FINRA Rules on Communications

FINRA is forever tweaking the definitions used for the communications put out by a member firm. A few years ago, I had to put serious effort into explaining how sales literature differed from advertising, and all the special rules on public appearances and independently prepared reprints. Going forward, FINRA only wants to work with three specific categories of communications: correspondence, retail communications, and institutional communications. Of these, only retail communications are subject to prior principal approval and filing copies with FINRA. Correspondence and institutional communications have to be monitored, and principals need to make sure that these communications are not misleading. They just are not subject to the heightened supervision of communications going out to > 25 retail investors. It is a little strange to see FINRA rely so heavily on this arbitrary number 25, but they do. The exact same thing--a seminar handout, for example--is correspondence if delivered to 25 or fewer retail investors but becomes a retail communication if delivered to more than 25. What we used to call advertising and sales literature is now either correspondence or retail communications depending on how large the audience is. FINRA also no longer cares whether the communication goes to an existing customer or a prospect--again, the number 25 is suddenly the determining factor. Pass Your Series 7 Exam

Mini-Options

The CBOE is rolling out some new "mini-options" allowing investors to buy contracts that cover just TEN shares . . . for the really high-per-share-priced stocks including AMZN, APPL, GOOG, SPDR Gold Trust, and the good ole SPDR S&P 500. Ordinary options use a multiplier of 100, of course, but these mini-options use a multiplier of ’10.' The #7 at the end of each stock symbol denotes ‘Mini,' so, the mini-option might look like this: AMZN7 or APPL7. A customer who owns just 40 shares of APPL could now hedge by writing 4 APPL7 mini-options (4 X 10 = 40 shares). Always innovating, this industry. Series 7 Tutoring Available Here

Series 7 Exam Sample Question: Mutual Funds

Don't forget that while the Series 7 exam asks many questions about options and debt securities, it also asks many questions about other topics. And, often these other topics can yield some pretty challenging and tough series 7 exam questions. Like this one:


A summary prospectus for a mutual fund states that the public offering price (POP) is $10.50 with the net asset value (NAV) at $10.00. The document also states that the sales charge is less than 5%. Which of the following could explain this?
a.Sales charges are expressed as a percentage of the net amount invested.
b.The summary prospectus is unaudited and frequently includes estimated figures.
c.Sales charges are expressed as a percentage of the gross amount invested.
d.Some investors may have purchased shares at lower sales loads through quantity discounts.

Explanation: the exam is expert at asking questions in ways you weren't quite expecting. Maybe you've done dozens of questions that simply asked you what the formula for calculating the sales charge percentage is, or maybe you've been running the calculations so many times you forgot to learn what it was you were calculating and why. As always, ask yourself what the question is telling you that allows you to eliminate at least one of the four answer choices. Unfortunately, this question gives you nothing that is obviously wrong at first glance. Maybe the document IS unaudited? Investors DO often purchase shares at a lower sales charge through breakpoints/quantity discounts. And, if you've never encountered the phrase "expressed as a percentage of the net/gross amount invested," you can easily panic and convince yourself there is just NO WAY TO GET A QUESTION LIKE THIS RIGHT.
Sure there is. Look at each answer choice more closely. The fact that SOME investors might have bought at lower sales charge percentages would hardly be a good reason for the mutual fund to quote their a-typical experience, right? Shouldn't this document use the maximum sales charge? Yes, and, even if we thought this might be the explanation, we have to keep thinking until we recall that some investors have all sales charges waived--usually at about $1 million--so Choice D wouldn't work even if we went down that path. Choice B bugs me, too--how about you? I mean, the American Balanced Fund, for example, had assets of around $50 billion last time they reported--would it be so hard for a fund that size to break out a calculator and tell us exactly what the sales charge is? Estimated figures? I think you can eliminate that one. Now, if you're not comfortable with the language used in Choice A and Choice C, you just have to interpret--the gross amount is the total amount one pays--the net amount is what's left after the distributors take out the sales charge. So, even if you weren't sure before the question, you can crunch a few numbers and prove what the answer is. If we take 50 cents divided by the net amount invested, the NAV, the % would be 5%. But, if we--properly--divided the 50 cents by the gross amount invested, the POP, we would get a figure of under 5%. Making Choice ______ the correct answer.
Right?






Answer: c  Need Help with your Series 7?

Updated Series 7 Exam Material

Just a quick word on how we make sure we keep our series 7 exam prep material updated:

1. Pass the 7 ExamCram Online Test Prep questions are updated/improved throughout the year
2. Pass the 7 textbook is updated each year.
3. Pass the 7 DVD set is updated either each year or as-needed.
4. Pass the 7 Audio CD lectures were just updated for 2013

How important is it that you have the most "up to date"  Series 7 material?

Nowhere near as much as most people think, since the exam tends to ask the same old questions for decades--yes, a few details change each year in the industry, but, by and large, the Series 7 does not need to change its questions to any great extent. Covered calls have worked the same way since I've been teaching this stuff--same for bond yields, sell-stops, margin accounts, and probably 96% of what anybody needs to know for the test. Still, folks want to feel they have the most updated materials, so we do what we can, as listed above. Pass Your Series 7

Who Has the Best Series 7 Sample Questions?

There are SO many urban legends connected to the Series 7 it makes my head hurt sometimes. One of the most popular is that some vendors have "actual test questions" in their possession. This is absurd on its face because even if Company XYZ had those questions, all other vendors would simply order the materials and eliminate any advantage--also the national pass rate would rise to about, oh, 100%, right?. One would also have to be unaware of a current FINRA lawsuit trying to punish and stop a vendor in this industry from taking exams for the purpose of memorizing test questions. Finally, one would have to assume that the Series 7 wants you to memorize endless factoids and simply spit back the most current/updated version of those facts.
Another shaky assumption is that since the exam is hard, the best questions are the "really hard ones," right?
IDK--what does a "hard question" look like? Is it really hard to read? Does it have 5 or 6 negative words in it? If so--that company has no idea what your test looks like. Are the questions 500 words long? Same deal. The actual Series 7 exam will expect  you to know your vocabulary terms very well, but it will go much further than that--you will be forced to figure out the right answer more often than not. The questions will usually seem unfamiliar on first read; your job is to take the facts and eliminate the wrong answer choices. Some of your questions will be lay-ups, but most will force you to think creatively and on-your-feet. If you can do that and get 3 of every 4 questions right, you will be done with this ordeal. If not, you'll have to try again in 30 days or so.
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Series 7 Sample Suitability Question

As you've heard, the Series 7 has many questions concerning suitable recommendations to investors . . . like this one:

One of your customers is in her early 50's. She is concerned about losing purchasing power once she retires from teaching in 10 years, with a modest defined benefit pension. The money she has to invest is an inheritance from a favorite aunt. She has no need to liquidate the investment until she retires, and she may wait several years after that. You would most likely recommend which of the following investment vehicles?
A. deferred indexed annuity
B. deferred variable annuity
C. long-term bond mutual fund
D. immediate fixed annuity

EXPLANATION: first, PLEASE stop doing the Sesame-Street-inspired one-of-these-things-is-not-like-the-other thing. I made Choice C different from the other three, but it's still wrong. Why? Bonds don't protect purchasing power. Fixed annuities also do not protect purchasing power, so we can eliminate Choice D. At this point, the answer seems obvious, doesn't it? She needs the upside of the stock market that the variable annuity offers.  The indexed annuity is all about the guaranteed minimum rate of return--the annuitant does not get the upside on the S&P 500. Not really. So, eliminate Choice A, and we're done here.

ANSWER: b

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A Few Words on Taxation

Now that the elections are over, let's clear up some confusion over taxation. First, how do wealthy people like Mitt Romney get by with paying just 13.7% income tax? In our current cynical climate, many assume he must be getting some sort of seedy political favors from his friends in Washington, DC, but the truth is much less interesting. Fact is, people that wealthy can live on dividends and long-term capital gains (trading profits). For close to a decade now those income sources are taxed at just 15%, regardless of one's income bracket. I just had a spirited phone discussion with a buddy last night, and it took a few tries to convince him that a lower tax on dividends makes perfect sense. Like most people, he thought companies pay dividends as kind of a pass-through to their owners. No, no, no--dividends come from "net income AFTER tax." Starbucks paid $674 million of income tax as a corporation last year. AFTER that, they were left with net income of $1.385 billion. So, the profits of the company have been taxed at this point. If the board of directors wants to pass out 72 cents-per-share of that after-tax profit to the shareholders/owners, why should the owners get taxed at all? I don't think they should, but the Republicans were only able to convince the Democrats to lower the tax rate to 15% back when George W was in office. Of course, to get that benefit, you have to own the dividend-paying stock in a taxable account. If it's in your IRA or 401(k), nothing here applies to you. But, what the heck would a Mitt Romney need with an IRA? Defer $6,000 a year? Why? And, he'd have to have earned income to make an IRA contribution--his income is mostly from dividends and capital gains. Then, with huge charitable contributions, he can bring the rate down from 15%, as he did. He paid a huge amount of taxes, but the percentage was 13.7%.
The rest of us live mostly on earned income; therefore, our income is taxed at various tax rates. At the same time the dividend and long-term capital gains rates dropped to 15%, Congress put the following tax brackets into place: 10%, 15%, 25%, 28%, 33%, 35%. Most recently, everybody's first $8,500 of income was taxed at just 10%. Then, the next so-much was taxed at 15%, and so on. If you made, say, $400,000 after all deductions, you would pay tax at all six of those tax rates--the last $21,000 or so would be taxed at 35%. Unfortunately, unless Congress passes new legislation, those tax brackets are going to revert to where they were about a decade ago. The 10% bracket goes away--ouch--and the 35% bracket becomes 39.6%, with about a 3-point jump in all the other brackets.
Wow. Yes, the tax code is always in play, but right now it is about as uncertain as it's ever been. People who will retire in 10 years now have to factor in that they may retire in a higher tax bracket--that diminishes the benefit of deferring their income in a retirement account. They might want to use a taxable account, but if the lower tax rates on dividends and capital gains are taken away or reduced, that might not be so attractive either. Would we be shocked if Congress reduced or eliminated the tax break on municipal bond interest? Yes, but it could still happen. And that would do some nasty things: it would cause the price of municipal bonds to plummet, which would push their yield up astronomically, thereby increasing the borrowing costs of states, cities, school districts, etc. through the roof. Would politicians at the federal level pass off so much of a burden to the states? If it helps them get re-elected, I think they would do just about anything, don't you?
Notice how even a brief discussion of a few aspects of taxation can get very detailed. It's no wonder that political activists prefer to steer the debate towards meaningless phrases like "a tax on job creators" or "paying your fair share." They'd probably lose their audience real quick if they got down to substance. You, unfortunately, do have to know the basics of this blog post when you sit down to take your Series 7 Exam. Exam Help