Series 99

Study Question of the Week: April 17, 2013 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 7, Series 62, Series 65, Series 79, Series 82, and Series 99. –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 62, Series 65, Series 79, Series 82, and Series 99):

A reverse stock split:

I. Reduces the value of shareholder equity

II. Requires SEC approval

III. May be done to maintain an exchange listing and to attract institutional investors

IV. Can result in fewer shareholders

Answers:

A. II, III

B. III, IV

C. I, II

D. I, IV

Correct Answer: B. III, IV

Rationale: A reverse stock split is the opposite of a stock split, so instead of ending up with more shares in the case of a stock split, in a reverse stock split shareholders end up with fewer shares. For example, in a 1 for 3 reverse split, shareholders receive one new share for three old shares, but the value of each share increases proportionately resulting in an increase in the value of each share but no change in the value of shareholder equity. The increase in the share price is a primary reason for reverse stock splits; a common reason for the reverse split is to keep a share price above some exchange-required minimum share price, such as $1. A higher share price is also desirable because it can broaden the base of potential investors to include institutions which may be prohibited from purchasing low-priced stocks. Stock splits are governed by state law and by company bylaws, they do not require SEC approval. Reverse stock splits that involve large reductions in the number of shares, for example a 1 for 100 reverse split, may result in shareholders not having enough of the old shares to exchange in return for the new shares, when this happens the shareholders are paid cash for their shares. This results in an overall reduction in the number of shareholders.

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

Exam Alert: SEC clarifies standards for filing social media communications by investment companies

On March 15, 2013, the SEC issued guidance for investment companies regarding their communications over social media. Noting that investment companies have been filing certain communications unnecessarily, the SEC describes which types of communications should or should not be filed, providing examples of each. Continue reading

Communications that should be filed include:

-Discussion of the specific elements of the performance of a fund

-Promotion of the performance of a fund

-Communication initiated by the issuer that talks about the merits of the fund

Communications that do not need to be filed include:

-Mention of an investment company that does not address the investment merits of the fund

-Talking about performance with no mention of any specific element of a fund’s return

-Factual introductory statements that include a link to the fund’s prospectus

-Factual responses to queries that do not address the investment merits of a fund

To see examples of what needs to be filed and what does not, check out the SEC guidance.

For further analysis of the SEC release, along with a general discussion of the intersection of regulation and social media, check out the blog post by Augie Ray at http://www.experiencetheblog.com/2013/03/regulators-to-financial-service-stop.html. Mr. Ray, an ex-Forrester analyst (source), asserts that regulators are encouraging firms to make more active use of social media, and that this guidance is part of that trend.

Source: SEC Release 2013-40: SEC Issues Guidance Update on Social Media Filings by Investment Companies

This alert applies primarily to the Series 6, Series 7, and Series 26. It may also be relevant to the Series 24, Series 62, Series 82, Series 99.

Exam Alert: FINRA provides reporting exceptions to avoid duplicative filings, permits online filing

FINRA will let members:
-avoid needing to independently report information that is already contained on Form U4
-avoid needing to independently report actions that FINRA takes against firms and agents
-file required copies of criminal complaints, civil complaints, and arbitration claims online Continue reading

Effective March 4, 2013, FINRA will let members avoid needing to independently report information that is already contained on Form U4. FINRA will also implement an exception for reporting regulatory actions that FINRA takes against firms and associated persons (since FINRA will already have the details of the action on file).

Effective July 1, 2013, FINRA will let firms file required copies of criminal complaints, civil complaints, and arbitration claims online.

Source: FINRA Regulatory Notice 13-08: FINRA Amends Rule 4530 to Eliminate Duplicative Reporting and Provide the Option to File Required Documents Online Using a New Form

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

Study Question of the Week: February 19, 2013 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 6, Series 7, Series 24, Series 26, Series 62, Series 79, Series 82, and Series 99. –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 6, Series 7, Series 24, Series 26, Series 62, Series 79, Series 82, and Series 99):

Richard had just returned to the States from his third tour of duty in Afghanistan. After relaxing with family and friends for a couple of months, he re-registers with his old employer where he had worked as a broker. In the meantime his license:

Answers:

A. Expired after his second year-long tour of duty

B. Expired ninety days after completing his second tour of duty

C. Remains current

D. Expires in 30 days unless Richard successfully completes his continuing education program

Correct Answer: C

Rationale: FINRA provides licensing relief to registered representatives who are called into or volunteer for active military service. Richard’s license will expire ninety days after completion of active service, unless he re-registers with a member firm before that time. Since he took only two months off before re-registering, Richard’s license is still current and will remain so.

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

Study Question of the Week: February 7, 2013 Edition

This week’s study question from the Solomon Online Exam Simulator question database is now available. Relevant to the Series 7, Series 62, Series 65, Series 66, and Series 99. –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 62, Series 65, Series 66, and Series 99):

Your client is short 100 XOM at $75, and wants to hedge his position. To protect him from the risk that XOM’s stock price may rise, you recommend that he:

Answers:

A. Buy a put

B. Sell a put

C. Sell a call

D. Buy a call

Correct Answer: D, Buy a call

“To hedge” means to put limits on how much you can gain or lose from an investment by taking the opposite position from your current position.

When it comes to options, an investor can hedge a position in two ways:

Buying an option to buy protection. In this specific question, buying a call buys protection from a rise in the share price. If it were a long position, the investor could buy a put to protect against a decline in the share price.
Selling an option to gain income. In this question, by selling an option the investor gains income, which may mitigate losses, but he also limits how much he can gain from the short sale.

If an exam question says “to hedge risk and get the best protection” go for buying an option (puts for long positions, calls for short positions)

If the exam questions says “to hedge risk and increase income” go for selling an option (calls for long positions, puts for short positions)

In this question, the investor is going for protection and is not seeking income so the best answer is to buy a call. While selling a put is a possible hedge it is not the most appropriate hedge for this investor’s goal.

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

Exam Alert: FINRA provides guidance on new communication rules

FINRA has provided guidance on its new communication rules. The guidance addresses various questions and details about the new rules. The rules take effect February 4, 2013. Continue reading

On February 4, 2013, the new communication rules described in this alert will take effect. FINRA has provided guidance on the new rules. This guidance provides that:

-educational material provided to other broker-dealers is considered “institutional communication,” not “internal communication”

-a firm’s one-year period of needing to file all public retail communication in 10 business days in advance now begins when the firm’s FINRA membership becomes active; free writing prospectuses may instead be filed within 10 business days of first use

-retail communications regarding “registered structured products” must be filed within 10 days of first use; examples of “registered structured products” include “exchange-traded notes that are not registered under the Investment Company Act but are registered under the Securities Act, registered reverse convertibles, registered structured notes, registered principal protection notes, and any other registered security that includes embedded derivative-like features”

-disclosure requirements for recommendations do not apply when discussing the past performance of a mutual fund

-a sales script used in a seminar is considered retail communication if the script is used with more than 25 retail investors in a 30-day period – this means that the firm must approve the script before use

-a firm’s name must be disclosed in scripted public appearances (both in the script and on any slide presentations or brochures used)

The guidance also addresses transitional issues for implementing the new rules.

Source: Regulatory Notice 13-03: FINRA Provides Guidance on New Rules Governing Communications With the Public

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

Exam Alert: SEC requires broker-dealers to search for lost holders of securities

On December 21, 2012, the SEC approved new rules that require broker-dealers to conduct searches for holders of securities with whom they have lost contact. The new rules also requires “paying agents” (certain issuers, broker-dealers, transfer agents, and other entities) to notify certain persons in writing when the paying agent has sent the person a check that has not been negotiated. Continue reading

On December 21, 2012, the SEC approved new rules that require broker-dealers to conduct searches for holders of securities with whom they have lost contact. Currently, transfer agents are required to conduct such searches – the rule will expand the requirement to broker-dealers.

The new rules also requires “paying agents” (certain issuers, broker-dealers, transfer agents, and other entities) to notify certain persons in writing when the paying agent has sent the person a check that has not been negotiated. This notification is not required if the value of the check is less than $25.

The new rules will become effective 60 days after the date of publication of the release in the Federal Register.

Source: SEC Release 2012-277: SEC Approves New Rules Regarding Lost Holders of Securities

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

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.

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.

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.