Tuesday, November 24, 2009

Higher Passing Scores Required on the 65 and 66 exams!



Starting January 1st, the passing score for the Series 65 is going up from 68.5% to 72%. Even worse, the passing score for the Series 66 is going up from 71 to 75%.

My company, Pass the Test, is helping people get the exams done this year with coupon codes. For any product at www.passthe66.com use coupon code: 66now.

For any product at www.passthe65.com use coupon code: november

Friday, November 20, 2009

FINRA fines firms over lack of email supervision

I'm at the FINRA website this Friday morning looking for recent disciplinary actions against member firms and/or their agents. Today's firm in the time-out chair is a well-known broker-dealer with lots of branch offices and affiliate broker-dealers. Unfortunately, they did not have an adequate system in place, according to FINRA, to monitor their agents' emails or their outside business activities, or their private securities transacations. Many financial service salespeople are hard-charging entrepreneurial types who think they can do whatever they want to do to make a buck. In fact, they can't. Once you sign on with a broker-dealer, you have to notify them of any outside employment, and you can not offer securities outside their knowledge and supervision, especially if you might get caught. Remember that even though the Series 65/66 exam is for investment advisers and IARs, it still asks plenty of questions about broker-dealers and their agents. Go ahead and see the notice of disciplinary action at:

Thursday, November 12, 2009

Securities Registration

Jimmy Jones is a go-getting business owner who recently sold "units of participation" in his plastic injection molding company, totalling $290,000, to 24 investors in State A and 15 investors in State B. Jimmy did not register the units based on his belief that they were not securities. The company has now filed for bankruptcy protection and is in receivorship. The "units of participation" have no secondary market and are deemed to be worthless. Therefore
A. investors may not pursue civil suits unless filed within 3 years of the securities offering
B. whichever state represents the majority of capital invested has sole jurisdiction in this matter
C. State A, where the majority of investors reside, has jurisdiction in this matter
D. the SEC has no authority over this matter unless the securities were registered under the Securities Act of 1933

EXPLANATION: both states could claim jurisdiction and pursue separate legal actions. The SEC could definitely get involved, since this is inter-state commerce. Investors have the right to sue as long as they file within 2 years of discovery/3 years of the cause of action. Chances are, Old Jimmy never bothered to register the "units of participation" and never disclosed any risk to investors . . . or, he presented bogus financial statements, etc. If so, they will have grounds to sue. Unfortunately, Old Jimmy appears to have no money at this time.


Saturday, November 7, 2009

Are you an adviser or not?

There is a subtle difference between the following two questions:

  1. Is the firm an investment adviser?
  2. Does the investment adviser have to register?

The first question is talking about an "exclusion," while the second is talking about an "exemption." In other words, some entities simply don't meet the definition of "investment adviser." An accounting firm that encourages clients to make IRA contributions is not an investment adviser. Neither is a bank or savings & loan. Whatever the Investment Advisers Act of 1940 or various state securities laws have to say about investment advisers, it does not apply to the accountants in our example, a bank, or an S & L. Why not?

They are not investment advisers.

On the other hand, an adviser in Rhode Island might have a couple of financial planning clients move to Massachusetts--if so, the Rhode Island investment adviser is excused/exempt from registration requirements in Massachusetts. As long as he isn't soliciting new business in Massachusetts, and as long as he has no more than 5 of these clients there, he is exempt from registration requirements.

But he is an investment adviser. And that's important to note because if you're not an investment adviser, then the Investment Advisers Act of 1940 has nothing to say to you. But, if you are an investment adviser who simply doesn't have to register--exempt--then, some parts of the Investment Advisers Act of 1940 still apply to you. At the risk of going overboard, let's look at the difference. Section 205 of the Act requires the contract between advisers and clients to contain at least 3 main items. But, it clearly doesn't apply to advisers who are exempt from registration requirements:

No investment adviser, unless exempt from registration pursuant to section 203(b), shall make use of the mails or any means or instrumentality of interstate commerce, directly or indirectly, to enter into, extend, or renew any investment advisory contract, or in any way to perform any investment advisory contract entered into, extended, or renewed on or after the effective date of this title, if such contract--
provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client;
fails to provide, in substance, that no assignment of such contract shall be made by the investment adviser without the consent of the other party to the contract; or
fails to provide, in substance, that the investment adviser, if a partnership, will notify the other party to the contract of any change in the membership of such partnership within a reasonable time after such change.

On the other hand Section 206, the anti-fraud statute, applies to anyone who meets the definition of investment adviser, even those who are exempt from registration requirements:

It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly--
to employ any device, scheme, or artifice to defraud any client or prospective client;
to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client;
acting as principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction.

So, if you're not an investment adviser, even Section 206's anti-fraud statute is outside of your world. But, while an adviser with an exemption would not have to comply with Section 205's requirement for client contracts, they're still an investment adviser, so they're still stubject to Section 206's anti-fraud statute. They don't have to comply with most of the Act of 1940, but if they're an investment adviser, they had better not do anything deceptive or misleading, even if they are excused from registration.

On the test and in the real world, it is difficult to know for sure if you meet the definition of "investment adviser." The State of Ohio has an excellent flow chart that helps people decide this crucial question. Take a look at it--very helpful stuff:


Friday, November 6, 2009

Insider Trading, For Real

It's Friday morning and, as usual, I'm at the FINRA website looking up recent disciplinary actions. Today I find a well-known broker-dealer being fined for insufficient anti-money laundering policies. $600,000 is the fine, but I also know how much it costs to shoot advertisements involving helicopters, let alone running those ads in prime time, so I think their pocketbook will survive.On the other hand, the individual referenced in the link I'll post below is done. Game over. Forced early retirement. As you'll see, when a broker-dealer is called in for investment banking work, they end up knowing information no one else has, information that can move the price of the company's stock up or down with near certainty. So, investment bankers are fiduciaries who have to keep the information confidential. Don't spread the news, and--for crying out loud--don't try to buy shares of the company's stock so you can dump it when the news becomes public. Tempting, sure. But it's a criminal violation. It leaves you open to all kinds of civil suits. And--as you'll see--it tends to end a registered representative's career permanently.
See what I'm talking about here:http://www.finra.org/Newsroom/NewsReleases/2009/P120328

Wednesday, November 4, 2009

Economics Practice Question

On the Series 65 exam, you should expect to see at least three or four questions concerning economic indicators. Like this one:

Which of the following is/are generally associated with the economic phase known as "expansion"
A. falling CPI
B. falling interest rates
C. falling unemployment
D. all choices listed

EXPLANATION: during an expansion, everybody’s working, so unemployment is falling, decreasing, dropping, or whatever the exam wants to call it. The CPI and interest rates tend to rise during an expansion. In other words, stockholders tend to do better in an expansion while bond holders tend to do worse . . . and during a contraction, bondholders tend to do better, since falling interest rates raise the market price of their bonds, and since their fixed income stream has greater purchasing power if the CPI begins to drop (deflation).


Sunday, November 1, 2009

Agency Cross Transactions

One of my Series 65 customers just asked me to explain "agency cross transactions," which are potentially "conflicts of interest" for investment advisers. I repsonded this way:

Hi, Kevin
If I'm your adviser, I'm supposed to be buying and selling securities only because it benefits you. If my advisory firm has an affiliated broker-dealer, and I start buying securities for your account or selling them from your account to our brokerage customers and pocketing commissions, that would be a major violation unless the "agency cross transactions" were disclosed to you. The fact that we get commissions when managing your portfolio could be making our buying and selling activities less than objective. So, we disclose the agency cross transactions to our advisory clients and once a year send itemized lists of all the agency cross transactions that we did while managing those accounts. We can never advise both sides of a transaction any more than a divorce attorney can represent both the husband and the wife in a divorce case. Here is the actual rule:

On a related note, the affiliated broker-dealer can act as a "principal" on a transaction and instead of getting a commission, the firm charges a markup-markdown. That also requires disclosure and client consent because the firm benefits suddenly beyond just the advisory fees being charged. Remember that whenever an adviser gets compensated beyond the advisory fee, this needs to be disclosed to the advisory client. If I put you into a mutual fund and receive 12b-1 fees or sales charges (with my Series 6 or 7 license) that definitely needs to be disclosed. Is my advice totally objective? If not, I must disclose anything that could make it less than objective.

These potential conflicts of interest are laid out in ADV Part 2 (disclosure brochure) and are also disclosed on a per-transaction basis to the advisory client.