How to Pass the FINRA Series 6 Exam

Learn what the FINRA Series 6 qualifies you to do, what the exam covers, and how you should prepare for it. Continue reading

What does the FINRA Series 6 exam allow me to do?

The Series 6, also known as the Investment Company Products/Variable Contracts Representative Exam, qualifies individuals to solicit, purchase, and/or sell certain investment products. These include mutual funds, initial offerings of closed-end funds, variable life insurance, variable annuities, municipal fund securities, and unit investment trusts (UITs).

The Series 6 does not entitle you to sell all securities products – for that, you’ll need the Series 7. But if you intend to only sell the products listed above, then the Series 6 exam may be an attractive option since it is shorter than the Series 7.

Common jobs in the securities and financial services industries that use the Series 6 are investment advisers, financial advisers, insurance agents, retirement plan specialists, and private bankers. Be aware, though, that some jobs might require other exams or qualifications in addition to the Series 6, depending on the duties required for a particular job. Salary ranges vary among these types of jobs, but the average base salary of people with a Series 6 certification is $56,000 per year (payscale.com).

To take the Series 6 exam, you must be sponsored by a FINRA member firm. The firm files a Form U4 application on your behalf through FINRA’s Central Registration Depository (CRD). Candidates must pass the co-requisite Securities Industry Essentials (SIE) exam in addition to the Series 6 to obtain the Series 6 license. Although you can take the exams in any order, Solomon Exam Prep recommends taking the SIE exam first because it is a foundational exam. Anyone 18 or older can take the SIE exam, and it doesn’t require firm sponsorship.

About the Exam

The Series 6 exam consists of 50 scored and 5 unscored multiple-choice questions covering the four sections of the FINRA Series 6 exam outline. The 5 additional unscored questions are ones that the exam committee is trying out. These are unidentified and are distributed randomly throughout the exam. FINRA updates its exam questions regularly to reflect the most current rules and regulations.

Note: Scores are rounded down to the next lowest whole number (e.g. 69.9% would be a final score of 69% – not a passing score for the Series 6 exam).

Topics Covered on the Exam

FINRA divides the Series 6 exam into four sections which represent the four job functions of a Series 6 registered representative:

The Series 6 exam covers many topics including the following:

    • Securities Registration
    • Communications
    • Client Accounts
    • Retirement Plans
    • Equity Securities
    • Debt Securities
    • Taxation
    • Options
    • Investment Companies
    • Annuities
    • Portfolio Management and CAPM
    • Investment Goals
    • Securities Analysis
    • Completing and Confirming Transactions

Question Types on the Series 6

The Series 6 exam consists of multiple-choice questions, each with four options. You will see these question structures:

Closed Stem Format:

This item type asks a question and gives four possible answers from which to choose.

In the cooling-off period, which of the following would not be allowed?

    1. Making an offer to sell a security with a preliminary prospectus
    2. Taking orders for the security
    3. Publishing a tombstone ad
    4. Distributing a preliminary prospectus
Incomplete Sentence Format:

This kind of question has an incomplete sentence followed by four options that present possible conclusions.

Regulation S-P helps protect customers from:

    1. Recommendations to purchase high-risk securities such as S&P 500 index derivatives
    2. Abusive commissions and sales charges
    3. Having their private information misused
    4. Money laundering
“EXCEPT” Format:

This type requires you to recognize the one choice that is an exception among the four answer choices presented.

All of the following would be considered a security except:

    1. Publicly traded stock
    2. Publicly traded bond
    3. A variable annuity
    4. A commodities future
Complex Multiple-Choice (“Roman Numeral”) Format:

For this question type, you see a question followed by two or more statements identified by Roman numerals. The four answer choices represent combinations of these statements. You must select the combination that best answers the question.

Regarding its telemarketing efforts, a firm or its representative must do which of the following?

    1. Identify themselves and the purpose of their call
    2. Compare potential prospects against the FTC’s National Do Not Call Registry
    3. Be licensed by FINRA as a telemarketer
    4. Establish a 900 number for potential complaints
    1. I and IV
    2. I and II
    3. II and III
    4. III and IV

This format is also used in items that ask you to rank or order a set of items from highest to lowest (or vice versa), or to place a series of events in the proper sequence.

Rank the following yields for a premium bond held to maturity from highest to lowest.

    1. Yield to call
    2. Coupon rate
    3. Yield to maturity
    4. Current yield
    1. II, IV, III, I
    2. IV, I, III, II
    3. II, IV, I, III
    4. III, I, IV, II

For an even better idea of the possible question types you might encounter on the Series 6 exam, try Solomon Exam Prep’s free Series 6 Sample Quiz.

How to Study for the Series 6

Follow Solomon Exam Prep’s proven study system:
    • Read and understand. Read the Solomon Study Guide, carefully. The Series 6 is a knowledge test, not an IQ test. Many students read the Study Guide two or three times before taking the exam. To increase your ability to focus while reading, or as an alternative to reading, listen to the Solomon Series 6 Audiobook, which is a word-for-word reading of the Solomon Series 6 Study Guide.
    • Answer practice questions in the Solomon Exam Simulator. When you’re done with a chapter in the Study Guide, take 4–6 chapter quizzes in the Solomon Online Exam Simulator. Use these quizzes to give yourself practice and to find out what you need to study more. Make sure you read and understand the question rationales. When you’re finished reading the entire Study Guide, review your handwritten notes once more. Then, and only then, start taking full practice exams in the Series 6 Exam Simulator. Aim to pass at least six full practice exams and try to get your Solomon Pass Probability™ score to at least an 80%; when you reach that point, you are probably ready to sit for the Series 6 exam.
Use these effective study strategies:
    • Take handwritten notes. As you read the Study Guide, take handwritten notes and review your notes every day for 10 to 15 minutes. Studies show that the act of taking handwritten notes in your own words and then reviewing them strengthens learning and memory.
    • Make flashcards. Making your own flashcards is another powerful and proven method to reinforce memory and strengthen learning. Solomon also offers digital flashcards for the Series 6 exam.
    • Research. Research anything you do not understand. Curiosity = learning. Students who take responsibility for their own learning by researching anything they do not understand get a deeper understanding of the subject matter and are much more likely to pass.
    • Become the teacher. Studies show that explaining what you are learning greatly increases your understanding of the material. Ask someone in your life to listen and ask questions. If you don’t have anyone, explain it to yourself. Studies show that helps almost as much as explaining to an actual person (see Solomon’s recent post to learn more about this strategy!).
Take advantage of Solomon’s supplemental tools and resources:
    • Use all the resources. The Resources folder in your Solomon student account has helpful information, including a detailed study schedule that you can print out – or use the online study schedule and check off tasks as you complete them.
    • Watch the Video Lecture. This provides a helpful review of the key concepts in each chapter after reading the Solomon Study Guide. Take notes to help yourself stay focused.
  • Good practices while studying:
    • Take regular breaks. Studies show that if you are studying for an exam, taking regular walks in a park or natural setting significantly improves scores. Walks in urban areas or among people did not improve test scores.
    • Get enough sleep during the period when you are studying. Sleep consolidates learning into memory, studies show. Be good to yourself while you are studying for the Series 6: exercise, eat well, and avoid activities that will hurt your ability to get a good night’s sleep.

You can pass the FINRA Series 6! It just takes focus and determination. Solomon Exam Prep is here to support you on your journey to becoming a registered Investment Company Products/Variable Life Contracts Representative.

To explore all Solomon Exam Prep Series 6 study materials, including product samples, visit the Solomon website here.

For more helpful securities exam-related content, study tips, and industry updates, join the Solomon email list. Just click the button below:

What Are the Permitted Activities of a Series 7 General Securities Representative?

Solomon Exam Prep explains what a Series 7 General Securities Representative can and cannot do and how this compares to other rep-level registrations. Continue reading

Of the representative-level FINRA registrations categories, the General Securities Representative (Series 7) registration is considered by many to be the most valuable, due to the range of products it allows you to sell. But how “general” is it? Are there other representative-level registrations that permit you do things a Series 7 representative cannot?

What is a Series 7 representative permitted to do?

FINRA allows a General Securities Representative to solicit the purchase and sales of all securities products, including:

    • Stocks, whether from IPOs, private placements, or secondary market trading
    • Other corporate securities, such as bonds, rights, and warrants
    • Mutual funds
    • Closed-end funds
    • Money market funds
    • Unit investment trusts (UITs)
    • Exchange-traded funds (ETFs)
    • Real estate investment trusts (REITs)
    • Variable contracts (insurance products whose funds are invested in securities)
    • Municipal securities
    • Municipal fund securities, such as 529 plans
    • Options
    • Government securities
    • Direct participation programs (DPPs)
    • Venture capital
    • Hedge funds

This long list of products means that a Series 7 registered rep may perform the functions of an Investment Company and Variable Contracts Representative (Series 6), Direct Participation Programs Representative (Series 22), or Private Securities Offerings Representative (Series 82).

Besides sales, General Securities Representatives may also perform certain activities closely related to sales. They may:

    • recommend investments after performing a suitability analysis for the customer
    • accept unsolicited orders
    • open customer accounts, subject to approval by a principal

What is a Series 7 representative NOT permitted to do?

Though a General Securities Representative may solicit purchases of IPO shares, he may not work on underwriting or structuring an IPO, or any other securities offerings. This means that he is not permitted to advise an issuer on an offering. This work requires registration as an Investment Banking Representative (Series 79). Likewise, working on municipal underwriting requires registration as a Municipal Securities Representative (Series 52).

A Series 7 representative is also not qualified to perform the back-office functions of an Operations Professional (Series 99). Among these functions are maintaining possession or control of the firm’s securities, calculating margin for margin accounts, and sending trade confirmations and account statements.

Of course, every registered representative must also pass the FINRA Securities Industry Essentials (SIE) exam. The SIE doesn’t qualify you to do anything, instead it is a foundational exam that focuses on industry terminology, securities products, the structure and function of the markets, regulatory agencies and their functions, and regulated and prohibited practices. Unlike other FINRA securities exams, you do not need to be employed or sponsored by a broker-dealer in order to take the SIE. The only requirement is that you be 18 years old.

If you’re considering taking the Series 7 exam, Solomon Exam Prep is here to help. Solomon provides a wide variety of study materials, together with resources such as study schedules, the Ask The Professor function, and helpful exam information. Explore Solomon’s Series 7 study materials.

For more helpful securities exam-related content, study tips, and industry updates, join the Solomon email list. Click the button below:

Answering Suitability Questions on the FINRA Series 7

Suitability questions may appear daunting. But they don’t have to be – read the Solomon guide to answering suitability questions with ease. Continue reading

If you’re taking the FINRA Series 7 exam, you very possibly dread the term suitability. We understand that suitability questions may appear daunting. But to enhance your chances of passing the exam, you should have a good understanding of the concept and how it applies to certain test questions.

Suitability questions can be difficult because they often contain more than one answer choice that seems plausible. In short, they are more open-ended than other questions that appear on the exam. While this can make these questions tough, keep in mind that in each suitability question has one BEST answer given the information provided. This blog will help you select that that best answer choice.

First, what is a suitability question? The most basic type of suitability question presents a hypothetical investor and his profile and asks you which investment or investments is most suitable for him. Other suitability questions are about specific products. For instance, a question might ask you to choose the bond that would be most suitable for a high-income earner – usually a municipal bond. Finally, other types of suitability questions may provide an information about an investor and her profile and you will be asked which investments should be removed and/or added to her portfolio, or which proposed asset allocation is best.

So, what’s the best strategy for answering these questions?

1. Learn and memorize the characteristics of the investment products.

The most basic requirement for properly approaching any of these questions is to have a good understanding of the investment products mentioned in the question. Think about it this way: if you don’t know the characteristics a product, it’s difficult to know who should and shouldn’t buy it. For instance, if you don’t know the characteristics of a growth fund or a municipal bond it will be hard to assess which investors should own these products or avoid them in favor of other products. This means learning and memorizing the characteristics of the major investment products, such as stocks, bonds, funds, and options, is the first step to mastering suitability.

2. Categorize the investment goals of the investor in the question.

Assuming that you understand the products mentioned in a question, let’s look at what else you should consider when answering a suitability question. First, when reading a suitability question, focus on the financial goals attributed to the hypothetical investor presented in the question.

There are four major investing goals and strategies that you should keep in mind when doing this. First, there are capital preservation investors. These investors are interested in obtaining a minimum level of return while not putting their principal at any significant risk. Then there are the income investors. These want to receive a steady stream of payments in hopes of supplementing their income. Third, there are capital growth investors. These are long-term investors whose primary hope is seeing the value of their investments rise over time. Finally, there are the speculative investors. These investors are willing to take on more risk in the hopes of earning higher gains in a shorter amount of time. Placing an investor in one of these categories, or a blend of two of these categories, will help you figure out which investments are most suitable for the investor.

3. Analyze the profile of the Investor, looking for risk tolerance, time horizon and tax bracket.
Risk Tolerance:

Look for the investor’s risk tolerance. If an investor is not willing to take on much risk, only the most conservative investments are suitable for him. In contrast, an investor with a high risk tolerance is willing to own more volatile types of investments. Typically, conservative risk tolerance correlates with capital preservation investors, and sometimes income investors, while high risk tolerance correlates with speculative investors and many capital growth investors. Examples of conservative investments include U.S. Treasury securities, money market funds, and bank CDs. Examples of high-risk investments include penny stocks, options, junk bonds, and possibly growth stocks.

Time Horizon:

An investor’s time horizon is another factor you must consider. Is the investor hoping for long-term growth, or is he going to need to cash out of his investments in a relatively short amount of time? Sometimes a question will not present you with this exact information but instead will give an investor’s age. Questions that mention an investor who is in his 20s or 30s are indicating someone with a long time horizon. In contrast, questions that describe an investor who only has a few years until retirement are usually describing someone with a shorter time horizon. Scenarios that describe a couple who wants to buy a house or pay for college in the next year, will also have a short time horizon, and therefore, will require liquid investments.

So which investments are best for long- and short-term investors? An investor with a long time horizon is able to invest in products that are expected to grow over time, such as growth stocks, equity mutual funds and ETFs, or annuities. He is also more likely to take on riskier investments since he has more time to make up for any losses. On the other hand, a short-term investor should invest in less volatile securities or debt investments that mature in the near term, such as U.S. Treasuries and money market funds. An investor with a short time horizon is also less likely to take on a high level of risk than a long-term investor because a short-term investor does not have as much time to make up any losses.

Tax Bracket:

A final factor to consider when determining suitability is income level or tax bracket. An investor who makes a lot of money will typically have a higher federal income tax rate. This means the money he receives from his investments will be more heavily taxed than the money someone in a lower tax bracket. Additionally, for a high income investor, capital gains are taxed at a lower rate than interest income. Oftentimes, it is best to recommend investments with fewer tax implications for a high-income investor. Municipal bonds, whose interest payments are usually tax-free at the federal level and often also tax-free at the state level, are typically suitable investments for high-income investors. In contrast, because the interest rates for municipal bonds are often lower than the interest rates for corporate bonds, investors in lower tax brackets may be better off purchasing corporate bonds than municipal bonds. Additionally, stocks are often suitable for investors with higher tax rates because their gains are not taxed until the stocks are actually sold. At the same time, investments that pay regular interest, but do not come with tax advantages may not be suitable for high-income investors because they will have to pay taxes on this interest.

So now that you know what to look for in suitability-type questions, let’s look at a couple of them:  

QUESTION ONE:

Mary is an investor in her thirties. She makes $50,000 a year and is hoping to find an investment that will provide capital appreciation. At the same time, she would not mind supplementing her income by receiving regular payments from her investment. Which of the following would be most suitable for her?

    1. A municipal bond fund
    2. A growth and income fund
    3. A small-cap stock fund
    4. Penny stocks

This question tells you Mary’s investment goals and objectives. She’s looking for capital growth and secondarily income, so she’s a blend between a capital growth and income investor. Additionally, since she’s in her thirties, you can assume that she has a relatively long time horizon. Finally, her low income means she is not in a high tax bracket.

You know that Mary needs an investment option that provides the potential for both capital growth and income payments. Both penny stocks and small-cap stocks carry the potential for capital growth; however, neither of them typically offers income payments. That is because neither penny stocks nor small-cap stocks pay meaningful dividends. This eliminates choices C and D. A municipal bond fund would provide income because municipal bonds make semi-annual interest payments. However, outside of high-yield bonds, bonds in general don’t offer much in the way of capital growth. Also, since interest from municipal bonds is generally not taxed at the federal level, municipal bond interest payments are lower than corporate debt securities and thus are not the best debt investment option for an investor who is not in a high tax bracket. Given all of this information, you can eliminate choice A as well. Now let’s look at choice B. A growth and income fund contains stocks with `capital growth potential along with stocks that provide regular dividend payments. Also, growth stocks are also good for investors like Mary who have long time horizons. Looks like you’ve found the correct answer: Choice B makes the most sense. 

 

QUESTION TWO:

Alisha is 26 and has just received an MBA. She’s starting on a career as a sales manager at a large company and has a bright future. She has $15,000 to invest with your firm, and she tells you that she would like to see that principal appreciate as much as possible over the next two to three decades. She also says she has no problem taking on a high level of risk to help make that happen. Which of the following asset allocations would be most suitable for Alisha?

    1. 20% income fund, 20% municipal bond fund, 20% fixed annuities, 20% dividend-paying stocks, 10% non-traditional ETFs, 10% cash
    2. 20% bond mutual fund, 20% agency bonds, 10% money market funds, 15% bank CDs, 15% dividend-paying stocks, 10%, 10% cash
    3. 30% large-cap stocks, 20% equity index mutual fund, 20% U.S. Treasuries, 20% AAA-rated corporate bond funds, 10% FDIC-insured bank CDs
    4. 20% small-cap stocks, 20% medium-cap stocks, 20% growth fund, 15% high-yield bond funds, 15% balanced fund, 10% interval fund

Again, you’re presented with the investor’s investment goals and objectives in the question prompt. In stating that Alisha hopes to see her principal appreciate as much as possible over a long period of time, the question is telling you that she is a capital growth investor. It also is implying that she has a long time horizon. Additionally, it states that she is willing to take on a high level of risk in meeting her investing goals, which means she’s an investor with a high risk tolerance.

Given each of these factors, you need to look for the portfolio that makes the most sense for her. That portfolio should contain more equity investments than debt investments. That is because in general equities provide better capital growth potential than bonds. Additionally, you should look for investments that have higher growth potential and which carry more than a moderate level of risk. Remember that higher risk often equals higher potential reward, and Alisha is willing to take this gamble.

So let’s look at each of the possible answer choices.

Alisha isn’t really interested in earning income as part of her strategy and wants the potential for large gains. That means choice A, which is heavy on income and low-return investments, should be discarded. The same is true of choice B. Choice C is a bit tougher to eliminate. That’s because this hypothetical portfolio does include some growth-type investments, such as large-cap stocks and equity index mutual funds. However, these are both equity investments that are known to provide a more moderate return potential than Alisha is seeking. Additionally, choice C contains a relatively high percentage of fixed and low-return investments, and thus it doesn’t look like a great answer choice. That leaves choice D. The hypothetical portfolio presented in that answer choice is heavy on aggressive growth-type stocks and funds that carry a high level of risk, such as small-cap stocks, mid-cap socks, and growth funds. Additionally, a high-yield bond fund is a type of debt security that comes with capital growth potential. And it includes 10% allocation to an interval fund, a type of fund that invests in non-publicly traded securities that are illiquid and may be less correlated to the other publicly trade securities in this portfolio. Thus, choice D is the best choice and the correct answer. 

Suitability questions are definitely not easy. But if you consider all of the relevant aspects presented in the answer choices and have a solid understanding of different types of investments, they are something you can master. And master them you must if you want to pass the Series 7 or the Series 6 exam.

For more helpful securities exam-related content, study tips, and industry updates, join the Solomon email list. Just click the button below:

Securities Exam Score Survey Results Are In

Do you think FINRA should provide exam scores to those who pass their qualification exams? Keep reading to learn the results of the Solomon survey. Continue reading

Solomon Exam Prep loves to hear customers’ opinions on all things securities exam-related. We recently conducted a LinkedIn poll about this question: 

Do you think FINRA should provide exam scores to those who pass their qualification exams? 

110 people voted: 73% answered “yes” and 27% answered “no.”  

Before October 2018, everyone who took a securities exam received a score. Since October 2018, FINRA only provides a score to those who fail. But the results of the Solomon survey are clear: ignorance is not bliss. A majority of exam respondents would like to know their exam scores upon passing. 

For more polls, news, and securities exam updates, follow the Solomon LinkedIn page.

Solomon Pass Probability™ Now Available for the FINRA Series 82

Everyone would like to feel confident when they take their securities exam, but how do you know if you’re ready for test day? Solomon Exam Prep can help – with Pass Probability™. Continue reading

Everyone would like to feel confident when they take their securities exam, but how do you know if you’re ready for test day? Solomon Exam Prep can help! With Pass Probability™, now available for the FINRA Series 82 exam, Solomon takes the guesswork out of deciding when to sit for your exam.

Pass Probability™ is Solomon Exam Prep’s innovative technology that measures your readiness to pass your securities exam. Once you take five practice exams in the Solomon Exam Simulator, the Pass Probability™ tool calculates the probability that you will pass your test, with a percentage out of 100.

"A securities licensing exam is hard work and high stakes. Your enemy is uncertainty. Solomon's industry-leading Pass Probability™ feature is based on the results of thousands of Solomon securities students and uses a proprietary algorithm to reduce uncertainty. So you can enter the exam room with confidence."
Jeremy Solomon
Co-founder and President of Solomon Exam Prep

Remediation Reporting

But what should you do if you take five practice exams, and the Solomon algorithm determines that you are not ready to take your exam? This is where Solomon’s brand-new feature, the Remediation Report, comes in.

The Remediation Report is an individualized report outlining how to focus your efforts BEFORE taking your exam. It provides an added level of customized study support – sent right to your email.

The Remediation Report gives you:
  • Summary of current study progress 
  • Personalized recommendations on areas for growth 
  • Study tips for the homestretch 
  • Reminders about student support elements 

In addition to the Series 82, Solomon Pass Probability and Remediation Reports are currently available for the following exams: SIE, Series 6, Series 7, Series 63, Series 65, Series 66, and Series 79. 

Solomon Releases New Edition of Series 14 Study Guide and Exam Simulator 

The Series 14 is one of the more difficult FINRA exams, so it’s a good idea to be well-prepared going into test day – Solomon Exam Prep can help! Continue reading

Do you need to know about compliance issues related to a wide range of broker-dealer activities? Do you plan to supervise others engaged in compliance activities? If you said “yes” to these questions, then you probably work for a broker-dealer and need to take the FINRA Series 14 exam. The Series 14 is one of the more difficult FINRA exams, so it’s a good idea to be well-prepared going into test day – Solomon Exam Prep can help! 

Solomon is proud to announce the release of the 2nd edition of the Solomon Exam Prep Guide to the Series 14 Compliance Officer Examination. This comprehensive Solomon Study Guide is written in clear English and packed with practice questions, exercises, and visual aids for better understanding. The 2nd edition includes key updates and improvements designed to help Series 14 students prepare for their exam more effectively so that they can pass the first time.   

The Solomon Series 14 Study Guide, 2nd edition, includes: 
  • A chapter dedicated to research reports and research analysts, with new practice questions 
  • Expanded and revised discussion of Regulation SHO vs. OTC close-out rules 
  • Streamlined and simplified explanation of margin accounts 
  • Expanded and revised discussion of Regulation M stabilizing activities 
  • New material about tax rules for gifting shares to charity 
  • New material about stock splits for restricted stock 
  • New material about SPACs 
  • New material about categories of issuers, such as WKSIs and EGCs 
  • The SEC’s March rules update regarding Regulation D and Regulation A offerings 

Solomon has also updated the Series 14 Online Exam Simulator to reflect the changes made to the Study Guide. The new Series 14 Exam Simulator contains over 2,400 questions written by Solomon content experts. This massive question bank means that you will encounter new questions with each practice quiz or exam you take. Plus, each question provides a robust explanation so that you learn even more as you test yourself.

I would like to say a big thank you to Solomon for helping me pass my Series 14 exam. I took this exam the first time and missed passing by few marks. I was really sad and discouraged so reached out to Jeremy Solomon and he really took the time to talk to me and provide his guidance and advice. He also provided me with additional resources immediately to help with my second attempt. I recently passed this exam. Their study material is easy to understand and the Online Exam Simulator also has a lot of questions chapter-wise which were very helpful. Their customer service has been amazing and very responsive. Thank you Solomon. I will definitely recommend Solomon for anyone planning to take this exam.

Rachna Shah

CBRE. Beverly Hills, CA 

Solomon Exam Prep is committed to providing industry-leading securities licensing materials, which are continuously kept up-to date. If you are an existing Solomon Series 14 customer, the new 2nd edition will be automatically updated in your account, free of charge. 

To view samples of the Solomon Series 14 Study Guide and Exam Simulator, visit the Solomon website here

The Power of Explaining: A Study Strategy Backed by Research

If you’re studying for the SIE, Series 65, Series 7, or another securities licensing exam, try this evidence-based study strategy. Continue reading

Updated June 23, 2022
Solomon Exam Prep’s learning system is built on understanding how people learn. Solomon is always looking for new ways to help our students learn more effectively and pass their securities exams.  

Research from Dr. Tania Lombrozo of UC Berkeley, published in the journal Trends in Cognitive Science, shows that explaining a new concept to another person is an enormously helpful learning technique. When you explain an unfamiliar concept to another person, your brain makes crucial learning connections. However, many people don’t have a person around them that is ready to listen to their new knowledge. Thus, Dr. Lombrozo recommends self-explanation, which is the practice of explaining concepts to yourself in order to better understand them.

Why does explaining work?

Dr. Lombrozo found that the positive effects of self-explanation can be attributed to the generalization process. Explaining requires you to put new information in the context of “prior beliefs,” which makes you generalize the information. In doing so, you’re forced to pick out what is most necessary for understanding the concept. In thinking about how to explain something, you in fact learn more about the thing itself!  

Dr. Lombrozo describes an experiment by psychologists Amsterlaw and Wellman that demonstrates the power of explaining in understanding. In Amsterlaw and Wellman’s experiment, they administered logic tests to children under various conditions. During the course of the experiment, the children were split into groups. One group would answer, and then they would be asked to explain the correct answer once it was revealed. A comparison group did the same, but only for half the problems. The third group was a control group and gave no explanation at all.

According to Amsterlaw and Wellman, “children in the explanation condition significantly outperformed the comparison and control groups….” In other words, explaining increased their understanding.

How to use this strategy for licensing exams:

What does this mean if you’re studying for the Series 65 or the Series 7 or some other securities licensing exam? Solomon Exam Prep suggests finding someone in your life who will listen to you explain topics from your securities exam prep. The person you choose doesn’t need to have any knowledge of securities. The person just needs to be a good listener. Even better, someone who will ask questions.

What if you don’t have anyone who can do that for you? Well, as Dr. Lombrozo showed, the practice of self-explanation is also helpful and will increase your understanding of the material you’re trying to learn.

Other recommended study strategies include:  

    • Listen to the Solomon Audiobook while you read the Solomon Study Guide.
    • As you read the Study Guide and watch the Solomon Video Lectures, take notes by hand.
    • When practicing in the Solomon Exam Simulator, read and re-read the question at least twice. 
    • If you answer a question correctly, explain to yourself why it was correct before reading the question rationale.  
    • If you answer a question incorrectly, read the rationale carefully. Explain to yourself what the right answer is, and why. Write down the explanation in your notes. 
    • Study with a partner. Trade off testing each other on concepts and asking for an explanation.  

Visit the Solomon Exam Prep  website to explore study materials for 21 different 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.

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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Solomon Exam Prep SIE Practice Exam Now Available!

Meet the newest addition to Solomon Exam Prep’s lineup of free Sample Quizzes: the SIE Sample Exam! Visit the Solomon website to try it out. Continue reading

Meet the newest addition to Solomon Exam Prep’s lineup of free Sample Quizzes: the SIE Sample Exam! Like all Solomon Sample Quizzes, the SIE Sample Exam features questions from our industry-leading Online Exam Simulator. Questions are written by Solomon content experts, who are experienced in both investment education and the process of adult learning. 

But unlike other Solomon Sample Quizzes, the SIE Sample Exam is a FULL exam – it contains 75 questions, just like the real FINRA SIE exam – giving you an even better idea of what the actual exam is like. You will encounter easy, medium, and difficult questions so that you can more easily gauge your current knowledge of SIE content. 

All Solomon Sample Quizzes and Exams also provide instant feedback for each answer, with a full rationale to help you understand the WHY behind the what. Plus, you get a report at the end detailing your results and giving you the opportunity to review all the questions. 

Visit the Solomon website here to try out the SIE Sample Exam and explore free samples of quizzes for 21 different exams.

How to Pass the FINRA Series 82 Exam

Looking to become a private securities offering representative? Read Solomon Exam Prep’s guide to effective preparation for the FINRA Series 82 exam. Continue reading

What does the Series 82 exam allow me to do?

The Series 82, also known as the Private Securities Offerings Representative Exam, is a FINRA exam that qualifies you to sell private securities in a primary offering. A primary offering refers to the first time the securities are offered for sale. The sale of private securities sold in a primary offering is often referred to as a “private placement.” Therefore, another way of saying this is that the Series 82 exam qualifies you to sell private placements.

Note that passing the Series 82 exam does not allow you to sell publicly registered stocks or bonds, nor does it permit you to sell municipal or government securities. Also, the Series 82 does not permit you to structure or sell public offerings, such as IPOs.

Does the Series 82 have any prerequisites?

The Series 82 exam is considered a “top off” exam because you must also pass the Securities Industry Essentials (SIE) Exam to be fully qualified. While the SIE exam tests your knowledge of securities industry products and rules, the Series 82 tests your specific knowledge of the rules and processes related to structuring and selling private placements. The Series 82 is a fairly difficult exam that requires approximately 60 hours of study.  

You must be associated with a FINRA member firm in order to take the Series 82.

About the Exam 

The Series 82 exam consists of 50 multiple-choice questions covering the four sections of the FINRA Series 82 exam outline. FINRA updates its exam questions regularly to reflect the most current rules and regulations. The Series 82 also includes five additional unscored questions that FINRA is trying out, so the Series 82 exam contains 55 questions in total. The five unscored questions are unidentified and are distributed randomly throughout the exam.

Note: Scores are rounded down to the lowest whole number (e.g. 69.9% would be a final score of 69%–not a passing score for the Series 82 exam).

Topics Covered on the Exam

FINRA divides the questions on the Series 82 exam into four areas. These areas represent the major job functions of a Private Securities Offerings Representative.

Series 82 Exam Topics

The Series 82 exam covers many topics including the following:

    • Types of securities offerings with an emphasis on exempt offerings, such as private placements, Reg A offerings, Rule 147 offerings and private investment in public equity (PIPE) offerings
    • Underwriting commitments including firm, best efforts, mini-max and standby
    • Mechanics of exempt offerings
    • Determination of qualified institutional buyer (QIB) or accredited investor status
    • Content and purpose of offering documents such as private placement memorandums (PPMs)
    • Investor portfolio concerns, such as tax considerations, suitability, product risks, diversification, appropriate mix of assets, risk tolerance
    • Securities Industry rules related to exempt offerings
Series 82 Example Questions

Question:

What entity can receive material, nonpublic information from an issuer without public disclosure?

A. Financial publication

B. Broker-dealer that makes a market in the securities

C. Law firm hired by the issuer

D. Investment company

 

Finish the statement:

Offerings of securities are categorized by who receives the proceeds of the offering. In a primary offering, the proceeds go to the:

A. Issuing corporation

B. Major stockholders

C. Underwriting broker-dealer

D. Issuing corporation, major stockholders, and principal underwriter

 

Fill-in-the-blank:

The underwriting of private placements is typically conducted on a _____ commitment basis.

A. Firm

B. Best efforts

C. Shelf

D. Standby

 

“Except” statements:

Under Regulation D, Rule 504, a private placement must meet all of the following requirements except:

A. The offering price must be less than or equal to $5 million.

B. The offering price must be more than $5 million.

C. If multiple offerings occur during a 12-month period, they are added together when determining whether the Regulation D, Rule 504 exemption applies.

D. The total number of purchasers is unrestricted.

Study Strategies for the Series 82

  • Use all the resources. The Resources folder in your Solomon student account has helpful information, including a “fast facts” sheet for last-minute studying, and a detailed study schedule that you can print out – or use the online study schedule and check off tasks as you complete them.
  • Watch the Video Lecture. This provides a helpful introduction to the key concepts in each chapter before diving deeper into the content by reading the Solomon Study Guide. Take notes to help you stay focused.
  • Read. It’s simple: read the Study Guide, carefully. Many report that they read the Study Guide two or three times before taking the exam. To increase your ability to focus while reading, or as an alternative to reading, listen to the Solomon Audiobook, which is a word-for-word reading of the Solomon Study Guide.
  • Take handwritten notes. As you watch the Video Lecture and read the Study Guide, take handwritten notes and review your notes every day for 10 to 15 minutes. Studies show that the act of taking handwritten notes in your own words and then reviewing these notes strengthens learning and memory.
  • Make flashcards. Making your own flashcards is another powerful and proven method to reinforce memory and strengthen learning. Solomon also has digital flashcards available for the Series 82.
  • Research. Research anything you do not understand. Curiosity = learning. Students who take responsibility for their own learning by researching anything they do not understand get a deeper understanding of the subject matter and are much more likely to pass. And if you’re stuck on a content question, submit it via the Ask the Professor feature, which is included in study packages, to receive a personalized response within one business day.
  • Answer practice questions in the Exam Simulator. When you’re done with a chapter in the Study Guide, take 4 – 6 chapter quizzes in the Exam Simulator. Use these quizzes to give yourself practice and to find out what you need to study more. Make sure you read and understand the question rationales. When you’re finished reading the entire Study Guide, review your handwritten notes once more. Then, and only then, start taking full practice exams in the Exam Simulator. Aim to pass at least six full practice exams and try to get your average score to at least an 80. When you reach that point, you are probably ready to sit for the exam.
  • Take regular breaks. Studies show that if you are studying for an exam, taking regular walks in a park or natural setting significantly improves scores. Walks in urban areas or among people did not improve test scores.
  • Get a good night’s sleep and take your exam!

You can pass the FINRA Series 82 exam! It just takes work and determination. Solomon Exam Prep is here to support you through the test-prep process!

Explore all Solomon Series 82 exam prep, including the Study Guide, Exam Simulator, Audiobook, Video Lecture, and Flashcards.