Friday, October 7, 2011

Occupying Wall Street

So once again folks want to add more regulations on the cartoon-like villain named "Wall Street." These folks obviously have never waded through, say, the Securities Exchange Act of 1934 and the rules "promulgated thereunder," or the dense, barely readable FINRA/NASD manual. If they had, they might see how futile it seems to add MORE regulations to an already highly regulated industry. The SEC, FINRA, and the state regulators have plenty of tools at their disposal. They can go after violators in administrative actions or civil court, maybe even refer cases to criminal prosecutors. And, believe it or not, the compliance officers at broker-dealers and investment advisers are pretty good at catching mischief internally.
Making fat bonuses and accepting bailout money--neither one is a crime. If Uncle Sam is handing out cash, take it, I say. These financial firms provide a huge benefit to the economy by raising capital for government entities and corporations and are behind every single 401K and IRA account in America. Rather than bash Wall Street, educate yourself on this fascinating part of our amazing economic machine.

Tuesday, August 9, 2011


A few things have changed due to Dodd Frank. Some items could be testable. You can get a free update at or The main changes have to do with the ADV Part 2, which will be in narrative vs. check-box format, and will have a supplement on the IARs overseeing/involved with a client's account. Also, AUM is now $100m for SEC (federal covered) eligibility.

Wednesday, June 29, 2011

Trouble with FINRA

If you click the title of this post, first of all, remember to hit the back arrow; otherwise, you're gone. Secondly, know that this is all public information. The New Jersey Bureau of Securities--what the test calls the Administrator--operates in a very public fashion. If you get in trouble, they publish your name, address, and registration number. And they tell the world what you did and why that was, like, not allowed. For example, the respondent whom we find first on the list, under "Aaron, Shawn E." got in trouble with FINRA (formerly NASD) for, apparently, threatening and intimidating an issuer of common stock, telling them they'd better listen up, or he could drive down the market price of their stock based on his large holdings. Well, like a lot of guys, he overstated the size of his holdings, but that's not what got him in trouble with NASD. It was the whole threatening/extortion thing that really ticked them off. Notice how NASD (now FINRA) suspended him for two years--meaning he might be able to get back in after requalifying by exam and probably finding a firm willing to do heightened supervision for a while, assuming anyone wants to hire him. Also notice that NASD/FINRA notify the state Administrator when somebody gets in trouble with them. And, that the state has a whole separate hearing to determine if the license should be--in this case--revoked.

Registration and Trouble with FINRA

Can I get registered as an IAR or RIA if I have gotten in trouble with FINRA in the past?

I get that question a lot. At, we're up to about 350 questions and comments from people who either have arrests and criminal charges or previous trouble with FINRA, a bank regulator, or an insurance commissioner, etc. As always, the answer is: depends. A felony charge has to be disclosed on Form U4 and U5, but it generally takes a conviction to get your license denied or revoked by the state securities Administrator. A misdemeanor conviction will get you in trouble if it's "investment-related." That means that a misdemeanor conviction for shoplifting would be "investment-related" because theft is relevant to ANY position in the financial services industry. On the other hand, if you pled guilty to misdemeanor DUI, that would not be disclosed on Form U4 or Form U5. It's a misdemeanor, and it's not a crime that involves money or deception.
We're talking about criminal disclosure here. There is also a section on Form U4 for regulatory disclosure. If you had been a securities agent 7 years ago and got suspended by FINRA (NASD at that point) for churning and unauthorized transactions, that has to be disclosed when registering as an IAR with your state securities Administrator. Forget to disclose it, and the state will have a hearing to officially deny you a license. Game-over kind of thing. Remember that IARs and RIAs don't register with FINRA; FINRA is for the brokerage side of the business only. IARs always register with the states; RIAs are either state-registered or federally registered. To register as an RIA, the firm uses Form ADV. For some reason, this form only asks about problems in the previous 10 years. But when the IAR associates with the firm, they submit a U4, and this form asks if the applicant has EVER been convicted of/pled guilty or no contest to/charged with any felony or any misdemeanor relevant to the industry. Ever. I know of a few agents who answered "no" to those uncomfortable questions, but when the IL Securities Dept found out they were lying, they revoked their licenses. Game over. Never lie on a form filed with any securities regulator, especially if there's a chance you'll get caught.
There's always a chance you'll get caught, too. A darned good chance, in fact. And, when you go through the Administrative hearing and end up getting your license revoked, the Administrator will be happy to publish the whole thing, complete with your name, address, and registration number.
To see what we mean, let's visit the "Administrator" for New Jersey at:

Tuesday, May 24, 2011

indexed annuities

Indexed annuities are insurance products with a minimum rate of return guaranteed to the investor by the insurance company. If the index--usually the S&P 500--has a great year, the investor gets a higher return than the promised minimum rate. But, he doesn't get the full upside on the S&P 500. And, there may be a maximum that the contract can go up in one year, period. These investment/insurance products usually impose a surrender period during which the contract owner would lose a % if he/she took a withdrawal. So they are only suitable for people with no need of liquidity on the money they plan to put into the contract.

Monday, May 16, 2011

Where do I take my Series 65 or 66 Exam?

Customers and prospects frequently ask, "Where do I take my actual Series 65 or Series 66 exam?" That's because while NASAA's website contains all kinds of information, they are not a well-known bunch of folks, and their website is just slightly more user-friendly than software developed in Redmond, Washington. In order to find information for your exams, you'd have to go to . . . then figure out that all the menus are only triggered as "mouse-overs." So, if you lay your pointer on "industry and regulatory resources" and then manage to click the little "exams" link, you'll then be at least half-way finished with your quest for knowledge. If you click on Exam FAQs, you will find the answer to the question above as well as several other important questions. For example, click on Where are the exams given? and you will see that: FINRA is NASAA's contractor for administering the Series 63, 65, and 66. As with other FINRA-administered exams, they are given at Sylvan Prometric Centers." NASAA then points you to the FINRA website, but I'll go ahead and tell you where you can find the "sylvan prometric centers" online, at
Now, you want to actually SCHEDULE an exam? Better leave that nightmare of a process for a separate blog post. Seriously.

Wednesday, April 13, 2011

If they have a place of business in the state

The Series 65/66 exam asks LOTS of questions on what I call "registration of persons." Does this broker-dealer or that adviser have to register in the state if it deals exclusively with institutional investors? That sort of thing. The exam is typically obsessed with these questions . . . which, to me, seems odd, since every single person taking the test obviously has to register and knows he has to register. Whatever. Let's keep it simple. If the "person," which means agent, broker-dealer, investment adviser, and investment adviser representative, has a place of business in the state, he/they have to register in that state. What does it mean to have a "place of business" in a state? More than you'd probably think. Most candidates assume that we're talking about an "office." And, we are, but that's just one example of a place of business. If the agent or adviser meets with people at a diner in New Jersey, THAT is their place of business. More surprising, simply "holding yourself out as an adviser" in a state means you have a place of business in that state. If you're soliciting clients in Minnesota, you're "holding yourself out as an adviser" in that state and need to register. After you get your 6th client? No, as soon as your start soliciting. Remember, if they have a place of business in the state, they register in the state. Except when they don't--the only exception here is the federal covered adviser. For everybody else, if they have a place of business in the state, they register with the state. For the federal covered adviser things are different. They might have a place of business in Nevada but since they're the adviser to a mutual fund company, they are federal covered. They register with the SEC and provide copies (notice filings) to Nevada. There, nice and simple, just the way the regulators like it.

Effective Tax Rate

Just learned something by looking at the tax returns I'm about to file in a few days: effective tax rate. As we've seen earlier, we use a progressive income tax system, which means that as your income gets bigger (progresses), so does the rate of tax. Maybe on the first $50,000, you pay 15%, then 20% up to $100,000, then 25% up to $150,000. Therefore, if you earned $150,000 of taxable income, what is the "effective rate" that you paid? What you do is figure out the total tax paid and divide that into/compare it to the $150,000 of taxable income. So, how would this work out? You paid 15% on the first $50,000 ($7,500) You paid 20% on the next $50,000 ($10,000) You paid 25% on the next $50,000 ($12,500) In total, you paid $30,000 on $150,000, which is an "effective tax rate" of . . . 20%. The 65/66 exam ask all kinds of far-flung taxation questions, so, just in case, know what the "effective tax rate" means. And, as always, keep moving.

Monday, March 14, 2011

What if I put money in the Wisconsin prepaid tuition plan?

Prepaid tuition plans are defined benefit plans. Parents putting money into their state's prepaid tuition plan are trusting their state government to honor their obligation to provide tuition credits that will actually cover the cost of education when it comes time to send Junior off to college.

Hmm. What if you put money into the Wisconsin plan? They've already shown a willingness to change the terms of the deal long after the money has already been contributed and folks are now depending on the payout. At least they stopped taking new money back in 2002, back when Colorado became the first state to come clean and tell people who'd contributed to the plan, "Well, what we actually meant by 'future tuition credits' was . . . "

It's possible the exam could bring up the fact that a prepaid tuition plan is an obligation of a state government to pay out a promised benefit to people crazy enough to trust it with their money. If I lived in a state with a lousy bond rating from Moody's/S&P/Fitch, and that state had already shown a willingness to renege on benefits to its employees, I'm thinkin I'd want the 529 Savings Plan instead, in which I pick little mutual funds and control the outcome to some extent. Just things to consider before taking the exam--not that you can remember every little thing that I blog about. But, if you can remember some or most of it, I'm convinced you'll have an edge at the testing center.

Wednesday, February 9, 2011

Capital Gains on a House

A capital gain can be realized on stocks, bonds, mutual funds, and even real estate. The rules for capital gains on a primary residence are considered testable, so remember the following:

If over the previous 5 years you:

  • owned the property for at least 2 years (the period does not have to be continuous)

  • used the property as your primary residence at least 2 years (does not have to be continuous)

  • during the 2-year period ending on the date of sale, you didn't exclude cap gains on a primary residence

you can exclude up to 250K of cap gains on the sale of the house. For married-filing-jointly, 500K of cap gains can be excluded.

Thursday, January 20, 2011

So Everything is Subject to Anti-Fraud Provisions?

Every SECURITY is subject to the Uniform Securities Act's anti-fraud provisions. Some securities are exempt, and some are sold thru exempt transactions. Those securities don't have to be registered. But they are still securities, so if they are sold deceptively, the anti-fraud provisions apply. The folks who put out bogus offering documents, misstating important facts and leaving out important negative information, can be prosecuted and/or sued.
But--and the test is exactly this tricky and mean--if the investment is NOT A SECURITY, it is not subject to anything under the Uniform Securities Act. Therefore, the test could ask you whether a fixed annuity or whole life insurance would be subject to the anti-fraud provisions. The answer?
Why?They're not securities. But a Treasury bond, a municipal bond, or a church bond--though they don't have to be registered--are all securities. Therefore, they are still subject to the Uniform Securities Act's anti-fraud provisions.
And then the securities that are not exempt (non-exempt securities) are not only subject to the anti-fraud provisions, but also they have to either be registered with the Administrator or sold through an exempt transaction.
That way the regulators can keep things the way they like them--nice and simple.

Monday, January 17, 2011

What in the world is a church bond?

When you're reading the Uniform Securities Act, it's easy to look at the information as if somebody just made it all up. In the live classes, people sometimes stop me and ask something like, "Whoah, hold on, Bob--a church bond? What the heck is a church bond?" Here goes. Religious organizations frequently raise money by selling debt securities to investors. I have an offering circular on my desk for a $240 million offer of various debt securities by a Lutheran organization that funds various missions. The offering is for the "mission investment fund," and on the front page of the offering circular we see that these securities have not been registered with the SEC in reliance on an exemption under the Securities Act of 1933 . . . but that this does not imply that any regulator has approved (or disapproved) of the securities, and any statement to the contrary is a criminal offense.
What does that mean? It means these debt securities do not have to be registered, period. But to raise $240 million, the organization has to disclose to investors all kinds of financial information. If any of that information is deceptive, this offer of securities is still subject to anti-fraud regulations, meaning the organization could face criminal prosecution and civil lawsuits. If the offering circular overstates the amount of money taken in through collections or bequests, that's a mistatement of a material fact. If the document leaves out some bad news that might have made investors think twice, thats' an ommission of material fact. So the offer of these securities is definitely subject to anti-fraud statues. It's just not subject to registration.

Sunday, January 16, 2011

Series 65 Exam

The Series 65 Exam is not known for changing drastically year-by-year. When something major is changed, NASAA announces it with plenty of lead time. For example, in 2010 they warned everyone early on that the outline was being changed and--worse--the passing score was being bumped up from 68.5% to 72%. This year, we don't see any announcements from NASAA about the Series 65 exam or the Series 66 exam. But, the industry itself is implementing some changes that will start showing up on the exams by the middle of this summer. We won't worry about them much now, but in a few months, the following will be considered testable:
  • federal covered advisers will need $100 million in AUM
  • form ADV Part 2 is changing formats to a narrative (vs. checkbox) form
  • form ADV Part 2 will have a Part A and Part B
  • ADV Part 2B is for disclosure related to IARs working with customer accounts

Saturday, January 15, 2011

Series 65 Sample Question

Best way to prepare for the Series 65/66 exam is to take and analyze practice questions. Notice how I said "take AND analyze." Too many candidates focus on trying to get a particular score on practice questions. It's much more important to learn from the practice questions. In fact, you should probably keep a notebook just for taking notes on what you can learn from working through practice questions. Like this one:

An annuitant chooses the settlement option known as "life with 10-year period certain." The annuitant dies 13 years later; therefore,
A. the annuity stopped paying after 10 years
B. the annuity stops paying when the man dies
C. the annuity pays the beneficiary another three years
D. the beneficiary receives the cost basis only

EXPLANATION: "life with 10-year period certain" means that either the annuitant or the beneficiary will receive at least 10 years of payments . . . and, if the annuitant lives longer than 10 years, the annuity will pay until he, you know, dies.


Real-World Low-Level Felonies

A willful violation of securities law is just what it sounds like--you violated the law and can't reasonably claim there was no way for you to know it was, like, a bad idea. For example, let's say you owned a bar and grill and wanted to raise money to build an addition to the restaurant. If the local bank shuts you down, you might start asking customers if they want to invest $5,000 each in exchange for 2% of the profits. You might not call the investments "stock," but the regulators would consider them to be investment contracts, which are securities. If you didn't register them, they can refer you to a criminal prosecutor (Attorney General, District Attorney, State's Attorney, etc.) who might want to charge you with some low-level felonies for selling unregistered securities through unregistered agents. Would they go that far? They might. Maybe some of your investors complain to the regulators that you didn't disclose the following material information:
  • your restaurant was on the verge of bankruptcy
  • the addition could only be built if granted a zoning variance
  • you intended to use some of the $ for a new Cadillac Escalade
  • your restaurant has never made a profit
Oopsie. Now, we're talking about multiple counts of felony charges like "securities fraud" or "omissions and misstatements," etc. on top of the unregistered securities and selling thru unregistered agents. The Uniform Securities Act's little "3 years/$5,000" criminal penalties are just for the little pretend Uniform Securities Act. The lowest-level felony in Alabama, for example, a "Class C felony," carries a sentence of anywhere between 1 and 10 years and a $15,000 fine! In IL, a Class 4 felony carries a sentence between 1 and 3 years, and/or a $25,000 fine. Wow. So, if a smarmy businessman takes people's money under false pretenses, the Administrator is not the problem. The problem would really be the possible criminal liability and also the civil liability to investors who end up suing him.

Estimating Probabilities

Believe it or not, a question as wacky as the following can and allegedly does show up on the Series 65/66 exams:

You have flipped a coin 100 times now. It has come up tails 68 times. If you flip the coin again, the probability of its landing "tails" is

A. 32%

B. 69%

C. 68.5%

D. 50%

EXPLANATION: I was tutoring a man who lives a few blocks from the Las Vegas strip. Man, did he have a hard time answering this question. "Well," he pushed back, "who's flipping the coin?" "What KIND of coin are we talking about here?" "Which casino is he in?"

Eventually, he--like you--figured out that if there are two outcomes, the probability is always 50%, period. End of story.

Also, note that if a coin turns up 7 out of 10 times heads, that is nowhere as freaky as a coin that comes up heads 650 times out of 1,000. The law of large numbers says that as the number of flips increases, the outcome should get closer to 50%. Why is this on the test? Financial planners talk about this stuff to help themselves understand why investing clients are so horrible at estimating and understanding risk.