Bob Eder's Blog: STUDY FOR YOUR SECURITIES EXAMS, page 2

THINKING ABOUT SELLING RILAS TO CLIENTS? THEN CAREFULLY CONSIDER THE VARIOUS CHARGES THAT RILA INVESTORS MAY FACE!

Several weeks ago, Bob Eder's blog discussed RILAS or Registered Index Linked Annuities. In this blog Bob discusses the major penalties and charges that can reduce a client's return. These penalties include, but are not limited to, surrender charges; interim value adjustments and mid-term investment withdrawals; and tax penalties. This information is based on a publication of the SEC's Office of the Investor Advocate entitled "Report on Activities Fiscal Year 2023."

A "RILA" has both insurance components and investment components. An investor puts money into a RILA, generally with a minimum requirement of $10,000 to $20,000.  After making this initial investment, the RILA purchaser then decides how much premium to put into investment options. These investments are relatively short-term, generally not exceeding six years. 

This short-term character of RILA investments means that the investment options generally will not exceed the life of the RILA contract itself. Each investment option is different and has different floors, buffers, caps and participation rates. Because of the different characteristics of investment options, the RILA investor is faced with being forced to change from one investment to another, each with different pitfalls and/or benefits.

1)    A RILA contract normally has a surrender penalty lasting from six to nine years. Surrender penalties are typically 9 to 10 percent and decrease over the minimum initial period. So if 20-year old Jimmy invests $100,000 into ABC RILA, and then withdraws all $100,000 during the first year of ownership, ABC RILA will return only $90,000, assuming it has a surrender penalty of 10 percent for the first year, all other charges not considered in this example.

2)    Jimmy will also face an "interim value adjustment," non-descriptive words for a penalty for withdrawing his monies from "Investment A" before the end of Investment A's six-year period. These penalties can be substantial. It is even possible that Jimmy can lose almost all of his investment. Note that a RILA can impose two separate penalties for early withdrawal, one for surrendering the RILA contract and a second one for withdrawing monies from the RILA's investment component.

3)    The third penalty would be imposed by IRS if Jimmy withdraws funds from the RILA prior to age 59 1/2.

What other type of investment offers the possibility of levying three different penalties upon the hapless owner?

If you plan to take the Series 65 exam, please study both annuities and registered index-linked annuities (RILA).

Bob Eder discusses RILAs and Indexed Annuities in his Study for the Series 65 Exam.

Here is the link to NASAA's new Series 65 Test Specifications. 

Study for the Series 65 Exam is available from Amazon in both paperback and Kindle e-book versions. Here is the link to Bob Eder's book on Amazon.

For questions about Bob Eder's Series 65 manual,  Study for the Series 65 Exam,  or questions in general about the Series 65 Exam, or about RILAs and Indexed Annuities, feel free to email Bob Eder at bobeder@bobeder.net.

Bob Eder received his Juris Doctor (J.D.) degree from the University of Utah, Quinney College of Law, in 2001. 
See Bob Eder's Author Page on Amazon.com.

COMPLEXITIES OF REGISTERED INDEX-LINKED ANNUITIES DRAW ATTENTION OF SEC, SO HEADS UP, SERIES 65 CANDIDATES!

Several blogs ago, I discussed RILAs, or Registered Index-Linked Annuities. Recall that NASAA's Series 65 Test Specifications specifically list Index Annuities under Section II (M) (1) (1.3), meaning that the Series 65 Exam covers these alternative investments and has questions about them. Today on the SEC website, I see that the SEC is paying close attention to the complex structure and details of RILAs in its SEC OIAD Report on Activities—Fiscal Year 2023. Here is just one paragraph from this SEC publication in regard to RILAs. I intend to present more segments in future blogs from this SEC Report on RILAs.

"REGISTERED INDEX-LINKEDANNUITIES (RILAs) 

"What Are RILAs and How Do They Work? 

"RILAs are tax-deferred retirement savings vehiclesthat advertise potentially reduced market riskrelative to investing directly in financial markets.Like many other retirement savings vehicles,money is first added to the overall vehicle andthen the investor allocates that money to specificinvestments. Unlike many other retirementsavings vehicles, because of their structure,withdrawal penalties, and other features, RILAsare complex, long-term, and illiquid products thattypically require investors to make a significantnumber of complicated decisions with perhapsunintuitive consequences. 

"Investors fund purchases of a RILA contractthrough premium payments; the initial minimumamount required to purchase a RILA variessubstantially from $10,000 to $25,000. Premiumpayments and investment earnings are allocatedby the investor to investment options. Theseinvestment options are shorter-term investmentsthat often last 1, 3 or 6 years (a period typicallyreferred to as the “investment term” or “term”); assuch, these investment options may not individuallylast as long as the RILA contract itself. Thus, theinvestor may need to pick investments several timesover the life of the contract."

"https://www.sec.gov/files/2023-oiad-a..."

From the above SEC discussion of RILAs, one sentence especially bears re-reading:

"Unlike many other retirement savings vehicles, because of their structure, withdrawal penalties, and other features, RILAs are complex, long-term, and illiquid products that typically require investors to make a significant number of complicated decisions with perhaps unintuitive consequences." 

Note that this comment implies that the SEC and other financial authorities will not take lightly the wholesale recommendation of these RILAs to clients.

Candidates for the Series 65 should therefore study the structure of RILAs and their complexity before taking the exam, or recommending them to clients after becoming registered.

Bob Eder discusses RILAs and Indexed Annuities in his Study for the Series 65 Exam.

Here is the link to NASAA's new Series 65 Test Specifications. 

Study for the Series 65 Exam is available from Amazon in both paperback and Kindle e-book versions. Here is the link to Bob Eder's book on Amazon.

For questions about Bob Eder's Series 65 manual,  Study for the Series 65 Exam,  or questions in general about the Series 65 Exam, or about RILAs and Indexed Annuities, feel free to email Bob Eder at bobeder@bobeder.net.

Bob Eder received his Juris Doctor (J.D.) degree from the University of Utah, Quinney College of Law, in 2001. 
See Bob Eder's Author Page on Amazon.com.

BE PREPARED ON THE SERIES 65 EXAM TO ANSWER QUESTIONS ABOUT STANDARD DEVIATION

Taking the Series 65 in the near future? If so, be prepared to answer questions on and about standard deviation. How do I know this? I know this because NASAA's Series 65 Test Specifications indicate in Section I (C) (2) that you as a test candidate should be familiar with standard deviation.

Here is a example of a question asking you to solve for standard deviation:

PRACTICEQUESTION

Professor Mayerhas only five students in his finance class. On a weekly 10-question quizdealing with unethical practices, the scores are 10, 8.5, 3, 6 and 7.5. Whichof the following is the standard deviation for these scores?

a.                  1.253

b.                  2.387

c.                   3.457

d.                  4.212

Bob Eder treats standard deviation in his Study for the Series 65 Exam. Here is a sample of Bob Eder's treatment:

EXAMPLE

In a college course on accounting, there are onlyfive students. Their scores on a quiz on balance sheet ratios were—75, 84, 61,92, 55. Professor Hendricks wants to find the standard deviation. To find thestandard deviation, first obtain the mean or average of all of the scores ordata points. Adding the five scores together, we obtain 367. Now divide 367 byfive to obtain the mean or average of 73.4. Next subtract 73.4 from each of thefive scores—thus, we obtain 1.6, 10.6, -12.4, 18.6, -18.4. Square all thesedifferences—2.56, 112.36, 153.76, 345.96, 338.56. Take the mean of thesesquared differences—953.2 divided by five, or 190.64. Now take the square rootof 190.64. This equals 13.807, the standard deviation.

So in the Practice Question involving Professor Mayer above, the answer is (b). To solve for standard deviation, here's how:

To compute standard deviation, first find the mean or average of the fivescores, by adding the five scores and dividing by the number of scores. Thus, obtain the average or mean by dividing 35 by 5. This equals 7 as the mean. Next, subtract 7 from each score. Thus,we have 3, 1.5, -4, -1, and .5. Next square these differences. We arrive at 9,2.25, 16, 1 and .25. Now calculate the mean of these squared differences, or 28.5 divided by 5. The average or mean is thus 5.70. Finally, take the square root of the mean,5.70. So, the square root of 5.70 equals 2.387, the standard deviation.

Here is the link to NASAA's new Series 65 Test Specifications. 

Study for the Series 65 Exam is available from Amazon in both paperback and Kindle e-book versions. Here is the link to Bob Eder's book on Amazon.

For questions about Bob Eder's Series 65 manual,  Study for the Series 65 Exam,  or questions in general about the Series 65 Exam, or about Standard Deviation, feel free to email Bob Eder at bobeder@bobeder.net.

Bob Eder received his Juris Doctor (J.D.) degree from the University of Utah, Quinney College of Law, in 2001. See Bob Eder's Author Page on Amazon.com.

SERIES 65 EXAM CONTAINS QUESTIONS ON ANNUITIES. BE PREPARED!

Taking the series 65 Exam in the near future? Yes? Then be prepared for questions about annuities, not only fixed and variable annuities, but also equity indexed annuities (EIA) and registered index-linked annuities (RILA).

How do I know that the Series 65 Exam includes annuity questions? I know this because NASAA publishes Test Specifications for the Series 65 that include Section II (M) (1) (1.1-1.3) which lists definitions and types of annuities. 

Here is the link to NASAA's new Series 65 Test Specifications. 

Bob Eder covers Annuities in Study for the Series 65 Exam, and here is a sample of Bob Eder's treatment:

Equity Index Annuities (EIA)                                                                         II (M) (1) (1.3)

Anequity-indexed annuity is a variation of a fixed annuity. An insurance companyguarantees an annuitant a certain low rate of interest or return, between oneand three percent. Additionally, it ties this rate to a stock market index,such as the S&P 500. If stocks go up, the insurance company may pay ahigher rate as explained and set forth in the annuity contract. Thus there is aminimum rate of interest that the owner of an EIA will receive.

Study for the Series 65 Exam is available from Amazon in both paperback and Kindle e-book versions. Here is the link to Bob Eder's book on Amazon.

For questions about Bob Eder's Series 65 manual,  Study for the Series 65 Exam,  or questions in general about the Series 65 Exam, or about Annuities, feel free to email Bob Eder at bobeder@bobeder.net.

Bob Eder received his Juris Doctor (J.D.) degree from the University of Utah, Quinney College of Law, in 2001. See Bob Eder's Author Page on Amazon.com.

PLANNING TO TAKE THE SERIES 65 EXAM? THEN STUDY AND KNOW THE VARIOUS MUTUAL FUND SHARE CLASSES!

If you plan on sitting for the Series 65 Exam, be prepared for test questions that ask about the various Share Classes for Mutual Funds. NASAA publishes a Content Outline or Test Specifications for the Series 65 Exam, and specifically lists knowledge of Share Classes in Section II (I) (1) of the Test Specifications.

Bob Eder in his Study for the Series 65 Exam discusses Share Classes of Mutual Funds. Here is an example of Bob Eder's treatment:

"Share Classes and OtherCharacteristics of Open End Funds                II(I) (1)

"Aprospectus for an open-end mutual fund must contain the investment objectivesof the fund. Is the fund looking for growth, conservation of capital, or both?Different mutual funds have objectives tailored-made to a certain segments ofretail investors. The prospectus must make a clear statement of the following,including a description of the share classes that the fund will issue:

1.        The share classes thatthe mutual fund will issue. Whether the shares beno-load? Class A, havinga front-end load? Willthey be Class C, havinga distribution charge? Or Class B,having a contingent deferred sales charge (CDSC)?

2.        The policiesof the mutual fund towards borrowing monies, purchasing on margin, sellingshort, trading options,etc. It must also list restrictions, i.e., what it may notdo, such as borrowing on margin,selling short, etc.

3.        The maximum sales charges,loads, or fees. Are there any breakpoints in the applicable salescharge, and if so, what are they?"

The Series 65 Exam covers Share Classes of Mutual Funds. NASAA's  revised Series 65 Test Specifications list Share Classes under Section II (I) (I), so expect questions on the Series 65 Exam.

Here is the link to NASAA's new Series 65 Test Specifications. 

Study for the Series 65 Exam is available from Amazon in both paperback and Kindle e-book versions. Here is the link to Bob Eder's book on Amazon.

For questions about Bob Eder's Series 65 manual,  Study for the Series 65 Exam,  or questions in general about the Series 65 Exam, or about Mutual Fund Share Classes, feel free to email Bob Eder at bobeder@bobeder.net.
Bob Eder received his Juris Doctor (J.D.) degree from the University of Utah, Quinney College of Law, in 2001. See Bob Eder's Author Page on Amazon.com.

STANDARD OF CARE OBLIGATION HAS THREE COMPONENTS: KNOW THEM FOR THE SERIES 65 EXAM

The Series 65 Exam covers the fiduciary obligations of I.A. reps when dealing with retail customers. Standard of care has three components and is not merely defined as putting a client's interests ahead of the rep's. 

The three components are diligence, care and skill. Diligence—It takes effort and work to come to an understanding of various investments and whether the investments make sense for retail customers in general. Care—It takes care in assessing whether the investments make sense for the particular clients who are being served by the rep. Skill—And finally, it takes skill in assessing whether the investments in question are applicable for the client in view of his or her other investments and investment experience and profile.

Here's how Bob Eder in his Study for the Series 65 Exam discusses standard of care:

Standard ofCare— As a fiduciary, an investmentadviser must always select the choice that benefits her client. If there is anydoubt, the adviser should put herself in the position of the client, and shouldalways choose the alternative that benefits the client, not herself. This iscalled the minimum "standard of care," below which the adviser orI.A.  representative violates his/herfiduciary duties. Here is what the SEC says: "Underthe Care Obligation, you must exercise reasonable diligence, care, andskill when making a recommendation to a retail customer to: 1) understandpotential risks, rewards, and costs associated with recommendation, and have areasonable basis to believe that the recommendation could be in the best interestof at least some retail customers; 2) have areasonable basis to believe the recommendation is in the best interest of aparticular retail customer based on that retail customer’s investment profileand the potential risks, rewards, and costs associated with the recommendationand does not place the interest of the broker-dealer ahead of the interest ofthe retail customer; and 3) have a reasonable basis to believe that a series ofrecommended transactions, even if in the retail customer’s best interest whenviewed in isolation, is not excessive and is in the retail customer’s bestinterest when taken together in light of the retail customer’s investmentprofile." (https://www.sec.gov/info/smallbus/sec...)

Bob Eder in his Study for the Series 65 Exam covers Standard of Care in detail in Chapter 16 on Communication with Clients.The Series 65 Exam covers Standard of Care, and NASAA's recently revised Series 65 Test Specifications lists Compensation under Section IV (H) (2) (2.4), so expect questions on the Series 65 Exam.

Here is the link to NASAA's new Series 65 Test Specifications. 

Study for the Series 65 Exam is available from Amazon in both paperback and Kindle e-book versions. Here is the link to Bob Eder's book on Amazon.

For questions about Bob Eder's Series 65 manual,  Study for the Series 65 Exam,  or questions in general about the Series 65 Exam, or about Standard of Care, feel free to email Bob Eder at bobeder@bobeder.net.
Bob Eder received his Juris Doctor (J.D.) degree from the University of Utah, Quinney College of Law, in 2001. See Bob Eder's Author Page on Amazon.com.

WELLS FARGO AGREES ON LOWER ADVISORY FEES FOR CERTAIN CLIENTS BUT THEN CHARGES THEM HIGHER FEES

If you plan to take the Series 65 Exam, you haveundoubtedly been studying and thinking about rules regarding charging clientsadvisory fees. Here's a real life example of the SEC investigating how advisoryfirms charge their clients, and then unearthing a problem with Wells Fargo, oneof the largest advisory firms or banks in the world. Important takeaway fromthe SEC's actions—what you read and study for the Series 65 Exam has importantramifications on your actual work as an I.A. representative.

Wells Fargo Settles with SEC for Charging Excessive Advisory Fees

FOR IMMEDIATE RELEASE
2023-159

Washington D.C., Aug. 25, 2023 —

The Securities and Exchange Commission today charged Wells Fargo Clearing Services LLC and Wells Fargo Advisors Financial Network LLC (collectively, Wells Fargo) for overcharging more than 10,900 investment advisory accounts more than $26.8 million in advisory fees. Wells Fargo agreed to pay a $35 million civil penalty to settle the SEC’s charges. 

According to the SEC’s order, certain financial advisers from Wells Fargo and its predecessor firms agreed to reduce the firms’ standard, pre-set advisory fees for certain clients and made handwritten or typed changes on the clients’ investment advisory agreements that reflected the reduced fees at the time their accounts were opened. However, in certain instances, the account processing employees at Wells Fargo and its predecessor firms failed to enter the agreed-upon reduced advisory fee rates into the firms’ billing systems when setting up the clients’ accounts. Additionally, Wells Fargo failed to adopt and implement written compliance policies and procedures reasonably designed to determine whether the billing systems it adopted contained accurate data and to prevent overbilling of the clients that the firm acquired through its predecessor firms and certain of its own new clients. As a result, Wells Fargo and its predecessor firms overcharged certain clients who opened accounts prior to 2014 for advisory fees through the end of December 2022.

“For years, Wells Fargo and its predecessor firms negotiated reduced advisory fees with thousands of clients, but failed to honor them, overcharging those clients millions of dollars as a result. Today’s enforcement action underscores the need for firms growing their businesses through acquisition to ensure that their growth does not come at the expense of client protection,” said Gurbir S. Grewal Director of the SEC’s Enforcement Division. “Investment advisers must adopt and implement policies and procedures to ensure that they honor their agreements with all of their clients, including legacy clients of predecessor firms.”

Bob Eder in his Study for the Series 65 Exam covers Compensation in detail in Chapter 16 on Communication with Clients.The Series 65 Exam covers Compensation, and NASAA's recently revised Series 65 Test Specifications lists Compensation under Section IV (H) (1) (1.1-1.5), so expect questions on the Series 65 Exam.

Here is the link to NASAA's new Series 65 Test Specifications. 

Study for the Series 65 Exam is available from Amazon in both paperback and Kindle e-book versions. Here is the link to Bob Eder's book on Amazon.

For questions about Bob Eder's Series 65 manual,  Study for the Series 65 Exam,  or questions in general about the Series 65 Exam, or about Compensation, feel free to email Bob Eder at bobeder@bobeder.net.
Bob Eder received his Juris Doctor (J.D.) degree from the University of Utah, Quinney College of Law, in 2001. See Bob Eder's Author Page on Amazon.com.

SEC CHARGES 10 BROKER/DEALERS/INVESTMENT ADVISERS WITH FAILURE TO KEEP RECORDS OF "OFF-CHANNEL COMMUNICATIONS" WITH CLIENTS

NASAA makes available Series 65 Test Specifications for those planning to sit for the Series 65. These Test Specifications describe the subject matter of the 65 Exam. The recently revised Series 65 Test Specifications include Section IV (G) (5) (5.3) covering correspondence with clients and advertising, and mentioning the use of social media, digital messaging, and internet communications.

From time to time, the SEC issues press releases about penalties and charges brought against broker/dealers and advisers. Here is one that imposes penalties on 10 firms for inadequate record-keeping of electronic communications with clients, called "off-channel communications." I include the SEC Release here because it demonstrates that a broker or adviser must treat the rules as having real life consequences, potentially bringing serious penalties and large fines for non-observance.

Bob Eder in his Study for the Series 65 Exam covers correspondence and advertising regulations, with a special emphasis on keeping records, especially of electronic and off-channel communications, such as those involving clients effected on or through social media.

Students who plan on sitting for the Series 65 Exam should pay careful attention to the following SEC Release as it demonstrates that the SEC and other financial regulators are on the look-out for violators of the record-keeping rules, especially for off-channel communications, and are very likely to ask questions on the Series 65 Exam about these rules.

"SEC Charges 11 Wall Street Firms with Widespread Recordkeeping Failures

"Firms admit to wrongdoing and agree to pay penalties totaling $289 million

"FOR IMMEDIATE RELEASE
2023-149

"Washington D.C., Aug. 8, 2023 —

The Securities and Exchange Commission today announced charges against 10 firms in their capacity as broker-dealers and one dually registered broker-dealer and investment adviser for widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications. The firms admitted the facts set forth in their respective SEC orders. They acknowledged that their conduct violated recordkeeping provisions of the federal securities laws, agreed to pay combined penalties of $289 million as outlined below, and have begun implementing improvements to their compliance policies and procedures to address these violations.

Wells Fargo Securities, LLC together with Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC agreed to pay a $125 million penalty;BNP Paribas Securities Corp. and SG Americas Securities, LLC have each agreed to pay penalties of $35 million;BMO Capital Markets Corp. and Mizuho Securities USA LLC have each agreed to pay penalties of $25 million;Houlihan Lokey Capital, Inc. has agreed to pay a $15 million penalty;Moelis & Company LLC and Wedbush Securities Inc. have each agreed to pay penalties of $10 million; andSMBC Nikko Securities America, Inc. has agreed to pay a $9 million penalty. . . . The SEC’s investigation uncovered pervasive and longstanding “off-channel” communications at all 11 firms. As described in the SEC’s orders, the firms admitted that from at least 2019, their employees often communicated through various messaging platforms on their personal devices, including iMessage, WhatsApp, and Signal, about the business of their employers. The firms did not maintain or preserve the substantial majority of these off-channel communications, in violation of the federal securities laws. By failing to maintain and preserve required records, certain of the firms likely deprived the Commission of these off-channel communications in various SEC investigations. The failures involved employees at multiple levels of authority, including supervisors and senior executives.

Each of the broker-dealers was charged with violating certain recordkeeping provisions of the Securities Exchange Act of 1934 and with failing to reasonably supervise with a view to preventing and detecting those violations. Wedbush Securities Inc., a dually registered broker-dealer and investment adviser, was additionally charged with violating certain recordkeeping provisions of the Investment Advisers Act of 1940 and with failing to reasonably supervise with a view to preventing and detecting those violations.

In addition to the significant financial penalties, each of the firms was ordered to cease and desist from future violations of the relevant recordkeeping provisions and was censured. The firms also agreed to retain independent compliance consultants to, among other things, conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices and their respective frameworks for addressing non-compliance by their employees with those policies and procedures."

Here is the link to NASAA's Series 65 Test Specifications. 

Study for the Series 65 Exam is available from Amazon in both paperback and Kindle e-book versions. Here is the link to Bob Eder's book on Amazon.

For questions about Bob Eder's Series 65 manual,  Study for the Series 65 Exam,  or questions in general about the Series 65 Exam, or about Off-Channel Communications, feel free to email Bob Eder at bobeder@bobeder.net.
Bob Eder received his Juris Doctor (J.D.) degree from the University of Utah, Quinney College of Law, in 2001. See Bob Eder's Author Page on Amazon.com.