Category: Series 65

ANSWER–Study Question of the Week: October 1, 2012 Edition

As a follow up to yesterday’s licensing exam study question (Relevant to Series 65, Series 66, Series 7, and Series 79), here is your question PLUS answer and rationale: 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 65, Series 66, Series 7, and Series 79):

Given the following assumptions for stock ABC, what is its expected return using the Capital Asset Pricing Model (CAPM)?

Assumptions: Risk Free Rate: 1%; Expected Return on general stock market: 7%; Beta: 1.; Sharpe Ratio: 2.

Answers:

A. 10%

B. 13%

C. 11.5%

D. 15%

Correct Answer: A

Rationale: The formula for the Capital Asset Pricing Model (CAPM) is given by the following: Return on Stock = Risk Free Rate + Beta of Stock x (Return on Market – Risk Free Rate). Plugging in for Stock ABC gives Return on Stock ABC = 1% + 1.5 x (7% – 1%) = 10%. Note the Sharpe Ratio is not used in the CAPM formula.

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

Study Question of the Week: October 1, 2012 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available (Relevant to Series 65, Series 66, Series 7, and Series 79). 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 65, Series 66, Series 7, and Series 79): Given the following assumptions for stock ABC, what is its expected return using the Capital Asset Pricing Model (CAPM)?

Risk Free Rate: 1%; Expected Return on general stock market: 7%; Beta: 1.;, Sharpe Ratio: 2.

Answers:

A. 10%

B. 13%

C. 11.5%

D. 15%

Exam Alert: Department of Labor requires additional disclosure to 401(k)-type plan participants

The U.S. Labor Department has released a final rule that will require the administrators of 401(k)-type retirement plans to provide additional information to plan participants. The rule states that investment of plan assets is a fiduciary act governed by fiduciary standards. The rule requires that if a plan gives investment responsibilities to its participants, that the plan administrator must regularly inform them of those responsibilities. The plan administrator must also provide specified plan-related information and investment-related information, as detailed below. Continue reading

The U.S. Labor Department has released a final rule that will require the administrators of 401(k)-type retirement plans to provide additional information to plan participants.  The rule states that investment of plan assets is a fiduciary act governed by fiduciary standards.  The rule requires that if a plan gives investment responsibilities to its participants, that the plan administrator must regularly inform them of those responsibilities.  The plan administrator must also provide specified plan-related information and investment-related information, as detailed below.

 

Plan-related information consists of three categories:

-general plan information (structure and mechanics of the plan),

-administrative expense information (fees deducted from all accounts), and

-individual expense information (fees charged for individual actions).

This information must be given to participants on or before the date they can first direct their investments, and annually thereafter.  Participants must also receive quarterly statements showing the actual charges for plan-related fees and expenses and a description of services provided.

 

Investment-related information includes –

For investments with a fixed rate of return:

-the annual rate of return

-the term of the investment

For investments that do not have a fixed rate of return:

-1-, 5-, and 10-year returns

-name and returns of an appropriate broad-based securities market index over the same 1-, 5-, and 10-year periods

-total annual operating expenses as a percentage of assets and as a dollar amount per $1000 invested

For all investments:

-any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment

-an address for a website that provides current, specific, additional information

-a general glossary of terms

Investment-related information must be given to participants on or before the date they can first direct their investments, and annually thereafter.  It must be provided in a comparative format, such as a chart.

 

Additional stipulations:

-The rule protects the plan administrator from liability for the completeness and accuracy of information given to participants if the administrator reasonably and in good faith relied on information given by a service provider.

-A participant must be given any materials the plan receives for that participant’s investments regarding voting, tender, or similar rights.

-Upon request, the plan administrator must give disclosure documents associated with an investment (prospectuses, financial reports, statements of valuation and of assets held).

 

The initial annual disclosure required under the rule must happen by August 30, 2012.  The initial quarterly disclosure required under the rule must happen by November 14, 2012.

 

Source: Final Rule to Improve Transparency of Fees and Expenses to Workers in 401(k)-Type Retirement Plans (DOL Fact Sheet)

 

This alert applies to the Series 62, Series 6, Series 26, Series 24, Series 7, Series 65, Series 66, and Series 82 – these exams address ERISA considerations.

Exam Alert: SEC and CFTC define “swap,” “security-based swap,” and “mixed swap”

Effective October 12, 2012, the SEC and CFTC will put into effect rules that specify whether a given product counts as a “swap,” “security-based swap,” “mixed swap,” or none of the above. The new rules also require market participants to keep the same books and records for “security-based swap agreements” as would be required for swaps. Continue reading

Effective October 12, 2012, the SEC and CFTC will put into effect rules that specify whether a given product counts as a “swap,” “security-based swap,” “mixed swap,” or none of the above.  The new rules also require market participants to keep the same books and records for “security-based swap agreements” as would be required for swaps.

 

The CFTC regulates swaps, the SEC regulates security-based swaps, and both agencies regulate mixed swaps.  The CFTC regulates security-based swap agreements, but the SEC has antifraud authority over those products.

 

Products that are not swaps or security-based swaps include:

-insurance that falls under 1) the grandfather provision, 2) the product safe harbor, or 3) the enumerated product safe harbor

-security forwards

-consumer transactions

-commercial transactions

 

Products that are considered swaps include:

-Title VII instruments on interest rates and other monetary rates

-Title VII instruments on rates or yields of U.S. Treasuries and certain other exempt securities

-Title VII instruments on futures (other than futures on foreign government debt securities)

-broad-based index credit default swaps that require cash settlement or auction settlement

 

Products that are considered security-based swaps include:

-Title VII instruments on yields of a non-exempt debt security, loan, or narrow-based security index

-Total Return Swaps on a single security, loan, or narrow-based security index

-Title VII instruments on security futures

 

Products that are considered mixed swaps include:

-Total Return Swaps that include interest-rate optionality or a non-securities component

-broad-based index credit default swaps that require mandatory physical settlement

 

Products that may be swaps or security-based swaps:

-Title VII instruments based on futures contracts on certain foreign government debt securities

-index credit default swaps

-foreign exchange forwards

-foreign exchange swaps

-foreign currency options (other than foreign currency options traded on a national securities exchange)

-non-deliverable forward contracts involving foreign exchange

-currency and cross-currency swaps

-forward rate agreements

-contracts for differences

-certain combinations and permutations of (or options on) swaps and security-based swaps

 

Market participants may request a determination from the SEC and the CFTC of whether a product is a swap, a security-based swap, or a mixed swap.

 

Sources:

SEC Approves Rules and Interpretations on Key Terms for Regulating Derivatives (SEC Release 2012-130)

Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping (Federal Register publication)

 

This alert applies to the Series 62, Series 79, Series 99, Series 7, Series 66, and Series 65.

Exam Alert: Test takers with limited English proficiency must submit a form to FINRA to receive extra time

Effective September 1, 2012, FINRA will implement a new policy for providing additional time to people with limited English proficiency on qualification exams and on Regulatory Element Continuing Education sessions. The new policy requires that people requesting additional time must submit an LEP Request Form to FINRA and receive confirmation from FINRA that the form has been processed before scheduling the exam or Continuing Education session. Continue reading

Effective September 1, 2012, FINRA will implement a new policy for providing additional time to people with limited English proficiency on qualification exams and on Regulatory Element Continuing Education sessions.  The new policy requires that people requesting additional time must submit an LEP Request Form to FINRA and receive confirmation from FINRA that the form has been processed before scheduling the exam or Continuing Education session.

This new policy replaces the current policy covering people who speak English as a second language.  Test center personnel will no longer be authorized to provide additional time to people who speak English as a second language or to people with limited English proficiency.

A person is considered to have “limited English proficiency” if they “(1) do not speak English as their primary language; and (2) have limited ability to read, speak, write and understand the English language.”

Further details on the new policy may be found on FINRA’s website.

Sources:

FINRA Information Notice 8/1/2012

Candidates with Limited English Proficiency (FINRA website)

This alert applies to all FINRA-administered exams.  This includes (among others) the Series 24, Series 26, Series 6, Series 7, Series 55, Series 62, Series 79, Series 82, Series 99, Series 56, Series 63, Series 65, and Series 66.

Exam Alert: Investment tax to take effect next year

Effective January 1, 2013, investment income of people with gross adjusted income over a certain threshold will be subject to a 3.8% tax. The threshold is $200,000 for single filers and $250,000 for joint filers. Income from certain investments will not be subject to the tax. The tax applies to investment income that causes the gross adjusted income of the individual or couple to be in excess of the $200,000 or $250,000 threshold. Continue reading

Effective January 1, 2013, investment income of people with gross adjusted income over a certain threshold will be subject to a 3.8% tax.  The threshold is $200,000 for single filers and $250,000 for joint filers.  Income from certain investments will not be subject to the tax.  The tax applies to investment income that causes the gross adjusted income of the individual or couple to be in excess of the $200,000 or $250,000 threshold.

 

The income unaffected by the tax, according to the Wall Street Journal, includes:

-payouts from a regular or Roth IRA, 401(k) plan or pension

-Social Security income

-annuities that are part of a retirement plan

-life-insurance proceeds

-municipal-bond interest

-veterans’ benefits

-Schedule C income from businesses

-income from a business on which you are paying self-employment tax, such as a Subchapter S firm or a partnership

 

Income that is expected to be subject to the tax, according to the Wall Street Journal, includes:

-dividends

-rents

-royalties

-interest, except municipal-bond interest

-short- and long-term capital gains

-the taxable portion of annuity payments

-income from the sale of a principal home above the $250,000/$500,000 exclusion

-a net gain from the sale of a second home

-passive income from real estate and investments in which a taxpayer doesn’t materially participate, such as a partnership

 

For examples of how to calculate the tax, see the linked articles below.

 

Sources:

“Get Ready for the New Investment Tax” (Wall Street Journal)

“Medicare tax hikes: What the rich will pay” (CNN)

“About That Investment Tax…” (Wall Street Journal)

This alert applies to the Series 6, Series 7, Series 62, Series 82, Series 65, and Series 66.

Exam Alert: NYSE Amex renamed NYSE MKT

Effective May 14, 2012, NYSE Amex was renamed NYSE MKT. NYSE Amex Options market has retained its name. Continue reading

Effective May 14, 2012, NYSE Amex was renamed NYSE MKT.  NYSE Amex Options market has retained its name.

NYSE MKT (formerly NYSE Amex) is a market for listing and trading small growth companies.

Source: “NYSE Amex LLC to be renamed NYSE MKT LLC” (NYSE news release)

This alert applies to the Series 7, Series 62, Series 24, Series 65, and Series 66.

Exam Alert: SEC adopts definitions for security-based swap rules

Under the Dodd-Frank Act, the SEC and CFTC (Commodity Futures Trading Commission) regulate the OTC swaps market. On April 18, 2012, the SEC adopted rules that provide definitions for terms used in the law, specifying who will be subject to regulation. Continue reading

Under the Dodd-Frank Act, the SEC and CFTC (Commodity Futures Trading Commission) regulate the OTC swaps market.  On April 18, 2012, the SEC adopted rules that provide definitions for terms used in the law, specifying who will be subject to regulation.

The rules provide two categories of persons subject to SEC registration: “security-based swap dealers” and “major security-based swap participants.”  In essence, a security-based dealer is a person that regularly trades security-based swaps for their own account.  A de minimis exemption exists for dealers who traded up to $3 billion worth of credit default swaps over the past year and up to $150 million worth of other security-based swaps.  Note that there is a different de minimis threshold of $25 million for security-based swaps involving “special entities,” including certain government agencies.

A major security-based swap participant is a person who maintains a “substantial position” in any of the major security-based swap categories, or whose outstanding security-based swaps create “substantial counterparty exposure.”  Note that hedging positions are not counted towards the “substantial position” threshold if the person is not a “highly leveraged financial entity,” meaning a financial entity with a ratio of liabilities to equity in excess of 12-to-1.  Two tests are provided for determining “substantial position,” and two thresholds are provided for “substantial counterparty exposure.”  The specifics of these tests and thresholds may be found in the SEC release, along with background information, a plan to phase-in the de minimis rule, a safe harbor to avoid being considered a major participant, and other details.

The rule will become effective 60 days after publication in the Federal Register, though the deadline for registration will be given in SEC’s final rules for registration of dealers and major participants.

Source: SEC Release 2012-67

This exam alert applies to the Series 62, Series 79, Series 99, Series 65, and Series 66.

Exam Alert: SEC rule excludes home value from net worth calculation for “qualified clients”

An SEC rule change announced on February 15, 2012, will exclude the value of an investor’s home from the “qualified client” net worth calculation. Continue reading

A qualified client is a client that may be charged performance-based fees by an investment adviser.  The threshold for determining whether a client is a qualified client is if they have at least $1 million in assets under management with the adviser or if they have a net worth of at least $2 million.  An SEC rule change announced on February 15, 2012, will exclude the value of an investor’s home (primary residence) from the net worth calculation.  The rule amendment will take effect 90 days after publication in the Federal Register.

Source: SEC Release 2012-29

This alert applies to the Series 63, Series 65, Series 66, and Series 24.

Exam Alert: US Labor Dept requires disclosures from plan service providers

The US Labor Department has finalized a rule under ERISA that will require service providers for pension plans to disclose information about their fees to the employers sponsoring the plans. The rule will be effective July 1, 2012. Continue reading

The US Labor Department has finalized a rule under ERISA that will require service providers for pension plans to disclose information about their fees to the employers sponsoring the plans.  The rule will be effective July 1, 2012.

The rule will require disclosure of the service provider’s compensation structure (including both “direct” compensation from the plan sponsor and “indirect” compensation from other sources), as well as potential conflicts of interest.  The rule is limited in scope to ERISA-covered defined benefit and defined contribution pension plans.  The rule applies to service providers who expect to receive at least $1,000 in compensation for specified plan-related services, including fiduciary, advisory, brokerage, and recordkeeping services, or other financial services for which they receive indirect compensation.

Sources:

U.S. Treasury, Labor Departments Act to Enhance Retirement Security for an America Built to Last

Fact Sheet – Final Regulation Relating to Service Provider Disclosures Under Section 408(b)(2)

This alert applies to the Series 62, Series 6, Series 26, Series 24, Series 7, Series 65, Series 66, and Series 82 – these exams address ERISA considerations.