Study Question of the Week: December 26, 2012 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 7, Series 24, Series 55, Series 62, Series 65, and Series 66. –ANSWER POSTED– Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available.

Question (Relevant to the Series 7, Series 24, Series 55, Series 62, Series 65, and Series 66):

ABCD is an actively traded security with an inside market of 19.25 – 19.95. A market maker receives an order to sell 100 shares and buys the security from the customer at a net price of ______________. Choose the net price that makes the most sense given what you know about markups, markdowns, and net prices.

Answers:

A: 18.75
B: 19.25
C: 19.95
D: 20.45

Correct Answer: A

Rationale: On a sell order in an active competitive market, the net price will contain a markdown from the best bid. In this case the only price that is lower than the best bid is the $18.75. The markdown amount is calculated by taking $19.25 – $18.75 = $.50. The markdown is $.50/$19.25 = 2.60%.

Weekly study questions are from Solomon’s industry-leading Online Exam Simulator.

Exam Alert: FINRA provides additional guidance on suitability rule

FINRA has provided additional guidance on its suitability rule. The new guidance redefines the terms “customer” and “investment strategy” and clarifies when the rule applies to recommendations involving non-security investments. FINRA has also created a webpage that addresses suitability issues. Continue reading

FINRA has provided additional guidance on its suitability rule (original guidance covered here). The new guidance redefines the terms “customer” and “investment strategy” and clarifies when the rule applies to recommendations involving non-security investments. FINRA has also created a webpage that addresses suitability issues.

The guidance states that “in general, for the purposes of the suitability rule, the term customer includes a person who is not a broker or dealer who opens a brokerage account at a broker-dealer or purchases a security for which the broker-dealer receives or will receive, directly or indirectly, compensation even though the security is held at an issuer, the issuer’s affiliate or a custodial agent (e.g., ‘direct application’ business, ‘investment program’ securities, or private placements), or using another similar arrangement.”  The suitability rule only applies to a recommendation made to a potential investor if the potential investor becomes a customer.

An “investment strategy” refers to a recommendation to invest in specific types of securities. However, a recommendation to invest in “equity” or “fixed income” securities would not generally be considered an investment strategy – the type of security must be more specific than those categories. An explicit recommendation to hold securities would be considered an investment strategy, as would a recommendation to continue an existing investment strategy.

The suitability rule only applies to non-security investments to the extent that the non-security investment is involved with a securities transaction (e.g. recommending that a customer sell a non-security investment to buy securities, or vice versa). The notice also provides comments on broker-dealer supervisory obligations regarding investment strategies that involve both securities and non-security investments.

Source: FINRA Regulatory Notice 12-55: Guidance on FINRA’s Suitability Rule

This alert applies to the Series 6, Series 79, Series 62, Series 24, Series 26, Series 55, Series 99, Series 7, and Series 82.

Study Question of the Week: November 27, 2012 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 7, Series 62, and Series 82. –ANSWER POSTED– Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available. Be sure to submit your answers in the comments section below.

Question (Relevant to the Series 7, Series 62, and Series 82):

ABC Corporation 6% preferred stock is convertible at $20. ABC Common trades at $25/share. What is the parity price of ABC preferred stock?

Answers:

A: $30

B: $50

C: $125

D: $500

Correct Answer: C

Rationale: First we must take the convertible price and divide it into the par value for the preferred stock to find out how many shares of common stock would be received for one share of preferred stock. $100/$20 = 5 shares of common for each share of preferred. Then we must multiple the number of common shares times the price of the common stock. 5 shares * $25/share = $125/share. The parity price of ABC preferred is $125/share.

Weekly study questions are from Solomon’s industry-leading Online Exam Simulator.

Exam Alert: FINRA amends margin requirements

Effective October 26, 2012, FINRA has changed its rules regarding margin requirements for option spread strategies. Effective January 23, 2013, FINRA will make additional changes to its margin requirement rules. Continue reading

Effective October 26, 2012, FINRA has changed its rules regarding margin requirements for option spread strategies. The changes include the following:

-Definition of a spread: the prior rule used to define several different types of spreads (e.g. butterfly spread, condor spread, calendar spread). The new rule just provides one definition for spreads overall, along with a separate definition for box spreads.  For a set of options to be considered a “spread”, they must all be: on the same security, all American-style or all European-style, and all listed or all OTC. In addition, the aggregate underlying contract value of the “long” options must equal that of the “short” options and the “short” options must expire on or before the date the “long” options expire.

-Margin for options within spreads: long options within spreads must be paid in full. The margin requirement for a short option within a spread is the lesser the normal requirement for the option and the maximum potential loss of the spread.

 

Effective January 23, 2013, FINRA will make additional changes to its margin requirement rules.  The changes include the following:

-Non-margin eligible equity securities: FINRA will clarify and modify how non-margin securities held in a margin account interact with the maintenance margin requirement. The maintenance margin requirement for non-margin securities is 100% of market value. Firms cannot extend maintenance loan value on non-margin securities except under specific conditions.

-Free-riding: FINRA will eliminate the exception to the free-riding rule for “designated accounts.”

-Exempt accounts: FINRA will eliminate an outdated definition of “exempt account.”

-Stress testing: FINRA will delete the requirement to stress test portfolio margin accounts in aggregate. Firms must still stress test individual portfolio margin accounts.

 

Source: SEC Approves Amendments to FINRA Rule 4210 (Margin Requirements) [FINRA Regulatory Notice 12-44]

This alert applies to the Series 24, Series 62, Series 99, and Series 7.

Exam Alert: FINRA launches data feed for securitized products, gives reminder about TRACE changes

Effective November 5, 2012, FINRA will launch the Securitized Products Dissemination Service (SPDS), which will act as a data feed for TRACE-eligible securitized products. FINRA also reminds firms of the changes to certain trade reporting and dissemination requirements set to take effect November 5, 2012. Continue reading

Effective November 5, 2012, FINRA will launch the Securitized Products Dissemination Service (SPDS), which will act as a data feed for TRACE-eligible securitized products.  SPDS will provide real-time last sale data and other transaction information.  SPDS, in its initial implementation, will only disseminate information for transactions in agency pass-through mortgage-backed securities that are traded to be announced (TBA).

FINRA also reminds firms of the changes to certain trade reporting and dissemination requirements set to take effect November 5, 2012.  These changes apply to transactions in TRACE-eligible securities that are agency pass-through mortgage-backed securities that are traded to be announced (TBA transactions).  For additional details, please see the prior exam alert on this change.

Source: Amendments to TRACE Reporting Requirements and Dissemination of Agency Pass-Through Mortgage-Backed Securities Traded To Be Announced

This alert applies to the Series 7, Series 24, and Series 62.

ANSWER – Study Question of the Week: October 23, 2012 Edition

As a follow up to yesterday’s licensing exam study question, here is your question PLUS answer and rationale. Relevant to Series 6, Series 7, Series 65, Series 66, Series 24, Series 26 and Series 99. Continue reading

As a follow up to yesterday’s licensing exam study question, here is your question PLUS answer and rationale:

Question (Relevant to Series 6, Series 7, Series 65, Series 66, Series 24, Series 26 and Series 99):

Which of the following is true of UGMA/UTMA accounts?

I. Only family members may contribute to a UGMA/UTMA
II. Annual contribution limit of $13,000 per year, per child
III. Assets may only be used for education expenses
IV. Earnings reported under adult custodian’s tax identification

Answers:

A: I, II

B: III, IV

C: II, III

D: None of the choices listed

Correct Answer: D

Rationale: Anyone may contribute to a Uniform Gifts to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) account and there are no contribution limits. Assets in UGMA/UTMA accounts may be used for any purpose and earnings are reported on the minor’s social security account, not the custodian’s.

*Questions featured in the weekly study question series are sampled from Solomon’s industry-leading Online Exam Simulator.

Study Question of the Week: October 23, 2012 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available (Relevant to Series 6, 7, 65, 66, 24, 26 and 99). Be sure to submit your answers in the comments section and check back tomorrow for the correct answer and rationale. Continue reading

This week’s study question from the Solomon Online Exam Simulator question database is now available. Be sure to submit your answers in the comments section and check back tomorrow for the correct answer and rationale. Happy studying!

Question (Relevant to Series 6, Series 7, Series 65, Series 66, Series 24, Series 26 and Series 99):

Which of the following is true of UGMA/UTMA accounts?

I. Only family members may contribute to a UGMA/UTMA
II. Annual contribution limit of $13,000 per year, per child
III. Assets may only be used for education expenses
IV. Earnings reported under adult custodian’s tax identification

Answers:

A: I, II

B: III, IV

C: II, III

D: None of the choices listed

ANSWER: Study Question of the Week (October 11, 2012 Edition)

As a follow up to yesterday’s licensing exam study question, here is your question PLUS answer and rationale (Relevant to the Series 7, Series 65, Series 66, Series 24 and Series 62). Continue reading

As a follow up to yesterday’s licensing exam study question, here is your question PLUS answer and rationale:

Question (Relevant to the Series 7, Series 65, Series 66, Series 24 and Series 62):

Todd finally hit the nail on the head when he sold short shares of Widget Corporation. He doesn’t see widgets coming around anytime soon, but would like to protect his profits in case the stock goes against him. What type of order would Todd most likely enter?

Answers:

A: Buy stop

B: Sell Stop

C: Market

D: FOK

Correct Answer: A

Rationale: Buy stop orders are commonly used to limit a loss or protect a profit on short sales. Because shares are sold to open a short position, they would need to be bought back in order to close the position. A stop order triggers a sale or purchase if the stock reaches a certain price. In this case, Todd would place the order above the current market and if the stock price increased to his ‘stop price,’ the order would become a market order and close his position. The order would still allow for Todd to potentially profit if the stock goes down. If a market order was entered, the stock would be immediately bought at the next available ask price. A Fill or Kill (FOK) is an order distinction used for limit orders which requires that all of the order be executed immediately and completely or cancelled.

*Questions featured in the weekly study question series are sampled from Solomon’s industry-leading Online Exam Simulator.

I will help you pass your licensing exam . . . What am I?

Willing to try anything to pass your securities exam? Here’s a tip you may want to consider! Continue reading

I’m a walnut!

If you’re looking for an edge on an upcoming securities exam, you may want to chow down on a couple of walnuts prior to your test.  A recent study suggests that walnut consumption provides a boost in cognitive brain functions. That said, you may want to think twice before adding this tactic to your study strategy. Students involved in the study were asked to consume one-half cup of walnuts, daily, for eight weeks—that’s a whole lot of walnuts!

 

A recent study finds that consumption of walnuts improves critical thinking.

 

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We also understand that every little bit helps. So, let us give you a nut! Use coupon code WALNUT15 upon your next purchase to receive 15% off individual study materials (Not applicable to study packages. Expires 12/31/2012).

Happy studying!

ANSWER–Study Question of the Week: September 19, 2012 Edition

As a follow up to yesterday’s licensing exam study question, here is your question PLUS answer and rationale (Relevant to Series 7, Series 79, Series 24, Series 62, Series 99, and Series 82). Continue reading

As a follow up to yesterday’s licensing exam study question, here is your question PLUS answer and rationale:

Question (Relevant to Series 7, Series 79, Series 24, Series 62, Series 99, and Series 82):

Before allowing a customer to buy shares in an IPO, the member firm must receive a representation that the account is not restricted by the account owner. How can this form be obtained initially?
I. Negative consent letter
II. Positive affirmation letter

Answers:

A: I

B: II

C: Either I or II

D: Neither I nor II

Correct Answer: B

Rationale: Before allowing a customer to buy shares in an IPO, the member firm must receive a representation declaring that the account is not restricted by the account owner. The firm must receive a positive affirmation letter in which the customer states in writing that the account is not restricted. After the initial verification is obtained, annual verifications may be obtained through a negative consent letter. A negative consent letter is a letter that states that the person is not restricted unless they inform the firm otherwise.

*Questions featured in the weekly study question series are sampled from Solomon’s industry-leading Online Exam Simulator.