Thursday, February 24, 2011

Personal Bankruptcy and FINRA Registration

Can I get registered with FINRA if I've ever declared personal bankruptcy?

This is a question I receive frequently, though not as frequently as the question, "Can I get registered with FINRA if I have a felony conviction?"

Both issues are covered on the U4 and, of course, you never want to lie on your U4, especially if you might get caught. However, a "yes" answer to these sticky questions does not automatically lead to a denial of your application. It's just that a "yes" answer to any felony conviction or any misdemeanor considered "investment-related" is usually a game-over for the applicant. What if you answer "yes" to questions about your personal finances? Let's see how FINRA handles this FAQ:
A personal bankruptcy is not an automatic diqualification from FINRA registration. However, you are required to report and disclose a personal bankruptcy that occured in the previous 10 years. You are required to keep the information on your U4 current at all times and any changes to your disclosure must be made within 30 days. Your firm will help you correctly answer specific questions about bankruptcy on Form U4 and will electronically submit the Form U4 amendment on your behalf.

Series 7 Study Materials

Some of the large, long-established test prep companies have done a great job of creating the illusion that they are somehow plugged directly into FINRA and put out "official" FINRA-approved series 7 study materials. Truth is, FINRA approves of no materials and provides no company with any access not provided to other companies. So, how does anyone know what you'll see on your Series 7? They don't. Not really. We all see the FINRA Series 7 outline. We all get feedback from customers as to the kinds of things showing up on the test. And maybe some of the instructors on board have taken the exam in the not-so distant past.
That's it. To illustrate the point, understand that FINRA actually has exams that people take for which no materials have been written. Seriously. FINRA doesn't think you necessarily need a test-prep company in the first place. In their mind, that's just one option available. The other options? Not FINRA's problem to come up with them.
The other day a customer asked how my book compares to the "FINRA/NASD manual" that he currently had. See what I mean? One of the big firms had convinced him that their stuff was the "official, FINRA/NASD-approved license exam manual." Nice marketing campaign that happens to be based on pure BS. My book is as "official" as any other book out there. It's just that my book is written in English. Kind of funny that Series 7 candidates reward the big companies for writing pedantic, elitist, opaque materials not only by continuing to buy them but also by interpreting that approach as a seal of approval from the regulators.
Oh well. The other license exam manuals out there are helpful, but, please, don't assume that some companies put out "official FINRA" materials and others are just winging it. We're all winging it, some more sucessfully than others.

Avoid Rigid Thinking

The other day a customer wrote an email asking about debit and credit spreads. He had been working with another vendor's material and had someone thought that memorizing "right to buy" and "obligation to sell" was about all he had to do to get through this whole options thing. In my book, I explain that if you buy the ABC Oct 50 call and sell the ABC Oct 55 call, you have created a debit spread. Why? The right to buy stock at $50 is worth more than the right to buy it for $55.
Whoah--slam the brakes, shut the system down, this guy was not happy with that explanation. He was convinced that there WAS no right to buy stock at $55 since this guy SOLD that call. This is why rigid thinking can be so detrimental on the Series 7 exam. The little options quadrant that everyone learns is helpful in some cases, but--like the T-chart--has its limitations, too. I need you to accept this statement, everyone: a call option is the RIGHT TO BUY stock at a set price.
You can buy that right, sell that right, or just take a pass on the whole thing. Okay? Whatever the premiums are, somebody paid more for the right to buy ABC for $50 than anyone paid for the right to buy it for $55. This guy bought the more valuable call and sold the less valuable call. Debit to his account. More money went out than came in. On the other hand, if he buys an ABC Dec 40 call and sells an ABC Dec 30 call, he sells the more valuable option and, therefore, starts with a credit. Whatever the premiums are, the right to buy stock for $30 is worth more than the right to buy it for $40. He took in more money than he spent. A credit to his account; credit spread.
I know it's hard to see this without the premiums provided, but you have to learn how to do that for your exam. What really helped me see this concept was pulling up real-world quotes on options. You'll see calls on the left, puts on the right. And, you'll see that as strike prices drop, call premiums rise and put premiums fall. Until you can see that and understand it fully, options questions will likely seem like a major challenge when, in fact, they should be among the easiest questions you encounter at the test center.

Tuesday, February 8, 2011

Real-World DPPs

One of the most frustrating aspects of studying for the Series 7 is that most of the information is presented as if totally divorced from the so-called "real world." The term "DPP" or "direct participation program," for example is not something most people actually say in the day-to-day world. Usually, these investments would be called "partnerships" or "limited partnerships." The business is established as a limited partnership, and what your investor buys is a limited partnership (LP) interest. The GP is also the sponsor of the program, the one who puts it together and oversees the management of the business. The LPs provide capital and stay out of day-to-day management. In exchange for staying out of the management decisions, the LPs maintain limited liability in terms of lawsuits against the partnership. For the Series 7 we seem to only talk about limited partnerships involved with oil & natural gas or real estate. But many of you are sports fans, so it might help to remember that many pro sports teams are also limited partnerships. Here in Chicago, the Chicago White Sox are owned by Chicago White Sox Ltd, a limited partnership. The LPs are all high-net-worth investors, and while they can vote through "partnership democracy," they can not get involved with day-to-day management of the business. If the Sox want to trade a left-handed reliever for two triple-A outfielders, the LPs would have no say over that, for example. The LPs would get to inspect the books of the business, just as a shareholder of a corporation would get to. The General Partner (GP) runs the business and happens to be Jerry Reinsdorf. Turns out, Reinsdorf is also the chairman of the limited partnership that owns the Chicago Blackhawks and co-owns the United Center. I wish I could sell enough Pass the 7 full packages to buy into either of these partnerships, but, so far, I don't find myself traveling in these circles.

Thursday, February 3, 2011

Municipal Securities Terminology

The key to ace-ing the questions on municipal securities is to know the vocabulary terms inside out and use what you know to do process-of-elimination with the answer choices. Luckily, the terms used in connection with municipal securities always mean exactly what they seem to mean. Except when they mean something different.
Seriously, the terms are usually pretty much what they sound like. For example, what would a "debt service coverage ratio" be? If you know that debt service is the interest and the part of the principal to be paid this year on the revenue bonds, you're half-way home. What would an "agreement among underwriters" be? If you know what underwriters are (syndicate members) and understand what they would care about--and not care about--you can figure out the answer. They don't care about the bond counsel, right? They care about the terms of syndicate operation, the participation of the members, the order priority, the spread, and the deadline for taking orders, etc. If you know that "primary" market = new issues and "secondary" market = trading, you can get a lot of questions right just from that.
Use the bold-letter terms in your textbook and the glossary--if it has one. But to really take it up a notch, use the MSRB's excellent glossary at

Wednesday, February 2, 2011

Can I get registered with FINRA if I have a felony conviction?

So, the post called "felonies and FINRA registration" has now grown to about 215 comments (half of them mine, of course). Who knew it was such a hot topic? Let's see what FINRA has to say about some of the quesitons I've been receiving.

Q: if a registered person is arrested but not charged with a crime, is the arrest required to be reported?
A: No. An arrest without a charge is not required to be reported.

Q: if a registered person is convicted of a crime and later pardoned, must the conviction continue to be reported? What if the conviction is set aside?
A: A person convicted of a crime and subsequently pardoned must continue to report the conviction. A pardon releases an individual from the punishment of the crime, but does not remove the conviction.

So, that comes close--but not quite--to answering the questions I keep getting from guys (it's always guys) who want to know if a conviction that is 'expunged' must be reported. Above FINRA uses the word "pardoned," which I don't think is the same thing as "expungement." But whether a conviction were pardoned or expunged, it appears that the CHARGE still has to be reported. FINRA gives me that clue with this statement, "Even if the conviction is not reportable, the charge may still be reportable." Don't you love the shades of gray they use? They then write, "Registered persons have an obligation to determine whether a criminal event is required to be reported through one or more questions under Item 14A or 14B."

Hmm . . . so I plan to talk to some more attorneys, but it appears my assumption so far is correct: even if you get a felony conviction expunged from your record, your truthful answer to the question of whether you were ever CHARGED with a felony is . . . YES.