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.

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.

ANSWER: c

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.



ANSWER: c

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: www.passthe7.com/fullbook.htm.

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 http://www.passthe7.com/ 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.

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.

ANSWER: D

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.