series 66 exam, it is important to have an in-depth understanding of the terms used within the securities industry—specifically within the framework of the Uniform Securities Act (USA). The terms used by the USA, also known as The Act, may have broader meanings than we are accustomed to in everyday usage.

SECURITY

A security is anything that can be exchanged for value that involves a risk to the holder. A security also represents an investment in an entity managed by a third party. The Supreme Court used the Howey test to determine a security. The Howey test states that a security must meet the following four characteristics:

1. It must be an investment of money.

2. It must involve a common enterprise.

3. It must give the investor an expectation of a profit.

4. It must entail the management of a third party.

The following are examples of securities:

• Stocks

• Bonds

• Notes

• Debentures

• Evidence of indebtedness

• Transferable shares

• Warrants, rights, or options for securities

Oftentimes when you see the term certificate, you have a security that is a:

• Certificate of interest in a profit sharing or partnership agreement.

• Preorganization certificate.

• Collateral trust certificate.

• Voting trust certificate.

• Certificate of interest in oil or a gas mining title.

• Certificate of deposit for a security, such as an American depositary receipt (ADR) or an American depositary share (ADS).

The term variable will also identify a security, as in:

• Variable annuity

• Variable life insurance

• Variable contract

The phrase interest in is another key to identifying a security on the Series 66 exam. All of the following are securities: Interest in:

• Farmland and animals.

• Whiskey warehouse receipts.

• Commodity options (not futures).

• Insurance company separate accounts.

• Real estate condominiums or cooperatives.

• Merchandise marketing programs, franchises, or schemes.

• Multilevel distributorships, such as Amway.

The term option is also a good way to identify a security, such as:

• Stock option

• Index option

• Futures option

• Commodity futures option

The following are not considered securities:

• Real estate

• Retirement plans, such as IRAs and 401(k)s

• Bank accounts

• Collectibles

• Precious metals

• Fixed annuities/fixed contracts

• Whole and term life policies

• Antiques

• Futures contracts (commodities)

• Trade confirmations

• Prospectuses

The term future, as it appears alone, is an indication that a security is not involved. If the question is asking about a commodity future option, however, then a security is involved. Also, the term fixed is a good indication that a security is not involved.

 
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