Study Question of the Month – January 2017

Submit your answer to info@solomonexamprep.com to be entered to win a $10 Starbucks gift card. Continue reading

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Question (Relevant to the Series 6)

Monique wants to invest in mutual fund shares, but she only plans to keep the shares for just over a year. Which shares are most suitable for Monique?

A. A shares
B. B shares
C. C shares
D. There is not enough information to answer the question.

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Study Question of the Month – December 2016

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Congratulations to Shira K., this month’s Study Question of the Month winner! 

See the answer below!

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Question (Relevant to the Series 27 and Series 28)

PDQ Brokers has a net long position of $15 million in 20-year Treasury bonds and a net short position of $10 million in 3-year Treasury notes. 20-year Treasury bonds have a haircut of 5.5% and 3-year Treasury bonds have a haircut of 3%. The required haircut in calculating net capital is:

A. 5.5% of the larger net long position

B. 3% of the smaller net short position

C. The difference between the haircut for the two positions

D. The sum of the haircuts for the two positions

Answer: D. The 20-year net long and 5-year net short positions each belong to a different Treasury category for purposes of calculating net capital. The haircut for Treasury and agency securities is the sum of the haircuts from each category.

Study Question of the Month – November 2016

This month’s study question from the Solomon Online Exam Simulator question database is now available!

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Congratulations to Tony P., this month’s Study Question of the Month winner! 

See the answer below!

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Question (Relevant to the Series 63, Series 65, and Series 66)

Nigel is a successful agent of a Canadian broker-dealer in Manitoba. The firm he works for has no offices in the U.S., and he has no interest in moving to the U.S. One of his biggest clients, Beatrice, is in temporary residence in Minnesota settling her mother’s estate. Nigel wants to keep Beatrice as a client but he is not registered in the U.S. and doesn’t know if he can continue to work with Beatrice under the current situation. What is your advice?

A. Nigel needs to bite the bullet and move to the U.S. where he can register in Minnesota and continue to transact business for Beatrice, including possibly reinvesting any proceeds of her mother’s estate.

B. Nigel cannot continue to transact business for Beatrice, since he is not registered in Minnesota and does not want to move to the U.S.

C. Nigel can transact business for Beatrice without problems. Canada and the U.S. have a reciprocity agreement that allows such international business relationships.

D. Nigel can transact business for Beatrice after he obtains a limited registration in Minnesota.

Answer: D. If the Canadian firm does not have offices in the U.S. state (which it does not), and the client is from Canada and is temporarily in that state (which Beatrice is), and had a relationship with the Canadian broker-dealer before entering the state (which Beatrice did), then an agent or broker-dealer may use a limited registration. Nigel has a good many hoops to jump through to get that limited registration, but because Beatrice is a big client, you would advise him to do so.

Ready or Not, Here it Comes: The DOL Fiduciary Rule

In 2009 the Department of Labor (DOL) began the work of creating what is now known as the “fiduciary rule,” or the “conflict of interest rule.” The goal of the rule is to help protect retirement savings by requiring representatives to only recommend investments that are in an investor’s best interest. Continue reading

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This article is available as a downloadable PDF.

Background

In 2009 the Department of Labor (DOL) began the work of creating what is now known as the “fiduciary rule,” or the “conflict of interest rule.” The goal of the rule is to help protect retirement savings by requiring representatives to only recommend investments that are in an investor’s best interest.

The transition period for the rule begins on April 10, 2017, and will continue until January 1, 2018, in order to give broker-dealers and other firms sufficient time to meet compliance standards.

Who Is a Fiduciary?

Almost any broker-dealer or financial advisor who is providing recommendations or advice in regard to 401(k)s and IRA accounts is considered by this rule to be an investment advice fiduciary. This includes (but is not limited to) recommendations given to an investor in a 401(k) plan or IRA account, or the fiduciary of a plan. A plan fiduciary is a person who manages a retirement plan and must put the plan’s interests before his own.

According to the rule, a representative is considered to be giving investment advice regarding a 401(k) plan or IRA if:

  • The representative gives a recommendation. No surprise here.
  • The recommendation is given for a fee or any kind of compensation. If you don’t get paid for it, it’s not investment advice, according to this law.
  • The recommendation regards:
    • What to do with an investment. For example: buy, sell, hold.
    • How to invest securities or other investments after they are rolled over, transferred, or distributed from the retirement plan or IRA.
    • Management of securities or other investments. This includes things like advice about what to add to a portfolio; recommending another investment advisor or manager; and advice about rollovers, transfers, and distributions from a retirement plan or IRA.

The person must also meet at least one of the following criteria to be considered a fiduciary by the rule:

  • He represents himself as a fiduciary. Simple enough, right?
  • He gives the advice by written or verbal agreement. It doesn’t have to be a formal contract, but it does have to be agreed upon by both parties.

What Constitutes a Recommendation?

In the context of the DOL rule, a recommendation is any communication that could reasonably be considered a suggestion for an investor to pursue or avoid a “course of action.” That means a rep does not have to explicitly tell an investor to make a certain decision in order to give a recommendation.

The more tailored the communication is to the individual, the more likely it will be considered a recommendation. However, simply providing certain services or other general information will not be considered a recommendation.

A person may also provide investment education without this being considered a recommendation.

Variable Compensation and the Best Interest Contract Exemption (BICE)

The DOL rule is known as the conflict of interest rule because it requires representatives to give advice that is in the best interest of the investor, and it prohibits them from being paid for any advice or recommendation that creates a conflict of interest. Variable compensation is one such example of a conflict of interest because reps may push products for which they have the opportunity to be paid more. This includes receiving variable compensation for advice about or transactions in a retirement account.

So what does that mean? It means a rep can’t receive a commission or any other form of compensation that is based on, for example, the size or frequency of transactions.

However, advisers may avoid this prohibition by taking advantage of the Best Interest Contract Exemption (BICE). If advisers meet the requirements of BICE, they may receive variable compensation.

To meet the requirements of the BICE exemption, representatives must:

  • Affirm their fiduciary status in writing. This acknowledges that the rep is in fact a fiduciary and the advice was not given in a non-fiduciary (suitability) manner.
  • Engage in impartial conduct. This includes:
    • Giving prudent advice that is in the customer’s best interest
    • Not making misleading statements
    • Being compensated no more than is reasonable
  • Adopt policies that will mitigate any harm that could come from conflicts of interest. It’s not enough to disclose conflicts of interest. A rep must demonstrate that he is actively preventing his conflicts of interest from having a negative impact on the investor.
  • Provide disclosure information regarding conflicts of interest and advisory fees. This information must be given to the investor up front.

If a representative is charging a level fee (that is, a set fee that is disclosed in advance) instead of a variable fee, the requirements are less burdensome. To be considered a level fee, the size of the fee must stay the same regardless of the size or frequency of the transaction, and there must be no additional commission. In these cases, the rep is required to:

  • Provide a written statement of fiduciary status
  • Comply with the standards of impartial conduct
  • Document the reasons for recommending a level fee arrangement

How Will this Affect the Investment Advice Industry? How Will It Affect Securities Licensing?

The DOL rule is set to change the landscape of the investment advisory industry. But Chris Wilson, Senior Partner at New York Life Insurance Company, says that while the rule might lead to more paperwork, more signatures, and more forms, this is simply a matter of firms “adapting to the ever-changing industry.”

The rule will require reps to use the Best Interest Contract Exemption (BICE) if they want to sell variable annuities or indexed annuities. The Department of Labor determined that variable annuities, indexed annuities, and other similar types of annuities come with significant complexity and investment risk. The DOL also associates these types of annuities with “conflicted sales practices.” This is why such annuities are subject to the increased protection provided by the Best Interest Contract Exemption. Many experts in the industry predict this will cause a dramatic reduction in sales of variable annuities. That could mean less of a demand for reps with Series 6 licenses and more of a demand for Series 65 and 66 licenses.

Additionally, because the requirements are fewer for level fee advisors, many firms might move away from commission-based brokerage business. In fact, Merrill Lynch recently announced that after the DOL rule goes into effect on April 10, 2017, it will no longer offer commission-based brokerage IRA accounts. Instead, it will offer a new investment advisory program called Merrill Lynch One, which offers level fee investment advisory services. A level fee advisor is one who only receives a set fee for providing advisory services. This fee must be communicated in advance to the investor. In other words, a level fee advisor does not make commissions. Some examples of level fees are flat fees or fees that are a percentage of assets under management.

Experts have said that this move on the part of Merrill Lynch could signal a larger trend within the industry, a movement away from commission-based brokerage services. Anthony Zak of PNC agrees: “I think many firms are going to be moving from brokerage accounts to managed accounts.”

If so, it would mean more openings for people who have passed the Series 65 or 66 exam. That means now is the perfect time to start studying for your Series 65 or 66 exam.

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