Wednesday, September 30, 2009

Misappropriating Money

Just when I start to think the material related to the Series 65/66 exam is boring, I find a headline such as the following to snap me out of my funk:

SEC Charges Illinois Money Manager with Misappropriating Investor Assets . . .

Of course, you have to love the word "misappropriating" in place of "stealing," but regulators are lawyers, and this is how they communicate. As a resident of big, scary Chicagoland, it is nice to see that some shenanigans take place downstate. As you'll see from the announcement at this investment adviser (money manager) apparently made some false claims to investors (fraud) and used investor deposits to enjoy a high-rolling lifestyle (misappropriating/stealing).

Notice how the SEC is doing whatever they can in this case, "seeking injunctive relief, disgorgement, prejudgment interest, civil penalties and the appointment of a receiver." So, they wanted a federal judge to issue an injunction, and this is what they got for the asking: The Honorable Ruben Castillo, U.S. District Court Judge for the Northern District of Illinois, granted the SEC's request for emergency relief, including an order permanently enjoining Huber and Hubadex from committing further violations of the antifraud provisions and an order freezing the assets of Huber, Hubadex and the relief defendants. Huber, Hubadex and the relief defendants agreed to the emergency relief requested by the SEC.

So, at this point, it's a civil matter. But, the US Attorney's office can also pursue these matters in criminal court--I mean millions of dollars are involved.

In any case, read the announcement yourself. If you still think the Series 65/66 material on regulatory issues and business practices is "irrelevant," go ahead and post your comment below.

Thursday, September 24, 2009

Natural Persons

Just got another great question, this one from a customer studying for his Series 63. Don't worry--the Series 63 exists on both the Series 65 and (moreso) on the Series 66 exams. The customer asked:

Can a broker-dealer be a natural person?

I responded:
The question is really asking if a broker-dealer could be set up as a sole proprietor.
The answer is--yes he could. A sole proprietor does business as himself, so he is a natural person--there is no LLC or corporate structure set up as a separate legal entity from himself.
An investment adviser could also be set up as a sole proprietor, which means he/she is a natural person doing business as him or herself. Usually, a broker-dealer or adviser would set up an LLC or corporation. When they do that, they end up with a separate legal entity/person apart from the human beings who run the business.
On the other hand, agents and IARs are always natural persons--they are employees who represent the broker-dealer or the adviser. Period.
Broker-dealers and RIAs can be natural persons, but are usually "legal persons" in the form of a corporation or LLC.

Why the exam would even go into this weird territory . . . no idea. It's NASAA's world. We just try to live in it.

Felony Drug Conviction

I just received an interesting question from a blog visitor, but he placed it after a blog written in July, and the content is just too important to leave it there, where it might get lost in the shuffle. He wrote:

Interested in acquiring the Series 7 and 66 license to obtain employment. I have a non-financial 1st-degree felony conviction (1996 drug charge), will I be accepted?

I responded:

There is no absolute black-and-white answer here, but it is extremely likely that you will be granted a license. You first have to get hired by a broker-dealer, though, to take the Series 7, and this could be the first roadblock. The firm might not want to hire any convicted felons, period. If you do get hired, you'll complete a Form U-4, and you will have to disclose the 1996 drug conviction and then explain it in detail on a DRP (disclosure reporting page). FINRA generally only uses the things that happened in the past 10 years against you, but you also have to get a salesperson or "securities agent" license from your state regulator. They might view a drug conviction as a red flag, because it represents an illegal financial scheme--they might see it in the same category as counterfeiting. Others might see it as a one-time event, a youthful indiscretion, etc.
If you can't get in as a securities agent, you could actually just take the Series 65 exam, then register your own LLC as an investment adviser through Form ADV. This form only asks about things that happened in the past 10 years, which means you don't even have to disclose the drug conviction from 1996.
With lawyers writing the rules, there is always an angle.

Thursday, September 17, 2009

Economic Indicators

Once again the economy is in the news this morning. New claims for unemployment are expected to rise, as is the number of people who remain on unemployment. That's the bad news. The good news includes the fact that inflation--measured by the CPI--is virtually nonexistent. Also, inventories are low, meaning factories will have to ramp up production soon. And, building permits are expected to rise about 3.5%. As you know, building permits and new claims for unemployment are leading indicators. CPI and unemployment/employment rates are coincident indicators. And, inventory is a lagging indicator.

In the article referenced below, you will see brief mention of both fiscal and monetary policy, even though those terms are not used. You'll see that "the Fed" sees no reason to change the discount or fed funds rate. You'll also see that fiscal policy, in the form of a tax credit, can help increase demand for housing.

I invite you to read the brief article at the link below. See how the "test world" matches up with the "real world" at:

Wednesday, September 16, 2009

Series 65 and 66 exams are CHANGING

If you're one of those people who need deadline pressure in order to actually start studying for the Series 65/66 exams, here you go: the Series 65 and 66 are changing starting January 1st.


Yes, new topics are being added and--more frightening--the emphasis is shifting on both exams. For example, the 45 questions on business practices/ethics is being reduced to 40 on the Series 65. The 80/20 split between regulatory questions and securities & analysis questions is changing to 50/50 on the Series 66.

So, if you were thinking of putting off the exam until 2010, I would not recommend that. It's going to take a while to see how the exams are really changing based on imperfect feedback and educated guesswork by everyone in the test prep industry. Theoretically, the existing practice questions available should be as close as they ever were going to be, given that the Series 65 and 66 outlines haven't changed since January 2004.

Friday, September 11, 2009

Borrowing from Customers Part 2

To follow up on the previous post , another agent got in trouble with FINRA for borrowing from a customer, but ended up with a much lighter punishment:
James Kelly Breeze (CRD #2591120, Registered Representative,Medford, Oregon) submitted a Letter of Acceptance,Waiver, and Consent in which he was fined $5,000 and suspended from association with any FINRA member in any capacity for 60 days. Without admitting or denying the findings, Breeze consented to the described sanctions and to the entry of findings that he purchased a building from a customer for $850,000, with the customer agreeing to finance the entire purchase. The findings stated that Breeze had a personal relationship with the customer outside of the broker/customer relationship. The findings also stated that Breeze’s member firm’s written procedures allowed its registered representatives to borrow from customers, but prior written approval was required, and Breeze failed to obtain his firm’s written approval before entering into the borrowing arrangement with the customer.

So, even though it involved a much larger amount of money, the fact is that his firm would have allowed the agent to borrow from the customer, if he had only gotten written permission first. FINRA is reasonable; they know there's a difference between doing something your firm prohibits and doing something they don't prohibit but failing to get written approval.

Either way, what the heck are all these agents doing borrowing money from clients? I have a better idea--try making some money for your clients and do your borrowing from your bank or your bookie like everyone else.

Borrowing from customers

How would you answer an exam question like this one?

A registered representative may borrow money from a customer
A. if the customer is a relative of the representative
B. according to the firm's written supervisory guidelines
C. only if the customer is a bank or other lending institution
D. under no circumstances

EXPLANATION: reading FINRA's August summary of disciplinary actions, I see an example of a registered representative at a firm here in Chicago who is no longer a registered representative and probably never will be. Why? He borrowed money from a customer who was not a relative and never repaid the improper $29,000 loan. Of course, if the rep had repaid the loan, I doubt anyone would have found out, but he violated firm policy and FINRA rules by taking the money in the first place. So, can a registered rep borrow money from no customer ever? Not quite, so we can eliminate Choice D. Can the rep borrow $ from a customer who is also a relative? Probably, but not automatically, so we can elminate Choice A. Surely a rep can borrow from a customer if the "customer" is actually the Clover Springs National Bank & Trust, right? Probably, but the only way to borrow money from customers--should you be so crass--is to do it according to your firm's written supervisory guidelines.


Typical Series 65/66 question. Two other answers almost work, but only one answer really satisfies the issue raised in the question. I think this one will become clearer if you see the real-world version of what I'm talking about. This is from the FINRA disciplinary wrap-up for August 2009:
Terrence Thomas Alexander (CRD #3273969, Registered Representative, Chicago, Illinois) was barred from association with any FINRAmember in any capacity. The sanction was based on findings that Alexander borrowed $29,000 from a firm customer contrary to his member firm’s compliance manual, which prohibited registered representatives from borrowing from customers other than relatives; the customer and Alexander were not related. The findings stated that Alexander failed to repay the loan.The findings also stated that Alexander failed to respond to FINRA requests for documents. (FINRA Case #2007011261701).
Oh well. It doesn't make him a bad guy--who knows why he needed $29,000? It's just unfortunate that he ended up going against the compliance manual and then blowing off FINRA's requests for documents. I'm thinking he could have reduced it to a suspension and a fine if he had cooperated with FINRA, worked out a repayment plan with the customer, and shown some remorse. In fact, that's exactly what happened at a recent hearing I attended at the IL Securities Department. For whatever reason, this registered rep's broker-dealer either didn't care or didn't discover that he had borrowed a similar amount of money from a client for a real estate deal he had cooked up and then--predictably--couldn't repay the customer. The customer filed a complaint form with the Administrator, and the rep had to come in to convince the "Administrator" not to revoke his license and issue an "order of prohibition" that would make it darned tough to ever re-enter the financial services industry. The hearing officer and the attorney for the Administrator were extremely cooperative and empathetic. The registered rep promised he would repay the gentlemen as soon as he could, and after a few minutes it was decided that by such-and-such date, the (former) rep would work out a repayment plan with the client, submit it to the "Administrator's" office, and go from there. No big deal.
Then again, this registered rep had not, apparently, violated his former broker-dealer's compliance manual, or--more likely--the firm was too busy to give a rip.
In any case, agents must follow their broker-dealer's compliance manual on every single point. And, if you get a request for documents from FINRA or your state securities Administrator, turn them over forthwith.

Tuesday, September 8, 2009

Trading markets for securities

The inherent challenge with the Series 65/66 exam is that it covers so many topics but only for a few questions at most. You wouldn't expect the next question to show up on everybody's exam, but you would expect something like this to show up here on there. So, let's be ready for the following possible exam question:

The inside market is:
A. highest bid, lowest ask from the market maker quoting the largest position
B. highest bid, highest ask from all market makers
C. highest bid, lowest ask from all market makers
D. lowest bid, highest ask from all market makers

EXPLANATION: when a customer places a market order to buy or sell stock, he is willing to pay the best available price ASAP to get the stock or sell it. The best prices for the customer would be the highest bid--if he's selling and the lowest ask/offer price--if he's buying.

Friday, September 4, 2009

Active Military Duty

Even though the Series 65 and 66 exams are for advisers and adviser reps, the questions frequently concern the broker-dealer side of the business. Therefore, let's see if you can answer a question like this one:

Javier Gamboa is a registered representative with AmericaFirst Securities, LLC. Javier was recently called up for active military duty in Afghanistan, where he is expected to remain deployed for 28 months. Therefore which of the following statements is/are accurate?
I. Javier's license will remain in effect if he completes Continuing Education while serving active military duty
II. Javier may receive commissions on securities transactions while serving active military duty
III. Javier must requalify by exam if his active military duty assignment exceeds 24 months
IV. Javier's license will remain in effect if he completes Continuing Education requirements after serving active military duty


EXPLANATION: when a registered rep or principal is called up for active military duty, the SEC/FINRA are very accomodating. The rep's license is placed on inactive status, and the CE requirements are waived, as is the requirement to requalify by exam after a 2-year-plus absence. He can earn commissions on his "book of business" and will probably cut a deal with a fellow registered rep to service his customers while he's away. Javier can not perform any of the functions of a registered rep during this period, no matter how impressive it might be for customers to get a phone call from a guy dodging RPG's as he also worries about their asset allocation strategies.