Wednesday, December 29, 2010

Do You Need a Private Tutor?

Even though your firm may have provided you with materials and even a live class, you might need some extra help in passing the Series 7 exam.

If so, consider getting some online private tutoring from yours truly.

We've helped many people get over the hump, and you can see testimonials/case studies by either clicking the title of this post or:

It's not "cheap," but our fees are reasonable. And, WHEN you pass the test, you'll consider it money well spent.

Wednesday, December 8, 2010

Series 7 Study Materials

When you're studying for your series 7 exam, you need an abundance of high-quality series 7 study materials. Many of you work for a large firm that provides you with materials. That's great, but you can quickly become way too familiar with any set of practice questions, no matter how large the question bank might be. That's why we have the Pass the 7 ExamCram Online Test Prep at For just $90, you can provide yourself with another batch of challenging questions with clear, concise answers.

Also, most books that the big firms provide their exam candidates are tough to read and understand. If that describes the one you're working from, you might want to take a look at the Series 7 in Plain English at For just $65, you can begin to understand the important concepts much faster and get through the information 50-100 pages at a time.

Since this is a blog, I probably shouldn't only promote my own products. So, for some good free information go to the home page and look under "Get Free Stuff."

Thursday, November 25, 2010

SIPC Coverage Has Increased to 250K

For a long, long time SIPC, which protects customer accounts held by broker-dealers, covered only 100K of uninvested cash. Well, in this industry everything is subject to change. At this point, if you get a question on the maximum SIPC coverage, the answer is 500K total, of which 250K can be in cash. I'm not sure that the test questions focus on memorized numbers in the first place, but if so, you do need to know those numbers. More likely, you'll need to know what SIPC covers (cash, securities) and what it doesn't (commodity futures, mutual fund shares held by the transfer agent, market loss). Remember, if you buy $300,000 of stock, and it drops to zero, SIPC would like you to know that this was a very bad idea. You aren't insured against market loss. You're only covered in the sense that broker-dealers holding your assets could go belly up (like Lehman or Merrill Lynch, i.e.). If so, your ass-ets are covered up to a certain amount.
What is "cash"? When you fund your account with a check, the broker-dealer is holding your cash. When you receive dividends, interest, and capital gains distributions, that goes into your cash balance. Same thing when you sell securities for . . .yes . . . cash. Broker-dealers use your cash as THEIR asset in order to earn interest and to post collateral for the crazy highly leveraged trading strategies they love to engage in. If they go belly up, your cash and securities can get held up by creditors of the firm--that's why SIPC is so important. It provides a line of defense to customers. If they hold too much cash, or their account is larger than 500K, they might become general creditors of the bankrupt firm for those excess amounts. But at least customer accounts are covered up to 500K, of which no more than 250K can be in cash. You'll notice that the firm where you work has "Member FINRA and SIPC" on their business cards, signage, and in any commercials they put out.
I wouldn't invest with any firm that wasn't a member of both, myself.

Tuesday, November 23, 2010

Unregistered Personnel

FINRA's website ( posts this frequently asked question, "Can a firm hire unregistered individuals whose sole function will be to cold call potential customers?" The answer is, "yes, but . . . " Basically, these unregistered cold callers can only invite people to attend events where registered personnel can discuss investing with them, or ask if they'd like to meet with a registered representative in order to discuss investments or receive investment literature from the firm. Notice how in none of these cases would the cold caller be talking to people about investing. FINRA also says, "The firms employing unregistered persons to perform these functions must be sure these employees do not discuss general or specific investment products or services offered by the firm, prequalify prospective customers as to financial status, investment history, and objectives, or solicit new accounts or orders." What if the individual will only sell exempt securities, or will only sell to institutions? FINRA rules require him to register. An exempt security simply doesn't have to be registered. The representatives who sell them--whether to retail or institutional investors--must be registered. Can unregistered persons provide published quotes to the firm's customers? FINRA answers on their website, "If the operators provide published yield quotations only to the firm's clients, they do not have to be registered with FINRA in any capacity." As you'll see at the link above unregistered persons can not accept unsolicited orders for securities, but they can help existing clients perform transfers among different mutual funds within a family of funds. So, no, an unregistered assistant can not accept an unsolicited order to buy 1,000 shares of XYZ today, but he or she could help an existing client put in a redemption order to sell shares of her ABC Growth Fund and a purchase order to buy shares of the ABC Income Fund with the proceeds.
Will the Series 7 exam expect you to know which activities registered and unregistered persons can perform for their member firm? Yes. I think it's worth spending five minutes at the FAQ section mentioned above. You can never be too prepared for the Series 7.

Wednesday, November 17, 2010

Up In Smoke

Once again, the daily Bond Buyer proves that the Series 7 information is much more interesting than folks realize. Remember when all the state attorneys general were suing "big tobacco" about 12 years ago? Well, "big tobacco" settled in exchange for the states dropping all further lawsuits against them. Do you suppose the states would wait for that settlement money to come in before spending it?
Heck no. Most of them sold municipal bonds called "tobacco bonds," backed by the settlement money that would come in over the years. As revenue bonds, these things are only as safe as the cash flow supporting them. And then the unthinkable happened--people started quitting faster than anyone predicted. With the recent recession, coupled with plunging tobacco use, many of the bonds now face default. You gotta check this out at:

Saturday, November 13, 2010

The Bond Buyer

Because I had a free 2-week subscription to the Bond Buyer, I still get emails of the top stories. Reading one of them this morning, I found several items that illustrate the "test world" points you're learning for your Series 7. If you'd like to see how things look in the "real world" check out

Monday, October 11, 2010


A sharing arrangement in which the sponsor bears capitalized costs such as the oil rig while limited partners take a share of intangible drilling costs is known as a(an)
A. functional allocation
B. overriding royalty interest
C. reversionary working interest
D. disproportionate sharing arrangement

EXPLANATION: too many Series 7 candidates put too much effort on options and debt securities to the detriment of everything else. Topics such as DPPs, which account for about 10 questions, also need your attention. A question like this really requires that you've studied--I don't see a lot of obvious things to be eliminated. What the GP and LPs are doing here is allocating the costs according to their function (capitalized vs. intangible). Functional allocation.



I'm not a big fan of "fan pages" in general, but I think you'll agree that the Pass the Test fan page is a helpful study tool. Some of our customers have recently cited it as their favorite and most effective tool.

Check out the daily questions and discussions at

Wednesday, September 22, 2010

Another options question

Juan buys 100 ABC @80 then sells 1 ABC Nov 80 call @2 and 1 ABC Nov 80 put @1.50. His maximum gain is, therefore

A. $8,000
B. $350
C. zero
D. $200

EXPLANATION: can't imagine why Juan--or anyone--would establish this weird position. But, if the stock goes up at all, it gets called away at $80. If so, he would only make the premiums of $350.


Monday, August 16, 2010

Difficult options question

The so-called "T-chart" is useful when you have to track money-in and money-out on an actual series of transactions, or a series of potential transactions. The following question requires a T-chart and some good, creative problem-solving:

If an investor purchases 100 ABC @44, then writes 1 ABC Aug 45 call @2 and 1 ABC Aug 45 put @2.50, his maximum loss is
A. $450
B. $100
C. $8,450
D. $4,400

EXPLANATION: if the stock goes up and gets called away at $45, that's actually the best that can happen and would be his maximum gain. The worst that can happen is that the stock drops to zero, a loss of $4,400. Then, he'd have to give some clown $4,500 for a worthless stock when the put is exercised. That's $8,900 out, with only $450 coming in for selling the straddle.


Wednesday, August 11, 2010

Options orders

Many of the options questions on the Series 7 have nothing to do with numbers.
Like this:

If one of your investing clients wrote put options a few weeks ago and would now like to liquidate the position, you would enter which of the following orders on his behalf?
A. opening sale
B. closing sale
C. closing purchase
D. opening purchase

EXPLANATION: a registered rep could really mess things up by checking off the wrong box among the four choices above. For example, if your customer wanted to buy call options, you could really do damage if you checked "opening sale" when you meant "opening purchase." Suddenly, because of your mistake, the guy is subject to huge and even unlimited losses by writing naked calls. A "long" position is initiated with an opening purchase. A short position is initiated with an opening sale. Here, the client has written options, so he's already done an opening sale. He needs to close out by buying them back--closing purchase. Some students will read this explanation and think, "Okay, I have to memorize these four things." To which I would say, "No. You have to understand them." If you understand the concepts surrounding options, you will get 90% or more of those questions right on the exam. Which is a good thing.


Wednesday, August 4, 2010

Today I REALLY Feel Your Pain

We now intend to update each of the five books every year, and I made the decision to start with the Big Kahuna, the Series 7. In order to see what we might be missing that the "big companies" are covering, I have to go through their practice questions and their . . . well, let's call them "books" for lack of a better name.


If you've ever felt overwhelmed and discouraged about studying for your Series 7, I now know why. What a bunch of soulless, joyless, ugly nonsense your firms are forcing you to read. It's as if the writers of the so-called "books" are convinced that their superiority to you is in direct proportion to your confusion. First, they're not superior. You will make more money selling financial services than they do writing mindless drivel about DPPs and variable-rate demand notes. Second, who the heck said that finance and investing are dull topics? Warren Buffett and Charlie Munger hold the Qwest Center overflow audience's attention for 5 or 6 hours . . . why can't these Series 7 "license exam manuals" explain how corporations raise capital without making you want to jam a hot needle in your eye socket every couple of minutes?
Oh well. No use complaining. In fact, I should send the "big guys" a big thank-you note today for guaranteeing that there will always be a market space for us, for readers who want to learn without losing their sanity. Just wanted you to know that if you find your "license exam manual" to be boring and poorly written, it's not just you.

Trust me.

Monday, July 26, 2010

Taxation and Mutual Funds

Let's take a look at a question about mutual fund taxation . . .

All of the following are taxable in relation to a mutual fund investment except
A. undistributed capital gains
B. unrealized capital gains
C. reinvested capital gains distributions
D. capital gains distributions from a tax-exempt municipal bond fund

EXPLANATION: a surprising fact about capital gains that a mutual fund portfolio manager realizes is that even if they're not paid out to shareholders, the shareholders are taxed on their fair share of the gains. If the fund does distribute capital gains, the investor is taxed whether she cashes the check or reinvests automatically. And, municipal bonds are subject to capital gains taxes just like other securities. Of course, if a capital gain is "unrealized," there is no capital gain.


Saturday, July 10, 2010

Straddle question

Bobby Bobson bought a BCD Mar 55 call @3 and a BCD Mar 55 put @3.50. If BCD becomes worthless, the resulting profit or loss would be
A. loss of $650
B. loss of $5,200
C. gain of $650
D. gain of $4,850

EXPLANATION: the questions on the exam are often not as clear as you'd like. What does it mean "if BCD becomes worthless"? It means the underlying common stock goes to zero, kaput. So, Bobby loses just the total premium of $650, right?
Not right. If the stock becomes worthless, the right to sell it (Mar 55 put) is worth $5,500. $5,500 minus the $650 he paid for the position = a gain of $4,850.


Time Value Once Again

On our Facebook fan page, we asked visitors which option would trade for a higher premium here in July: MSFT Aug 30 call or MSFT Oct 30 call. At first, it might seem that you need more information . . . well, what is the underlying stock trading for?

Doesn't matter.


No matter what MSFT common stock is trading for, the time value is higher on the Oct 30 call. Why? Because--get this--there is more time on the option. See, the premium is the market's collective opinion on the buyer's chance of winning. Period. The market as a collective is so efficient at assigning a value based on probabilities, in fact, that right after the Sep 11th attacks, the US Government actually floated the idea of creating a "terrorism exchange" on which speculators would bet on where the next attack might occur. Maybe they realized how sick the temptation for market manipulation would have been--go long the Los Angeles Mar 15s and then pay some sickos to blow up LAX--or maybe their sanity suddenly returned. Either way, they did not actually create such an exchange, thankfully, as it would have been, you know, crazy. Still, their premise was correct--a market of speculators is very good at determining a fair price for an option based on its probability of working out for the buyer. If the underlying stock trades at $29, an Aug 30 call is worth more than an Aug 35 call, even though both are out-of-the-money. Why aren't they both worth 0? Because there is a chance the stock can rise above $30 before expiration, and a chance it could rise above $35. Which chance is more likely? Obviously, the Aug 30 call has a more realistic chance of going in-the-money, so its time value is higher than the Aug 35 option. If it's early July, maybe the Aug 30 calls trade for $1.50, with the Aug 35 calls trading at just $.45. It actually depends on how volatile the stock is. If it's the kind of stock that jumps around all the time, the market might charge you $2.00 even for the Aug 35 call. The market is saying the stock could easily rise that high that fast. Google options trade at high premiums, because that stock can easily rise or fall $20 in a week. Microsoft, on the other hand, is so sluggish and predictable that the options are cheap. The market basically says no way is MSFT going up $10 any time soon. You can buy these options dirt cheap.

So, what determines the premium of a call option?

1. the market price of the underlying stock

2. the amount of time left on the option

3. the volatility of the underlying stock

An army of computer-modeling, big-brain speculators plug those factors into their software and, voila, an options premium becomes X, Y, or Z. I know it hurts to think this hard about the concept of an option. But, trust me, your score will go up if you understand options well beyond any little chart or cheat-sheet.

Monday, June 28, 2010


The Series 7 could ask you what information is contained in a "tombstone ad." First, remember the context: we're talking about a new offering of securities. Once the registration statement has been filed with the SEC, the issuer and underwriters go into a cooling off period. During this period, no sales or advertising is allowed. Tombstone ads, however, are okay, since they don't really entice anyone or make any claims. They just provide the bare bones facts about an offer of securities. They simply announce that an offering of common stock, preferred stock, bonds etc. is available from a particular issuer. The number of shares is listed, as is the offering price. Then, we see the underwriters, with the lead underwriters in larger text than the syndicate members taking a smaller percentage of the offering. And, there is the disclaimer that this announcement is not an offer to sell the securities or the solicitation of an offer to buy the securities. It's just an announcement. It might help to look at one, which you can do at this link:

Tuesday, June 8, 2010

Time Value Again

A "call" option is the right to buy a stock at a set price known as the "strike price" or "exercise price." If the stock is worth $3 more than that strike/exercise price, the call option is worth that $3 difference, always. That's the intrinsic value of being able to save $3 when buying that stock. But, the option would be worth more than just that $3, as long as there is still some time left. If there is still a month to go, an ABC Aug 50 call might be trading for $4 a share, when ABC common stock is only trading for $53. The intrinsic value is $3, but there is still time for ABC to keep rising. If you want to buy this call option, you pay $4 a share, which is $3 of intrinsic value and $1 of time value. If the stock stops moving at $53, that time value will begin to evaporate quickly, as time runs out on the option. If you buy this option for $4 today, you can only win if the stock rises, and rises fast enough to outweigh the negative effects of time.

Let's work with the concept of time value in a rather annoying practice question:

Which option below has the most time value if ABC currently trades at $51 a share?
A. ABC Aug 50 call @$1.50
B. ABC Oct 50 call @2.50
C. ABC Oct 50 put @2.00
D. ABC Oct 55 put @4.25

EXPLANATION: step one, find the intrinsic value in each option and subtract that out of the premium. An Aug 50 call @1.50 has $1 of intrinsic value, 50 cents of time value. An Oct 50 call (which HAS to have more time value on it than the Aug 50) also has $1 of intrinsic value and, therefore, $1.50 of time value. Choice A is eliminated. An Oct 50 put has ZERO intrinsic value, so the time value is $2.00. Choice B is eliminated. An Oct 55 put has $4 of intrinsic value, so only 25 cents per share of time value. D is eliminated. The Answer is . . .


Saturday, June 5, 2010

Time Value

Remember, not all Series 7 questions concerning options involve calculations or even numbers. Many of the tougher options questions look like the one below:

Which of the following represents an accurate statement about put options on ABC common stock?
A. If ABC common stock drops from $45 to $40, an ABC Aug 40 put goes in the money
B. If ABC common stock drops from $45 to $40, the premium on an ABC Aug 40 put would likely increase
C. If ABC common stock drops from $45 to $40, an ABC Aug 40 put goes out of the money
D. If ABC common stock rises from $35 to $40, the ABC Aug 40 put premiums should increase

EXPLANATION: as always, try to eliminate some answer choices. Choice A says that an ABC Aug 40 put would be in the money with the stock at $40. That makes no sense, so eliminate it. Choice C says that an ABC Aug 40 put would be out-of-the-money with the stock at $40, but, actually, it would be at-the-money. Choice D says that put premiums increase when the stock price rises, but that's backwards. Strike prices are fixed--the puts only become more valuable as the underlying stock drops, making the right to sell it more valuable. Eliminate Choice D, and you're done. Why is Choice B accurate? Remember that even though the ABC Aug 40 put would not go in the money if the stock dropped from $45 to $40, the "time value" would increase, the speculative component of the premium. With the stock at $45, the right to sell it at $40 is not worth much, but if the stock then drops to $40, the market would assume it could easily keep dropping, and any little drop makes the put go in-the-money. The premium would reflect the 50-50 chance that the option will go in-the-money, and, of course, the premium would be 100% time value. So, a seller might like to write an at-the-money option, and then if the stock simply stops moving, that time value will evaporate, letting the seller keep the whole premium without lifting a finger as the option expires.


Thursday, May 27, 2010

Broker Check

So, I got a call yesterday from a registered representative at TD Ameritrade. Apparently, he was going through a list of customers who never talk to any of the brokers and reaching out to us "self-directed" investors. Nice guy. Seems to know what he's talking about, so I accepted his invitation to come on in for a sit-down in a few weeks. At the very least, I'll learn something, I figure, and it might be fun to track the story on this blog. Frankly, I thought the "kid" would have been more impressed with some of my answers. For example, he asked "which strategies I'm using to pick stocks for my accounts," and I told him that I typically look at a company's 10-K, focusing on the income statement primarily, and I try to buy equity in solid companies trading at reasonable valuation ratios.
Nothing. Not even a semi-impressed "hmmfff" from the guy. Clearly, he was on a mission to sell bonds through the idea of "asset allocation," so he pressed me a bit on why a 46-year-old investor is 100% invested in stock. Well, I said, interest rates have to go up from here, so I don't want to receive historically low yields and then watch my bond holdings plummet when interest rates rise. Bonds can still be an important part of your portfolio, he countered. It was then I remembered that registered representatives are not engaging in academic discussions--they are SELLING. Period. If they've been told to talk about "asset allocation" and push bond investing, then, by golly, that's what they're gonna do. And that's okay. I'll still learn something by playing the role of the customer to a registered representative--up to now, since 1999, I've been buying and occasionally selling stock and options without anybody's assistance. So, I've never had a broker try to do a needs analysis with me or hand me product literature on variable annuities or mutual funds. It will be interesting to hear how many of you will be explaining investment products and strategies to your clients. I did have to deduct some coolpoints from the guy when he asked which email he should send the invitation to. "Should I use ''," he asked. I let him think about that for a second, but, alas, no connection to the SERIES 7 was ever drawn, not even after all I had just spewed about inverse relationships and valuation ratios. I'm thinking that maybe some registered reps go into auto-pilot mode when smiling and dialing and are not so much listening as waiting for their turn to speak. Oh well. I'm still going to the meeting. I figure I'll learn something to help my investing as well as a thing or two that relates to the Series 7. Sure hope the guy is as ethical as his background implies, because if he tries to violate any FINRA rules, I will definitely be blogging about it.

Tuesday, May 25, 2010

Build America Bonds

Just in case the Series 7 throws a question at you about "Build America Bonds," let's say a few words about them here. BABs are issued by states and cities, but, unlike typical municipal bonds, these are taxable to the investor. The issuer has to, therefore, pay a higher nominal yield to investors, but the issuer receives a big chunk of the interest they pay right back from the US Government. The Build America Bonds are designed to stimulate the rebuilding of infrastructure (roads, bridges, sewers, etc.), and are authorized under the American Recovery and Reinvestment Act of 2009. Basically, the federal government is helping municipalities to rebuild infrastructure by allowing them to sell bonds to a bigger group of investors compared to those who typically buy the tax-exempt municipal bonds. See, since the interest payment the investor receives is taxable, any bond investor might be interested, not just high-bracket investors who typically buy tax-exempt municipal bonds. As the US Treasury explains, low-income investors, corporate bond investors, and pension funds--who would normally not buy municipal bonds--will in many cases be interested in buying the taxable municipal bonds called "BABs." How does the issuer benefit by paying a higher interest rate? The federal government reimburses the issuer for 35% of the interest paid to investors. As the US Treasury explains, if an issuer sells a 10% bond to an investor, the issuer receives 35% of that back from Uncle Sam, making their net borrowing cost just 6.5%, while being able to sell bonds to a wider spectrum of investors. The way I just described BABs actually applies to just one type of them, which we could call the "BABs - Direct Payment." There is another type in which the tax credit is given to the investor, and we could call these "BABs - Tax Credit." The investor's tax credit is also equal to 35% of the interest payable on the bonds. The effective savings that the bond issuer realizes is not as high on the "tax credit" BABs, but these bonds also don't carry as many restrictions. Basically, as long as the "tax credit" bonds would normally pay tax-exempt interest and are issued before January 1, 2011, they can be used for virtually any purpose. On the other hand, with "direct payment" BABs issuers have to use virtually all the money raised to build something (capital expenditures), while the money raised through "tax credit" BABs can be used for both capital expenditures (building stuff) or working capital (paying bills). They can also be used to perform refundings and no more than one advance refunding.
If the test brings these Build America Bonds up at all, I would anticipate that it would focus on the main points:
  • they pay taxable interest to the investor
  • the issuer receives a direct payment (refundable credit) from the US Treasury of 35% of the interest paid on the bonds for "direct payment" BABs
  • the investor receives a tax credit of 35% of the interest received from the issuer for "tax credit" BABs
  • BABs are not guaranteed by the federal government/not direct obligations

Saturday, May 22, 2010


I'm up early on a Saturday doing my weekly visit to the FINRA website. I see that two broker-dealers have decided to provide me with real-world examples of Reg SHO violations, and pay a total fine of $925,000 to FINRA. Remember that Reg SHO requires broker-dealers to determine that actual securities are available to be borrowed and sold short before executing a short sale. Stock prices are based purely on supply and demand, so if short sellers get to sell phantom shares short, that artificially depresses the price of a stock and distorts the market.

I'll let you stretch a little bit by reading the news release yourself at:

Tuesday, May 18, 2010

Half again as much

Many Series 7 candidates struggle with the initial credit created in a short margin account. The way to check your work--if you get such a test question--is to make sure that whatever the amount of the stock, the margin customer's initial credit is "half again as much." If he sells $40,000 short, his initial credit is $60,000. If he sells $100,000 of stock short, his initial credit is $150,000.
Because Reg T is 50%. He receives the cash for the sale of securities, plus he deposits half that amount in cash, and ends up with "half again as much." So, the following question should be fairly easy:

A customer sells 1,000 shares of ABC common stock short @45. Therefore, his initial credit in the short margin account is:
A. $45,000
B. $67,500
C. $50,000
D. $90,000

EXPLANATION: again, the short seller receives the proceeds of $45,000, plus he deposits half that amount ($22,500) to meet the Reg T requirement. Add those two numbers together, and you see that the answer is . . . .


Thursday, May 6, 2010

Automatic Orders

Here's a practice question appropriate for today's scary movement in the secondary markets:

A large number of which of the following orders could exaggerate a market drop, sending the DJIA down nearly 1,000 points in a half hour?
A. sell-limit orders
B. sell-stop orders
C. buy-stop orders
D. market not held orders

EXPLANATION: you can eliminate any choice with the word "buy" in it, since buyers don't cause the price of things to drop. The "market not held orders" choice doesn't really tell you enough--that could be a buy or a sell. Somebody's just trying to throw you off. So, you can quickly eliminate two answer choices. But, then, many candidates become confused between the sell-limit and the sell-stop. The key is this--where is the sell order placed in relation to the current market price for the stock? The sell-limit order is placed above/higher than the current market price, so those sales only go off if the price rises. Sell-stop orders, on the other hand, go off when the stock price drops--see the problem? Market price drops a bit, a bunch of sell orders go off at the same time, sending the price down some more, setting off more sell-stop orders. The news media usually refer to these orders as "program trading," but the exam would probably call them sell-stop or "stop loss" orders. They are placed below the current market price, usually to protect a long position in the stock. Trouble is, if too many people use these orders on the same stocks at the same time, a bear market can get even scarier. Oh well. Just one more testable point to keep track of. Eleven thousand seven hundred fifty-three to go.

Tuesday, April 27, 2010


In olden days a short sale could only be executed at a price that was higher than the previous price for the security, or at the same price if the price before had been an "uptick." Reg SHO now requires that before executing a short sale, broker-dealers have to locate the securities so that the laws of supply and demand are not distorted by "naked short selling" in which people sell stock that doesn't even exist short, artificially depressing its price. If the broker-dealer executes a short sale without reasonably believing the shares can be delivered by the lender, they have violated the rule.

In May 2010 Reg SHO is being updated to impose a temporary version of the old uptick rule that applies when a "circuit breaker" is tripped for a particular security. Starting in May, if a security drops during the day by 10% or more below its most recent closing price, short sellers will not be able to sell short at or below the current best bid price for the security. In other words, people “selling long,” which means selling the shares they own, will have priority and will be able to liquidate their holdings before short sellers can jump onto the pile. As the SEC states in their unique brand of English: a targeted short sale price test restriction will apply the alternative uptick rule for the remainder of the day and the following day if the price of an individual security declines intra-day by 10% or more from the prior day’s closing price for that security. By not allowing short sellers to sell at or below the current national best bid while the circuit breaker is in effect, the short sale price test restriction in Rule 201 will allow long sellers, who will be able to sell at the bid, to sell first in a declining market for a particular security. As the Commission has noted previously in connection with short sale price test restrictions, a goal of such restrictions is to allow long sellers to sell first in a declining market. In addition, by making such bids accessible only by long sellers when a security’s price is undergoing significant downward price pressure, Rule 201 will help to facilitate and maintain stability in the markets and help ensure that they function efficiently. It will also help restore investor confidence during times of substantial uncertainty because, once the circuit breaker has been triggered for a particular security, long sellers will have preferred access to bids for the security, and the security’s continued price decline will more likely be due to long selling and the underlying fundamentals of the issuer, rather than to other factors.

Friday, April 23, 2010

Painful Options Question

As I was saying in today's Friday Free Broadcast, the Series 7 questions on options will often not involve calculations. For many people, questions similar to the one below are among the most difficult because they force the test taker to really know how options work:

Which of the following option series trades at the highest premium?
A. ABC Apr 30 put
B. ABC Apr 40 put
C. ABC May 45 put
D. ABC Jun 45 put

Okay, it seems there may be information missing. Unfortunately, there isn't. No stock price provided in the question? There's your clue--it can't matter what the stock price is. The test is hard, but it's not a rigged game. If the stock price were required to answer the question, it would be provided. It wasn't provided, so it doesn't matter. Why doesn't it matter? Because puts with higher strike prices are worth more money, period. No matter where the stock is right now, the right to sell it for $45 is worth more than the right to sell it for $40 or $30. So, the answer has to be the May 45 put or the Jun 45 put. Which one gives the buyer more time to win? The Jun 45 put. That's the one that's worth the most.


Wednesday, April 21, 2010


Just a quick word on how we handle comments at this blog. If you have a question related to the exam, I publish your comment and usually respond to it. As long as it helps the other blog visitors to prepare for their exams, and as long as you refrain from profanity and insults, I publish it immediately.

On the other hand, if you think this blog is your format for ranting, insulting, and generally making a fool of yourself, while financial services professionals are spending their valuable time studying for their license exams, think again. Or, go ahead and vent with your head down until the foam covers your keyboard. Either way, you won't be seeing your words published at this blog. There are millions of outlets for you in the blogosphere, but we have no room and no time for such foolishness here.

Thanks, and we appreciate your cooperation in advance.

Friday, April 16, 2010

Every little thing

I've passed my Series 65 exam within the past two years, so if I wanted to I could register as an investment adviser. I have no criminal or disciplinary activity in my past, so I would definitely be granted a license by the State of Illinois Securities Department to start telling people what to do with their money or managing their brokerage accounts in exchange for a percentage of assets. But, unfortunately, my record-keeping skills are atrocious. I'm always getting notices from the IL Dept. of Revenue about late filings, penalties, and interest. I'll print my monthly account statement for the Roth IRA but inexplicably forget to print statements for the SIMPLE IRA. So, I stink at keeping records, and record keeping is a big deal for both advisers and broker-dealers. On Friday mornings, I usually go to the FINRA website and see what kind of rule violations are going on in the industry. For the firms, it's usually a lack of good record-keeping that gets them in trouble. They fail to report trades to TRACE (corporate bonds), or they submit reports that are inaccurate. Every little thing has to be perfect, as AXA Advisors discovered recently, according to this disciplinary action summary I'm reading right now. Apparently, on a few trades in municipal securities, the firm reported to the RTRS system that they had acted in a "principal" capacity, when, in reality, they had acted in an "agency" capacity. This, of course, also caused the firm to deliver customer trade confirmations that were inaccurate. Penalty? $20,000 fine.
Geeze. If you read the summary, you'll notice that AXA didn't bother to argue--they used AWC (acceptance, waiver, and consent) to settle the matter. On the other hand, I saw that in another case, the respondents appealed the NAC decision to the SEC, and are now appealing the SEC decision to the federal appellate courts.
However, we can only have so much fun with one blog post, and it's time for me to head to the office pretty soon, anyway.

Monday, April 12, 2010

Ending My Margin Adventure

So my margin account adventure ended with a wimper, not a bang. I just logged into my TD Ameritrade account and saw that the "margin balance," or what the exam calls the "debit register" or "debit balance," is at zero. After selling the 90 shares of HSP (Hospira) for $4,723 on March 1, the "DR" or "margin balance" sat stubbornly at eight or nine dollars, increasing gradually with the margin interest charges. Too lazy to deposit money into the account, I just waited for the next dividend payment to come in, and on April 1 and April 7 three little dividends came in--$5.60, $5.50, and $7.60--from Northern Trust, Bancorp South, and Merck, respectively. They're all marked "qualified dividends," which means that--until and unless Congress and the President (fiscal policy) take the kinder, gentler tax rate of 15% away--those little payments are darned tax efficient, even if this is just a taxable brokerage account. Your exam calls this type of investment account a "margin account," but that just means it's approved for margin. IF I want or need to, I can purchase securities on margin or borrow money against the value of my stock and bond assets. However, I have never bought securities "on margin," and I have only taken one margin loan against "SMA."
So, what did I learn from my 10-month adventure in margin?

  1. Being forced to sell stock to pay the margin loan is really stupid. Those 90 shares of Hospira that I sold to pay off the loan would have generated $1,000 in dividends over my holding period and possibly increased in value by 50-100%.
  2. The real world uses different terminology than the Series 7, but the concepts are exactly the same as what you study for your exam. My account doesn't use the term "SMA," or "debit balance," but you quickly get used to the terms "available funds for trading" and "margin balance."
  3. I will never use margin again.

My adventure was highly educational, and the $4,000 loan was totally necessary when I took it. But, if you see me blogging about another adventure in margin, please remind me that I no longer engage in that sort of foolishness.

I could borrow $4,790.72 from "SMA" right now with just a few clicks of the mouse, but I won't do it. Just like I won't walk down to the liquor store at the end of the block this evening. Nothing illegal about either activity, but as someone who has experienced both destructive pursuits, I can say with confidence that I'm better off without it.

Saturday, March 27, 2010

Felonies and FINRA registration

A customer recently emailed a question to me that touches on an important testable point: statutory disqualification. Here is the question:

I have been charged with felony forgery in the past year. I received probation and did not inform my firm. When my broker-dealer found out, they updated my U5 and terminated me. Now FINRA is investigating me for failing to update my U4 with the felony forgery information. My criminal information is now on BrokerCheck. Can I realistically get hired in the business again?

Forgery is directly related to the securities industry and would be a big problem whether a felony or a misdemeanor. There are bad-boy agents out there who will sell a deferred annuity to an unsuspecting senior citizen, then tell the customer to sell the thing and conceal the nasty surrender charge by forging the client's signature on the paperwork to do the annuity sale or switch. Also, so much sensitive information is provided by clients to registered reps that any crimes of dishonesty are major red flags to FINRA. To follow up by failing to update your U-4 with the negative information also hurts, because, in their eyes, it's another blatant form of dishonesty. Then again, if you cooperate with the investigation, maybe they'll suspend you, which is temporary. A bar is also very likely, unfortunately, and--unfortunately--a bar means "game over" in FINRAspeak. Wish I could be more upbeat about the situation, but it doesn't look good. Still, why not wait to see how the investigation ends up. Talk to an attorney who works in this area. More bad news: your state Administrator is likely to also take action if FINRA alerts them of any disciplinary decisions. Be sure to cooperate with all the regulators and try to get some good advice and/or representation by an attorney, who will want his or her retainer upfront. Be sure to be sitting down when they quote their retainer. Cooperating with FINRA can only help, while refusing to cooperate will keep people out of the business permanently every single time. You might want to go to and look up the enforcement section and discplinary orders. Read through the recent cases that led to temporary suspensions and permanent bars to get a feel of how things generally turn out. I wish the violation were more of a goof-up than two separate acts of dishonesty. "A member, in the conduct of his business shall observe high standards of commercial honor. . . " is the basic creed of FINRA and all the other self-regulatory organizations. Without trust, the system can't function.

Series 7 Exam Help

Sunday, March 21, 2010

Hanging tough

It's early on a cold, rainy Sunday morning in Chicago. The calendar declares that "spring" has begun, yet the snow-covered ground plus my hat and gloves still point hard toward winter. It's easy to get discouraged on a day like this, to give up on being productive and start planning an elaborate afternoon revolving around deep dish pizza, DVDs, the Sun-Times, and a seldom-used sofa that's just crying out to be broken in this afternoon.
But no. That's not how things go in general. Yesterday, with cold wind and a wet snow pelting my face, I ran 4 miles through a local cemetery. Today, I'll give myself a break and merely work myself into a sweaty stupor at the local gym. Most test prep companies have dozens of writers and editors churning out their exam manuals and practice questions, but at Pass the Test, there is only one person producing all the practice questions, books, audio cd's, DVDs, and on-demand classes. In two days, that person is going to be 46 years old, which is why that person needs to stay in shape. A little rain and snow? Dress for the weather and snarl at the elements. A little tired on a Sunday afternoon? Sounds like a trip to the gym is in order.
The Series 7 is mostly an endurance event. You might think of it as one test, but it's really equivalent to a semester of college, 12-15 credit hours' worth of hard work. You need to be in shape physically, mentally, and emotionally for this challenge. I can't think of a better time to start an exercise routine. To start drinking more water than coffee, to start eating more vegetables and fewer potato chips, and to start cooking rather than ordering meals. The 3-4 months it will take to study for your exam would be a great time to start spending more time exercising than watching television. No time? Listen to our audio lectures as you walk, ride, run, etc. Our ExamCram questions will soon be available as an I-phone application; maybe you could ride the exercise bike while working practice questions a few times each week. Talk about getting the mind and body in shape!
The Series 7 involves a lot more than scheduling a test date, skimming a big, thick textbook, taking a few practice questions, and expecting to pass. Unless you're a genius, that approach will lead to a 30-day stay in the penalty box. If you think it's stressful studying for your first attempt, imagine the stress you'll feel studying after you've already failed the thing. With your company threatening to fire you and your bills piling up left and right. On the other hand, if you take a holistic, disciplined, diligent approach to this endurance event, success is almost assured.
So, what's it going to be?

Thursday, March 11, 2010

Closed-end funds

Closed-end funds are exactly the same as open-end funds, only completely different.
Let's look at the similarities:
  • both are portfolios managed by an investment adviser
  • investment objectives are often similar
  • both are investment companies
  • both are "management companies" as opposed to UITs and face-amount certificates

Now let's look at the differences:

  • open-end funds are redeemed for the NAV (net asset value)
  • closed-end funds are traded, independent of their NAV
  • sales charges and 12b-1 fees are charged to open-end fund investors
  • investors pay commissions to buy and sell closed-end funds
  • closed-end funds use more leverage offering auction-rate preferred shares to investors
  • open-end funds may continuously offer new shares
  • closed-end funds have a fixed number of shares

Wednesday, February 17, 2010

Buy-Stop Limits

Let's enjoy a fun question on types of orders that customers can place either online or over the phone with their trusted registered representative (you). Ready? Let's take a stab at it, anyway:

A customer of a broker-dealer places a buy-stop @45 limit 45 order on XYZ. The following trades in XYZ are reported to the consolidated tape:

44.50, 44.95, 45.10, 45.05, 44.95, 45.00

What is the most likely result?
A. the order has not yet been executed
B. the order has not yet been activated
C. the customer was filled at $44.95
D. the customer was filled at $45.05

EXPLANATION: many candidates absolutely loathe questions like this one, almost as much as they hate options questions. Oh well. If you're going to be entering orders for customers, you'll need to know this stuff, which is why it's very likely fodder for the Series 7. Remember that a buy-stop @45 is activated when the stock trades at $45 or higher. So, this order was activated when it traded at $45.10. That eliminates Choice B. Can the order be filled at $45.05? No, the customer won't pay any more than $45. That eliminates Choice D. Can the order be filled at $44.95? Yes, so the answer is . . . c.

Saturday, February 13, 2010

A twisted spread

I was listening to the playback of yesterday's Friday Free Broadcast on Straddles, Spreads, and Combinations, and I realized how hard a guy could make an options question on the Series 7 concerning any of these topics. With that in mind, let's see how twisted a question on option spreads could actually get on the Series 7:

Joe E. Investor buys an ABC Apr 45 put, writing an ABC Apr 50 put. Which of the following is/are true of this position?
I. Joe will profit if the spread widens
II. Joe will profit if ABC drops below 45
III. Joe will establish this position at a net credit to his account
IV. Joe will profit if ABC rises to 50 or above

A. I
C. I, II

EXPLANATION: okay, let's see what can be eliminated. Widen vs. narrow has to do with whether Joe has a debit or a credit spread. Which put is worth more, the ability to sell stock at $50 or at $45? Obviously, the April 50 put is worth more. Since Joe sold that one, he has a credit spread. Credit = narrow, so eliminate anything with "I" in it. A, and C are gone. And, suddenly "III" is in your answer. And, you just determined that Joe has a credit, so there is no doubt that "III" is in your answer. All you have to do is eliminate "II" or "IV," and you're done. Choice "II" implies that Joe is bearish on ABC. Does that make sense? Is he "long-the-lower-strike"? Yes. So, it does not make sense, because this is a B-U-L-L spread. Choice "II" is eliminated, making the correct answer . . . d

Now quick, what is your middle name?
Sorry--it can get a little confusing, can't it? Notice how I approach every "Roman Numeral" question as if it's a chess game. I'm using logic to eliminate players until I get down to just one remainder. Don't deal with the A-B-C-D structure first. Take each Roman Numeral choice and try to decide if it's in, or if it's out. Then, eliminate the A-B-C-D choices accordingly. This is how you need to approach the Series 7. This is how you take away the upper hand and turn it back on the test itself.

Wednesday, February 10, 2010

Holy Hypothecation Mishap, Batman!

You could easily see a Series 7 question like this one at the testing center:

Broker-dealers may lawfully hypothecate which of the following?
A. customers' fully paid securities
B. customers' excess margin securities
C. customers' securities held in safekeeping
D. customers' securities upon which the firm holds a proper lien

EXPLANATION: one of my pet peeves with all these license exams is that it eventually becomes a guessing game rather than an opportunity to teach new hires some very important information. This question here appears to mean absolutely nothing, but, in fact, a failure to understand its meaning can cost you a big fine by FINRA and a suspension or revocation of your license. A broker-dealer called a "clearing member" or a "custodial broker-dealer" routinely holds customer assets on its books. When I cut a check to my SIMPLE IRA each month, TD Ameritrade puts it on their books--do they wrap up $875 with my name on it? No--like a bank, they play with my cash and merely put it down as what is owed to me. Similarly, I've never seen any of the stock certificates that I've purchased because my broker-dealer holds them in street name, on my behalf. In other words, I put a lot of trust in my broker-dealer. I assume they're good for that cash balance in my account and that all of those shares of stock are actually still under their control/possession. If FINRA found out that a broker-dealer was going around pledging customer assets as collateral for a loan to the firm, that could be a problem. It would be similar to having your neighbor take out a home equity loan but actually pledge your house as collateral. Wouldn't that be awkward if your neighbor couldn't pay off the loan, and the bank foreclosed on your house. To prevent that, FINRA, the SEC, and the state regulators will only allow broker-dealers to pledge customer securities required to secure the margin loan in a margin account. Fully paid securities belong to customers, even if the firm holds them in street name or in the customer's name in "safekeeping." When the customer signs the margin agreement, including the hypothecation agreement, then the firm can pledge the customer's securities as collateral. But if a firm accidentally pledges securities it has no business pledging, bad things can happen. Just a few weeks ago, we saw an instance where a principal got in trouble for hypothecating securities the firm had no right to hypothecate. To read about it yourself, go to, click on "industry professionals" then under Enforcement click on "disciplinary actions" then find the January 2010 summary. On page 11, you'll see that a principal accidentally hypothecated customer securities worth about $106 million dollars, earning him a suspension and a small fine. You'll also see that it takes about 10 clicks to find anything on the FINRA website, but that's another matter.

Oh yeah, and the answer to the question is . . . D.

Tuesday, February 9, 2010

Good news from the battlefield

While there are no guarantees for people studying the Series 7, I am often amazed by how many people pass the exam, and on their first attempt. Like the customer who just sent me this email:

I have conquered the beast and made it into the coveted fraternity! I am pleased and relieved to say that I passed the 7 this past Saturday in Phoenix. At the break, I had my doubts. All 10 of the additional phantom questions were stacked in the first half. You are right, they are nasty people who write the exam. I am totally convinced that I could not have done it without your weekly webinars, your on demand classes, your practice lessons, your practice exams and your printed material. It took the whole enchilada to "get 'er done." But... WE did it. Thank you!

Friday, February 5, 2010

Fun with IRAs

Remember that when you're doing the 1,500 or so practice questions in our new Pass the 7 ExamCram Online Test Prep, you're seeing questions that should be very similar to what you'll see on the test. But only some of them will seem like close replicas; many of the questions at the testing center are going to shock the heck out of you. Half of those shockers are really familiar concepts that have been distorted so horribly that you no longer recognize what you're being asked. The other half are just questions no one could have known would show up based on the exam outline. That's why you have to develop test-taking skills. You need to use process of elimination so that you will minimize the errors that people make on questions they sort of knew and maximize the number you get right on questions your sort of don't. Let's enjoy a practice question on IRAs and approach it with all the skill and strategy you can muster:

Which of the following is true of a Roth Individual Retirement Arrangement but not a Traditional Individual Retirement Arrangement?
A. REITs may be held within the account
B. income limits prevent the deductibility of contributions
C. income limits prohibit certain individuals from making contributions
D. withdrawals must begin the year following the individual's 70 1/2th birthday

EXPLANATION: your job is to read each answer choice and ask first if it's true about Roth IRAs and then, is it not true of Traditional IRAs. Start with A--is that true of a Roth; can you buy REITs in it? Sure? Is that not true of the Traditional IRA? No, you can also buy them in a Traditional IRA, so choice "A" is eliminated. Your odds now rise from 25% to 33.3%. What about B--do income limits prevent the deductibility of contributions? Uh-oh. You don't deduct contributions to a Roth, so I guess income limits don't affect the deductibility. Unless you're reading it wrong, which is what the question wants you to worry about. Hmm. What about C--do income limits prohibit individuals from making contributions to their Roth IRA? Yes. Does that happen in a Traditional IRA? Actually, no, it does not. But most people confuse this statment with whether a rich person with a 401K established can deduct her contribution to a Traditonal IRA--totally different question. Of course, you're all turned around now and might not recognize that you just found the right answer--you did. But, you have to eliminate D before you pull the trigger. When do withdrawals have to begin in the Roth? They don't. So, D is, in fact, eliminated. And, even though "B" left us confused, "C" is our best answer.

Excellent, only 259 more questions to go.

Thursday, February 4, 2010

Margin Question

Margin questions are always fun, so let's enjoy one right now, shall we?

A customer of a broker-dealer purchases $30,000 of XYZ in a new margin account. The margin requirement is 60%; therefore, the required equity initially is
A. $18,000
B. $15,000
C. $12,000
D. $2,000

EXPLANATION: if the question says the intial margin requirement is above 50%, you have to accept that fact and work with it. If margin is what the customer has to deposit, he has to deposit $18,000. Which makes the initial equity $18,000.


Also, for anyone who remembers back when I was willing to discuss the stupid loan I took from "SMA" in my own margin account, the debit balance is now $4,700 with the little interest charges adding up each month. The 90 shares of Hospira that I plan to sell to pay off the debit is worth about $4,500, after advancing 17%. Back when I started blogging about my adventures in margin, Hospira was in negative territory. Unfortunately, as it slowly rises in value, it never seems to quite catch up to the interest charged on the loan. Even if/when it rises above what I owe, it will still be an idiotic maneuver. I'll end up selling a stock that would otherwise pay me dividends for decades and probably end up worth three times what I bought it for when/if I reach retirement age. Oh well. I needed the cash at that point, and I was willing to sacrifice good judgment for the sake of my Series 7 customers, who deserve to see at least a few testable points played out in the real world.

Friday, January 29, 2010

More Muni's in the Real World

I've posted on this theme before, but I'm constantly amazed how much of a connection there is between my daily life and municipal bonds. Across the street from this office sits an old brick industrial facility that was supposed to be turned into a townhouse/condo development. Unfortunately, the developers borrowed $15 million but sold only 1 unit, and now the property sits in foreclosure, owned by a very unhappy bank. So, the Park District, with land that presses right up to the property, would like to use the building for offices, conference rooms, exercise rooms, and also some green space after tearing down part of the structure. They need $6 million to acquire the property and, therefore, want to issue $6 million of municipal bonds. Next Tuesday, Forest Parkers like me will vote yea or nay to allow the Park District to raise our property taxes slightly in order to create the money needed to retire a $6 million bond issue. I'm kind of tired of seeing the old, useless structure across the street, and green space is a rare commodity in this densely-packed community. I plan to vote "yea." Senior citizens will probably vote "no," based on their argument that "we don't use it; why should we pay for it?" Nice to see how much today's seniors care about the youth of their community--as if an extra $75 a year in property taxes is really going to impact anyone.

On another note, I see that the Cubs are threatening to move their spring training facility from Arizona to Florida. I invite you to read this article from the Bond Buyer yourself. As before, you will see that municipal bonds impact our daily lives, far outside the scope of the Series 7 Exam. The Bond Buyer article is at:

Using social networking sites

It's a brutally cold 5 degrees in Chicago this Friday morning and I'm doing my usual routine of visiting the FINRA website to see what's new. I'm not surprised to find a Notice to Members concerning the use of social networking websites by registered representatives. Obviously, a registered representative can now easily post stock and bond recommendations on his "wall" at Facebook, or--even scarier--post them on all of his friends' walls. Or, maybe he starts a fan page in which friends can "become a fan of Oracle 6% convertible preferred stock," although I'm not sure how many devotees he'd find for that one.

Point is, broker-dealers have to either supervise or pre-approve a registered representative's communications on social networking sites or blogs. I hadn't actually thought of it until just now, but a blog post is "static" and, therefore, considered to be advertising. Advertising has to be pre-approved by a principal, which could really slow down your blog posts, especially if you continue to promote various stocks, mutual funds, or variable annuities. And, your recommendations have to be suitable for everyone who receives them, which seems to open a huge can of worms for the compliance department.
The FINRA notice is at:
It's very easy to read, as it's presented mostly in Q and A format. Enjoy, and study hard. The Series 7 is always looking to flunk 1/3 of all people sitting down to take it. Your job is to end up in the other 2/3s. And, there is still about 2 hours in which you can sign up for today's Friday Free Broadcast at 11 AM Central on TAXATION. See the home page under "Get Free Stuff" to sign up (

Thursday, January 28, 2010

Convertible bond question

The Series 7 exam does not necessarily ask questions the way that you or your practice questions assumed. For example, most practice questions on convertible bonds involve the mathematical calculations and relationships involved. You finally get used to dealing with "convertible at 50" and "parity," and you start to feel confident that you're ready for questions on convertible bonds or convertible preferred stock. When you get to the exam center, however, maybe you get a fun question like this one:

When should a convertible bondholder be advised to convert her bonds to the underlying common stock?
A. when the bonds trade above parity
B. generally, under no circumstances
C. when the market for the common stock loses liquidity
D. when the bonds trade for less than the underlying stock net of commissions

See, this actually has very little to do with numbers or calculations. Suddenly you realize that all that time you spent dividing by the conversion price and figuring parity is only loosely connected to this question. In other words, welcome to the Series 7. Time to start thinking on your feet a little bit. What you have to know is that there is no reason to convert a convertible bond or preferred stock unless the prices between the convertible security and the underlying stock get "out of whack." If the bond trades at parity or above, the investor enjoys the higher market price. If the bond trades for less than the underlying stock--even after commissions paid to do the trade--investors might wish to convert to exploit the "arbitrage opportunity."


So, don't allow yourself to focus on just one narrow aspect about, for example, convertible bonds. Don't obsess over the conversion ratio and parity without also knowing that convertible bonds pay lower rates of return and are less sensitive to interest rates, etc. Calculations are not the focus of the test--being able to show your understanding of concepts is what the exam is usually after.

Monday, January 25, 2010

What about the new Roth IRA rules?

Many Series 7 candidates have been sending emails asking if the Series 7 exam will be testing the new Roth IRA rules for 2010. The most accurate answer is this: nobody knows.
Why not? Because nobody ever knows what the Series 7 is going to ask. There are companies out there who will give you a definitive answer here, and there are companies like Pass the Test who prefer to tell you the truth--nobody knows.

If the test does ask a question requiring you to know the peculiar situation concerning Roth IRAs in 2010, this is what you would need to know:
  • Income limits still apply and prevent "high-income" people from making a contribution
  • The only change is that "high-income" people can do a Roth conversion by paying tax on all the money in their Traditional IRA account and making it a Roth account

That's all that's happening this year--if you want to convert a Traditional IRA to a Roth IRA, you can do that this year regardless of your income level. If you want to add new money to your Roth IRA, you will be prevented from doing so if you reach a certain income level that is one set of numbers for single filers and another for married couples filing jointly. What are those numbers? Your firm has them somewhere, and we do not think those numbers are testable. But, again, nobody really knows for sure what is "testable" and what isn't. That's just the sort of folks we deal with when taking the Series 7 exam. They do whatever it takes to flunk about 1/3 of all test takers on any given day. Don't let the wisenheimers put you into that bottom 1/3.

Thursday, January 21, 2010

Workin' outside the firm--hey, it's MY business!

Many agents don't understand how much control their broker-dealer actually has over them. Many think they can maintain investment accounts all over the place that their firm knows nothing about, for example. Others think they can call their clients to interest them in some real estate investment they're cooking up with their brother-in-law. How would you answer a very likely exam question such as the following?

When an agent of a broker-dealer would like to give harpsichord lessons for compensation just two times per week
A. the employing broker-dealer may not restrict or prohibit this activity
B. the employing broker-dealer must grant written permission
C. the agent must provide prior written notification to the employing broker-dealer
D. the agent must provide prior written notification to the broker-dealer if compensation exceeds $100

EXPLANATION: there is some hair-splitting going on here. Does the broker-dealer need to grant written permission? No. Can they tell you not to do it? Yes. Anytime you want to work outside the firm for compensation, notify your supervisor in writing.


Tuesday, January 19, 2010

Net Asset Value

Net Asset Value in a mutual fund seems to annoy a large number of Series 7 candidates, so let's take a closer look. Here is a rather difficult practice question on the concept:

The Pacesetter Equity Income Fund holds large positions in exactly 10 common stock issues. This week 5 of the holdings distributed dividend payments of $10,000 each. Therefore, which of the following statements is true?
a. the NAV remains unchanged if proportionally more purchase orders come in versus redemptions
b. the NAV remains unchanged due to dividend distributions
c. the NAV will rise unless market values decline by more than the dividends distributed
d. the NAV remains unchanged unless redemptions outweigh purchase orders for the fund shares

EXPLANATION: NAV is figured before anybody buys or sells shares of the fund on a particular trading day. The buyers are not bidding competitively on a fixed number of shares--the fund creates new shares for the buyers and converts the sellers' shares to an equal amount of cash. Purchases and redemptions have no effect whatsoever on NAV. On the other hand, if $50,000 of cash money comes into the mutual fund portfolio, that makes the assets of the fund rise. The only way the NAV could go down that day is if the market values of the securities dropped by more than $50,000.


Thursday, January 14, 2010

It's a book

Broker-dealers often provide study materials "free of charge" to those taking the Series 7. Many exam candidates are unhappy with what they've been provided, or they feel they could use more clarification of key points. Some people just want to read the Series 7 material in a language they are more familiar with--English.

Remember that you can still buy the Pass the 7 book at the link below, even if your firm already provided you with materials. I'm not even implying that there's something wrong with the other vendors' materials. It's just that when you're studying for something as massive and difficult as the Series 7, you can probably use all the extra help you can get.

Since most Series 7 candidates are on a tight budget, I can help you save 21% with this coupon code: blog10. To check out and maybe buy the Pass the 7 book, please click on:

Can I reschedule my exam?

Exam candidates often get confused about if and how they can reschedule their exam. Now, if your firm says you can't reschedule, then that's the end of that issue. But, if you have the flexibility to take the test only when you feel ready to pass it, you can definitely reschedule your exam by telephone or through the testing center's website. Why would you reschedule your test? How about because you would rather push it back 1 week yourself than have it pushed back 30 days through a failing grade. Right? While it's nice to "get it all over with," it's a bad call to take the test unprepared and end up failing and having to wait 30 days. It's like speeding to get to an appointment--if you get in a wreck or get a ticket, you won't make the appointment at all. We will have a GoNoGo exam soon for Series 7--check the home page and look for "Am I ready to take my exam?" These scores will give you an idea of your readiness. Or maybe you already know you're not quite ready. If so, you can reschedule without losing your testing fees if you do so by noon two business days before your test. As FINRA just sent to me by email, you can reschedule as follows:

If appointment is scheduled for Monday, cancellation must be made no later than noon on Thursday of the preceding week. If the appointment is scheduled for Tuesday, cancellation must be made no later than noon on Friday of the preceding week. Etc.

In other words, they made it slightly more convenient than in the olden days, when they counted 48 hours before the time of your exam; now it's just by noon two business days before your test, no matter what time it starts.

Tuesday, January 12, 2010

Completion of a securities transaction

I was doing some exciting research for our Pass the 65 ExamCram questions and ran into this concept buried in an SEC release that was referred to by a financial planning textbook--yes, my social life really can't get any more exciting at this point. In any case, I came up with this possible Series 7, 65, or 66 question:

When does the SEC consider that a securities transaction has been "completed"?
A. when the prospectus has been received
B. when a registered representative completes the order ticket and submits it to the wire room
C. when the customer gives oral authorization for the terms of the order
D. upon settlement

EXPLANATION: a securities transaction has been "completed" when it settles/clears, at which point payment has been made, and the securities have been delivered. An investment adviser, for example, must disclose that it intends to act in a 'principal' capacity on a customer transaction and get the customer's consent no later than completion of the transaction, which is settlement. Settlement is usually T + 3 business days.


Saturday, January 9, 2010

Figure it out

Far too many license exam candidates labor under a misconception about the exams; they think they are supposed to know the answer as soon as they read the question. Unfortunately, for most questions, your job is to figure it out. For example, take a look at the following:

Parents often use zero coupon bonds such as Treasury STRIPS to fund future educational needs. Which of the following is an inaccurate statement of such investments?
A. they lock in a rate of return for the life of the bonds
B. taxation is deferred until maturity
C. their market price volatility is higher compared to interest-paying debt securities
D. they require lower capital commitments

Maybe you already know the answer, but your approach should be to take each choice and try to eliminate it--the choice you can't eliminate must be your answer. Also, it helps to remember that you're eliminating the three TRUE statements in this one. Right? Ok, so do zero coupon bonds lock in a rate of return for the life of the bond? Don't try to picture an imaginary flash card here--ask yourself how zero coupons work. Why are they called "zero coupon" bonds in the first place? Because they make exactly zero coupon payments--therefore, the investor does not reinvest coupon payments at varying rates along the way (reinvestment risk), so I guess the return is "locked in for the life of the bonds." See how much thought it can take to eliminate just one answer choice? Good--two more need to be eliminated, and then we're done. Taxation is deferred until maturity--is that true? Many people have memorized this, but even if so, don't choose this answer yet. Not until you eliminate the other two. Put this one on hold--it looks good, but maybe one of the other choices looks even gooder. What about the "market price volatility," does that make sense? Well, if you remember all that we've said about "duration" and how zero coupons have high "durations," you know it's true. If you don't remember it, figure it out--why would their price be volatile? Probably because there's no cash flow being paid to make the investor feel better about holding the thing. That's true, so we eliminate it, and we sit 50-50 at this point. Either B or D is going to be our answer--getting tired and frustrated? Suck it up, people--you have 260 questions to answer on your Series 7 exam. Okay, Choice D says that zero coupon bonds somehow "require lower capital commitments." And here is where we separate those who will pass the first time and those who might pass on their second or third attempt. The candidates who get frustrated now and start squirming like a little kid have little chance of getting it right. So, take a deep breath and figure it out. Why would the zero coupon require a lower capital commitment? Well, how are they purchased? At a deep discount to the par value--aha! If you can buy $100,000 par value of STRIPS for just $50,000 or $60,000, I'd say that represents a "lower capital commitment," whether I've ever thought of it that way or not. Choice D is eliminated, along with Choice A and Choice C. What's the right answer? The one that is not A, C, or D.