Tuesday, August 24, 2010

Tough Options Question

Some of the options questions on the Series 65/66 exam can be quite alarming. Like this one:

An investor owns a portfolio of large-cap, blue chip stocks, all of them in the Dow Jones Industrial Average. He fears a downturn and wants to protect his holdings without selling off the stocks. To best protect the portfolio, he should
A. purchase a narrow-based index put
B. purchase a broad-based index put
C. sell a narrow-based index call
D. sell a broad-based index call

EXPLANATION: they key is to know that "the Dow" is a broad-based index of stocks from many different industries. That eliminates the "narrow-based index" choices. Narrow-based indexes focus on a particular sector, i.e. the pharmaceutical or telecommunications index. Now, if the question says the investor wants to generate some income, recommend that he sell an option. When the question says or implies that he just wants to protect a position, have him buy something. He's afraid the index could drop, so he buys a put on the index.


Thursday, August 5, 2010

Another blurb on FEINs

So, based on the last post, a test-taker like yourself might conclude that sole proprietors don't receive FEINs. That's certainly what the folks who write test questions are hoping--they love assumptions that people bring to the testing center. They exploit them again and again. Do sole proprietors receive FEINs?
Not automatically, the way a corporation or an estate would.
But if you look closely at the questions the IRS asks in the previous post, you begin to see that it could easily include sole proprietors. A word like "excise" is easy to just skim over because it's boring and, let's face it, so is most of the Series 65/66 material. But a trucker would have to pay "excise" taxes and, therefore, need an FEIN. And a restaurant could be owned by a sole proprietor, but if he has 20 waitresses and 10 cocktail servers, he's going to either admit he has "employees" now or wait for the revenue collectors to issue a ruling plus penalties and interest. He needs an FEIN. So, as always, don't make assumptions. Think through your answer choices clearly--is this always the case? Are there exceptions to this general rule? Did anybody ever actually say that, or did I just sort of assume that?
That's what the test demands of you--an ability to think clearly, from many angles, using creative problem solving and solid reasoning.

Wednesday, August 4, 2010


A federal employer identification number (FEIN) would probably be easier to understand if it were only issued to, you know, employers. But as you've probably noticed, things are never what they seem to be in connection to finance, taxation, and other testable points. An estate also receives an FEIN, which I learned when serving as executor several years ago. A trust receives an FEIN. Estates and trusts are legal entities/legal persons. Like corporations and partnerships, they receive FEINs from the IRS. If you go to the IRS website and type in "fein," you find a helpful table that determines if somebody needs to apply for an FEIN. If the answer to ANY of the following questions is "yes," then the person needs to get a federal employer identification number:
Do you have employees?
Do you operate your business as a corporation or partnership?
Do you have a Keogh plan?
Are you involved with: trusts, estates, REMICs, non-profit organizations, farmers' cooperatives, plan administrators

Is this informatoin testable?
Sure. If NASAA says that "taxation issues" are testable, they only give a couple of examples as to which items we should focus on. Everything is, apparently, testable. And, since business entities are a testable item, we have to assume that you might need to remember what an "FEIN" is and that trusts and estates have them, as do corporations and partnerships.


The Series 65/66 exams definitely consider limited and general partnerships to be fair game, as they indicate on their exam outlines. How would you navigate a question like this one . . .

Which of the following is an accurate statement of the business structures known as "general partnerships" and/or "limited partnerships"?
A. only limited partnerships allow for direct flow-through of income and expenses
B. both ownership structures leave at least some owners with unlimited liability
C. general partnerships are no longer enforceable effective January 1, 2011

D. general partnerships relieve the owners of personal liability

EXPLANATION: a general partnership is really just a sole proprietorship with more than one owner. These folks want to go into business together, so they form a general partnership. It does provide for flow-through of income and expenses, but it also leaves all general partners personally liable for debts and lawsuits of and against the business. To form a limited partnership, you have to have at least one general partner (GP), and GPs always have unlimited liability. Don't read a choice like Choice C and automatically assume you forgot to study something. The Exam occasionally makes stuff up to see if you'll fall for it when a much better answer was available. Don't do that. Instead choose answer . . .