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