Simplifying After-Tax and Tax-Equivalent Yields

For many when choosing bonds the most important factor is the tax implications. Knowing the after-tax yield and tax-equivalent yield calculations is critical. Continue reading

Bonds can be nice, reliable investments. Pay some money to an issuing company or municipality, receive interest payments twice a year, and then get all of your original investment back sometime down the road. Sounds like a plan.

But which bonds are best for a specific investor? There are many factors for bond investors to consider when choosing which bond to buy, but for many the most important is the tax implications of investing in one bond instead of another. This concern is most prominent when an investor compares a corporate bond to a municipal bond. For reference, a corporate bond is one issued by a corporation or business, while a municipal bond is one issued by a state, city, or municipal agency.

Comparing the tax implications of these bonds is important because the interest payments that investors receive from municipal bonds are typically not taxed at the federal level. Conversely, interest payments on all corporate bonds are subject to federal taxation. This means that someone in the 32% tax bracket will have to give Uncle Sam 32% of his interest received from a corporate bond, while he will not give up any of his interest received from a municipal bond. Additionally, an investor does not pay state taxes on municipal bond interest if the bond is issued in the state in which the investor lives. Corporate bond interest, on the other hand, is always subject to state tax.

  • interest payments taxed federally
  • interest payments subject to state tax
  • interest payments not federally taxed
  • interest payments not taxed by state if issued in state local to investor

For these reasons, when comparing a corporate bond to a municipal bond, understanding the after-tax yield and the tax-equivalent or corporate-equivalent yield is essential. This is true both for investors and for those who will be taking many of the FINRA, NASAA, and MSRB exams. So let’s look at how to calculate those yields.

After-Tax Yield

First the after-tax yield. The after-tax yield tells you the amount of a corporate bond’s annual interest payment that an investor will take home after accounting for taxes he will be assessed on that interest. Once that amount is known, the investor can compare it to the yield he would receive from a specific municipal bond and see which potential investment would put more money in his pocket. When calculating the after-tax yield, start with the annual interest percentage (a.k.a. coupon percentage) of the corporate bond, which represents the percent of the bond’s par value that an investor receives each year in interest. For instance, a corporate bond that has a $1,000 par value and an interest rate of 8% will pay an investor $80 dollars in annual interest ($1,000 x 0.08 = $80). You then multiply the coupon percentage by 1 minus the taxes an investor will pay on the corporate bond that he will not pay on the municipal bond that he is considering.

This is where it sometimes gets tricky. What taxes will an investor not pay when investing in a municipal bond that he will pay when investing in a corporate bond? Remember that for just about all municipal bonds, investors do not pay federal tax on interest received.

The formula for after tax yield is:

After-tax yield = Corporate Bond Annual Interest Rate x
( 1 – Taxes Investor Does Not Pay By Investing in Municipal Bond)

On the other hand, an investor always pays federal taxes on interest received from a corporate bond. Additionally, an investor does not pay state taxes on interest payments from a municipal bond issued in the state in which the investor lives.

On the other hand, an investor always pays state taxes on interest received from corporate bonds. So if you see an exam question in which you need to calculate the after-tax yield of a corporate bond to compare it the yield on a municipal bond, you will always subtract the investor’s federal income tax rate from 1 in the equation. You will also subtract the investor’s state tax rate from 1 if the municipal bond is issued in the investor’s state of residence.

Seems simple, right? Here’s a question to provide context:

Marilyn is a resident of Kentucky. She is considering a bond issued by XYZ Corporation. The bond comes with a 7% annual interest rate. Marilyn is also interested in purchasing municipal bonds issued in Ohio. If Marilyn has a federal tax rate of 28% and Kentucky’s state tax rate is 4%, what is the after-tax yield on XYZ’s bond?

To answer this question, begin with the interest rate on the XYZ bond, which is 7%. Then subtract from 1 the taxes Marilyn will not pay if she invests in the municipal bond in question. She will not pay federal taxes on the municipal bond interest, so you would subtract 28%, or .28. However, because Marilyn is a resident of Kentucky and the municipal bonds she is considering are issued in Ohio, she will pay state taxes on the bond. That means you would not subtract her state tax rate (0.04) from 1. After subtracting .28 from 1 to get 0.72, you multiply that amount by the 7% coupon payment. Doing so gives you a value of 5.04 (7 x 0.72 = 5.04%). This means that the interest amount she would take home from the XYZ bond would be equivalent to what she would receive from a municipal bond issued in Ohio that has a 5.04% interest payment. If she can get a bond issued in Ohio that has a higher interest payment than 5.04%, she would take home more money in annual interest payments than she would from the XYZ bond.

Tax-Equivalent Yield

The second approach an investor can take to compare how a potential bond investment will be affected by taxation is to calculate the tax-equivalent yield (TEY). This calculation is also known as the corporate-equivalent yield (CEY). The TEY/CEY measures the yield that a corporate bond will have to pay to be equivalent to a given municipal bond after accounting for taxes due. To calculate this yield, you take the annual interest of the given municipal bond and divide it by 1 minus the taxes the investor will not pay if she invests in the municipal bond that she would pay if she invested in a corporate bond.

Here’s the formula for tax-equivalent yield:

Tax-equivalent yield = Municipal Bond Annual Interest Rate /
(1 – Taxes Investor Does Not Pay By Investing in Municipal Bond)

When determining what tax rates to subtract from 1 in the denominator, the same principal as described above applies. That is, the investor will not have to pay federal tax on the municipal bond, so her federal rate is always subtracted from 1. The investor will also not have to pay state tax on the bond if it is issued in the state in which she lives. If that is the case, the investor’s state tax rate should also be subtracted from 1. However, if the investor lives in a different state than the state in which the bond is issued, she will have to pay state taxes on the interest payments. In that case, her state tax rate would not be subtracted from 1.

Here’s another question to provide context.

Franz, a resident of Michigan, has purchased a Michigan municipal bond that pays 4% annual interest. If his federal tax bracket is 30% and the Michigan state tax rate is 4%, what interest rate would he need to receive on a corporate bond to have a comparable rate after accounting for taxes owed?

To answer this question, begin with the interest rate on the Michigan municipal bond, which is 4%. Then subtract from 1 the taxes that Franz will not pay on that bond that he would pay if he invested in a corporate bond. He wouldn’t pay federal taxes on the municipal bond interest, so you would subtract 0.30 from 1. Additionally, since the bond is issued in Michigan and he is a Michigan resident, Franz will not pay state taxes on the bond. So you subtract Michigan’s state tax rate of 4%, or 0.04, from 1 as well. After subtracting 0.30 and 0.04 from 1 to get 0.66, you divide that number into the 4% municipal bond annual interest. Doing so gives a value of 6.06 (4 / 0.66 = 6.06). This means Franz would need to find a corporate bond that pays 6.06% in annual interest to match the amount of interest he will take home annually from the Michigan municipal bond after accounting for taxes.

Many people are confused by the concepts of the after-tax and tax-equivalent yields. But you don’t have to be one of them. Just follow this simple approach and any questions you see on this topic will not be overly taxing.

Mastering these equations will help you succeed in passing the Series 6, Series 7, Series 50, Series 52, Series 65, Series 66, and Series 82.

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What is a SPAC and should you care about it for the FINRA Series 79 exam?

SPACs have grown by leaps and bounds in recent years, and the growth is only accelerating. What will this mean for regulations and the Series 79 exam? Continue reading

It sounds like a securities-industry riddle: what do you call a blank check company with no hard assets that holds a multimillion dollar IPO? But the answer is very real: SPACs (special purposes acquisition companies) are an alternative to traditional IPOs that have exploded in popularity.

What’s a “blank check company?”  A blank check company is an exchange-listed shell company that, according to the SEC, has “no specific business plan or…its business plan is to engage in a merger or acquisition.”

The purpose of a SPAC is to raise money to acquire a privately held company. Think of it as crowdfunding on a massive scale. First, the SPAC sells shares of itself in an IPO. Then it uses the IPO proceeds to fund a merger between itself and a target company. When the merger is complete, the SPAC’s shareholders become shareholders in the target company. Investors buy SPAC shares based on their confidence that the SPAC’s management will complete the merger, and the anticipated value of the shares after the merger.

SPACs have grown by leaps and bounds in recent years, and the growth is only accelerating. The amount raised by SPAC IPOs in 2020 more than quadrupled the amount they raised in 2019. According to Reuters, the total value of SPAC mergers in 2021 has already exceeded the total size of SPAC mergers for all of 2020.

What does this mean for regulations?

As investor excitement around SPACs has heated up, there are indications that the SEC is beginning to take a closer look at this new kind of IPO. On March 10th, the SEC issued a warning against investing based on celebrity involvement with a SPAC. Celebrities with high-profile ties to SPACs include A-Rod, Shaquille O’Neal, Serena Williams, and former Speaker of the House Paul Ryan. Acting SEC Chair Allison Herren Lee recently warned of “more and more evidence on the risk side of the equation for SPACs as we see studies showing that their performance for most investors doesn’t match the hype.”

While none of this guarantees that new rules for SPACs are around the corner, it does make it more likely that FINRA’s Series 79 investment banking exam may begin to include mention of SPACs. They are a topic that investment bankers are increasingly likely to encounter in practice, and therefore are increasingly likely to be viewed as fair game for the exam.

Solomon Exam Prep is ahead of the curve with new material in our Series 79 Study Guide. Series 79 customers can find material on SPACs now included in the online edition of Solomon Study Guide.

Potentially testable points about SPACs include:
  • SPAC are formed by “sponsors,” commonly institutional investors or high net worth individuals, who are compensated with both a portion of the IPO proceeds, as well as an equity stake in the SPAC of up to 20%.
  • SPAC’s typically avoid committing to merge with a specific company, even if the SPAC was formed with the intention of targeting that company. The SPAC’s management may respond to changing market conditions by choosing a different target, subject to approval from the SPAC’s shareholders.
  • After a SPAC goes public, its shares trade freely on exchanges even before it completes a merger.
  • A SPAC must hold at least 85% of proceeds from its IPO in an escrow account.
  • The SPAC commits to return investor funds if it fails to complete a merger within a specified timeframe.
  • As a blank check company with no business operations of its own, a SPAC cannot take advantage of certain options available to more established securities issuers. For example, a SPAC is not permitted to make an electronic version of its road show presentation.

Solomon Exam Prep will continue to follow industry trends and how they affect your licensing exams.

Solomon Exam Prep has helped thousands pass their securities licensing exams, including the SIE and the Series 3, 6, 7, 14, 22, 24, 26, 27, 28, 50, 51, 52, 53, 54, 63, 65, 66, 79, 82 and 99.

SEC Overhauls Marketing Rules for Investment Advisers

On December 22, the SEC announced a major rule change that it hopes will clarify what investment advisers can and can’t do when it comes to marketing their services. Continue reading

On December 22, the SEC announced a major rule change that it hopes will clarify what investment advisers are permitted to do when it comes to marketing their services.

The SEC cited the need to adapt its rules to changing communications technology. “The marketing rule reflects important updates to the traditional advertising and solicitation regimes, which have not been amended for decades, despite our evolving financial markets and technology,” said SEC Chairman Jay Clayton in announcing the overhaul.

The SEC’s current rules about advertisements and paying for client referrals will be consolidated into a single rule. Paying a third party to solicit new clients will now be considered a form of advertising, as will paid testimonials and endorsements and some one-on-one communications with clients.

Currently, each of these activities is subject to a separate set of requirements. By bringing them under the definition of advertising, the new rule replaces this complex system with a set of six broad principles that all forms of IA advertising must adhere to:

  1. No untrue statements or omissions of material facts
  2. No unsubstantiated statements
  3. No statements that imply something untrue or misleading
  4. When the benefits of the IA’s services are discussed, there must be a fair and balanced discussion of material risks
  5. “Anti-cherry picking”: the IA must present its track record in a fair and balanced way
  6. No advertisements that are otherwise materially misleading (intended as a “catch-all provision” for misleading advertising not covered above)

The rule change is expected to take effect sometime in the spring of 2021 and will affect the Series 65 and Series 66 exams.

SEC Announces Major Revisions to Registration Exemptions Aimed at “Harmonizing” Regulation A Offerings, Regulation D Private Placements, and Crowdfunding

On November 2, the SEC announced a collection of rule changes meant to, in the announcement’s words, “harmonize, simplify, and improve” its “overly complex exempt offering framework.” Continue reading

On November 2, the SEC announced a collection of rule changes meant to, in the announcement’s words, “harmonize, simplify, and improve” its “overly complex exempt offering framework.” The changes affect Regulation A, which governs small public offerings; Regulation D, which governs private placements; and Regulation CF, which governs crowdfunding. This system of exemptions allows various small offerings to avoid the normal registration process required by the Securities Act.  
 
The rule changes should provide a clearer choice as to which exemption is most appropriate to an issuer, based on how much the issuer needs to raise and other factors.
 
The changes also seek to clarify how issuers can avoid “integration” of exempt offerings. Integration is the risk that exempt offerings will be considered a single offering by the SEC, because the offerings are too similar.
 
Highlights of the changes include:
 
  • If two exempt offerings are conducted more than 30 days apart, they are almost always protected from integration.
  • An issuer can “test the waters” with potential investors before deciding which exemption it will use for an offering. Test-the-waters communications solicit interest in a potential offering before the issuer has filed anything with the SEC. Previously, an issuer could only test the waters after deciding that its potential offering would take place under Regulation A.
  • Caps on the amount that may be raised through these exemptions have been increased:
    • Crowdfunding: from $1.07 million to $5 million
    • Regulation A, Tier 2: from $50 million to $75 million 
    • Regulation D, Rule 504: from $5 million to $10 million
  • Make “bad actor” exclusions more consistent across different exemptions.
The rule changes will take effect early next year. Until the changes take effect, securities exam questions will continue to be based on the old rules. FINRA Exams affected by these rule changes include the SIE, Series 6, Series 7, Series 14, Series 22, Series 24, Series 65, Series 66, Series 79, and Series 82.

Passing Your Securities Exam May Now Make You an Accredited Investor

On Wednesday, the SEC finalized rule changes that will broaden its definition of “accredited investor” to encompass industry professionals who have earned certain FINRA licenses. Continue reading

On Wednesday, the SEC finalized rule changes that will broaden its definition of “accredited investor” to encompass industry professionals who have earned certain FINRA licenses.
 
An accredited investor is an investor considered sophisticated enough to weigh an investment’s merits independently. Accredited investors have easier access to certain types of investments, such as private equity offerings.
 
Under the newly expanded definition, General Securities Representatives (Series 7), Private Securities Offerings Representatives (Series 82), and Licensed Investment Adviser Representatives (Series 65) are now accredited investors. The SEC indicated that it may add other FINRA licenses later.
 
The rule change also allows “spousal equivalents” such as domestic partners to qualify as accredited investors based on the total income and assets of both partners, a benefit previously limited to couples who are legally married. Native American tribes and foreign governments now qualify as accredited investors as well.
 
The Solomon Exam Prep team is always on the lookout for how current developments affect the securities industry. For more updates from our Industry News blog, use the subscribe form on this page.

Move over T+3! T+2 is here to stay.

Effective September 5, 2017, for most securities, the SEC will shorten the regular-way settlement period from three to two business days. Continue reading

Effective September 5, 2017, for most securities, the SEC will shorten the regular-way settlement period from three to two business days. This means:

  • Securities must be paid for and delivered by two business days from the trade date
  • An investor doesn’t become the owner of record of a security until two business days after purchase

The regular-way settlement cycle is often referred to as T+2, which refers to trade date plus two business days.

This shorter settlement period for the trading of secondary market securities has been discussed by the SEC for years. The change is expected to lower margin requirements for clearing agency members, reduce liquidity stress when markets are volatile, and harmonize settlement with European markets, which moved to T+2 in 2014.

This settlement period will not apply to every securities transaction. T+2, like T+3 before it, will apply to:

  • Stocks
  • Bonds
  • Municipal securities
  • Exchange-traded funds
  • Mutual funds traded through a brokerage firm
  • Unit investment trusts
  • Limited partnerships that trade on an exchange

This change affects the Series 6, Series 7, Series 24, Series 26, Series 27, Series 28, Series 52, Series 53, Series 62, Series 65, Series 66, and Series 82.

But never fear—Solomon has already updated all study materials to reflect this change.

The securities industry moves fast. Don’t get left behind!

Visit www.solomonexamprep.com or call us at 503-601-0212 for more information about the latest securities exam preparation and education.

No More Delays: DOL Moves Forward with Fiduciary Rule

Like a groom who finally ran out of excuses, Labor Department secretary Alexander Acosta announced on Monday, May 22, 2017, that the DOL would no longer seek to delay implementation of the Obama-era fiduciary rule. Continue reading

Like a groom who finally ran out of excuses, Labor Department secretary Alexander Acosta announced on Monday, May 22, 2017, that the DOL would no longer seek to delay implementation of the Obama-era fiduciary rule. The rule goes into effect on June 9, 2017.

The fiduciary rule requires financial professionals to put an investor’s interests first—that is, to meet a fiduciary duty—when providing investment advice regarding virtually any retirement plan.

In the past, financial professionals only had to demonstrate that an investment was suitable, which allowed bad actors to recommend expensive investments with high commissions that diminished investors’ retirement savings over time. This is known as conflicted advice, and the Obama White House estimated that it costs investors $17 billion a year.

When the rule was submitted for public comment, the vast majority of commenters were in favor of the proposed regulation.

Opponents of the rule, including the Trump administration, believe that implementation of the rule will raise costs and limit choices for investors.

Secretary Acosta stated that, although the rule will no longer be delayed, the Trump administration “presumes that Americans can be trusted to decide for themselves what is best for them,” indicating that the rule could possibly be repealed or rewritten in the future.

However, those who defend the fiduciary rule claim that average investors, faced with confusing industry jargon, cannot always make the best investment choices for themselves and will benefit from the protection that the rule provides.

The Department of Labor’s fiduciary rule goes into effect on June 9, 2017, but it will not be enforced until January 1, 2018, so firms have until the end of the year to fully implement the required changes.

Once the fiduciary rule is in effect, it will mean more openings for people who have passed the Series 65 or Series 66 exam, which means that now is the perfect time to start studying. Visit Solomon Exam Prep today for more information about our study materials!

Laboring Toward Completion: The Fate of the Fiduciary Rule

The Department of Labor’s fiduciary rule has been subject to more back and forth than an Olympic table tennis match. Will it go into effect? Will it be repealed? Or will it merely be delayed? The answer seems to change from day to day. Continue reading

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Update: On March 1, 2017, the Department of Labor proposed a 60-day delay of implementation of the fiduciary rule. The DOL will allow a 15-day comment period before determining whether to finalize the delay.

***

The Department of Labor’s fiduciary rule has been subject to more back and forth than an Olympic table tennis match. Will it go into effect? Will it be repealed? Or will it merely be delayed? The answer seems to change from day to day. While some groups work toward implementation of the rule, other groups fight against it, questioning whether the Department of Labor even has the authority to issue such a rule.

The fiduciary rule would require financial professionals to put an investor’s interests first—that is, to meet a fiduciary duty—when providing investment advice regarding covered retirement plans.

Let’s look at a brief timeline of the life of the fiduciary rule so far:

February 23, 2015: President Obama called for the Department of Labor to move forward with the creation of rules to limit conflicts of interest regarding investor retirement accounts.

April 14, 2016: The Department of Labor proposed the fiduciary rule, intended to begin implementation on April 10, 2017.

February 3, 2017: President Trump issues an executive order directing the DOL to review the fiduciary rule.

February 8, 2017: A federal district court judge in Texas upheld the Department of Labor’s authority to issue the fiduciary rule.

February 17, 2017: A federal district court judge in Kansas upheld the Department of Labor’s authority to issue the fiduciary rule.

When President Trump issued his executive order, he ordered the Secretary of Labor to provide an “economic and legal analysis” of the rule to answer the following questions:

  • Will it reduce investors’ access to a variety of retirement services, offerings, product structures, or other information or advice?
  • Has it disrupted the retirement services industry in a way that could harm investors?
  • Is it likely to increase the amount of litigation in the industry and thereby cause an increase in prices for investors?

If the Secretary of Labor determines that the answer to any of these questions is yes, it must revise or rescind the rule.

However, many firms are proceeding with their plans to implement the fiduciary rule whether or not the rule as it now exists goes into effect.  For example, Merrill Lynch has said it will no longer offer commission-based brokerage IRA accounts. Instead, the firm will offer level fee investment advisory services regardless of the outcome of the fiduciary rule.

Senator Elizabeth Warren of Massachusetts reached out to over thirty leading finance companies, and the overall response from the companies that responded was that they support the fiduciary rule and are prepared to implement it. For example, TIAA wrote, “Putting our clients’ best interests first is a core value at TIAA and, accordingly, we support a best-interest standard,” and Fidelity noted that the firm is “fully prepared to comply with the rule if and when it becomes applicable.”

So even though we don’t know what will be the ultimate fate of the DOL fiduciary rule, it’s safe to say that it has already begun to change the face of the financial industry.

For more information about the DOL fiduciary rule, see our earlier blogpost: https://solomonexamprep.com/news/finra/ready-or-not-here-it-comes-the-dol-fiduciary-rule-2/.

 

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.

Where Does Solomon Exam Prep Come In?

It turns out you’re in luck, because Solomon Exam Prep has just the materials you need. Our industry-leading study materials have helped thousands of students pass their licensing exams.

Our Series 65 and 66 Total Study Packages include an Exam Study Guide, an Online Exam Simulator, a Video Lecture, and an Audiobook. With these materials, you will have the tools you need to pass the Series 65 or 66 and enter the world of investment advisory services.

Don’t wait! Be at the forefront of a changing industry. Check out our Series 65 or Series 66 study materials.

For more information, visit www.solomonexamprep.com or call us at 503-601-0212.

 

Crowdfunding Has Arrived

Capital markets in the United States are arguably the strongest in the world. Recent developments could strengthen them even more by making equity investing and equity capital-raising much more accessible. Continue reading

CrowdfundingCapital markets in the United States are arguably the strongest in the world. Recent developments could strengthen them even more by making equity investing and equity capital-raising much more accessible.

In an effort to lower the cost and increase the availability of equity investing to small businesses, the SEC just adopted Regulation Crowdfunding (Title III of the Jobs Act adding Securities Act Section 4(a)(6)). These are the much-awaited final rules permitting equity crowdfunding, which allows small and startup companies to raise capital via the internet through relatively small contributions from investors.

Under the terms of the new rules, crowdfunding transactions for eligible U.S. companies will be exempted from SEC registration, provided

  • the aggregate amount the issuer sells to all investors in a 12-month period does not exceed $1 million,
  • The aggregate amount sold to any investor does not exceed a given percentage of that investor’s annual income or net worth (the greater of 2% or $5,000 for investors with either an annual income or net worth of less than $100,000; 10%, but not to exceed $100,000, for all others),
  • The transaction is conducted through either a registered broker-dealer or a registered “funding portal”, and
  • Issuers are in compliance with required SEC disclosure filings.

Certain companies are not eligible for the crowdfunding exception.  These include all foreign-based companies, Exchange Act-reporting companies, certain investment companies, and companies that have previously failed to comply with crowdfunding reporting requirements.

Buyers of crowdfunding securities will be required to hold them for at least a year before they can resell them.

This alert applies to the Series 7, Series 24, Series 62, Series 79, and Series 82.