SERIES 6 CANDIDATES SHOULD KNOW PROVISIONS OF SEC REGULATION S-P ON CONFIDENTIALITY OF CUSTOMER DATA

The Series 6 exam asks questions about safeguarding customer information obtained when opening the account.  Specifically, the Series includes questions Regulation S-P, the privacy regulation of the SEC.

Regulation S-P has direct bearing on customer information when a representative quits one firm and moves to another.  The first thing the rep thinks about is how to transfer his customers from his old firm to his new one.  The temptation is to copy all the names of customers, their telephone numbers, their social security numbers and personal confidential financial information, and resume business with these customers from the person's new firm.  However, before a person carries or discloses confidential customer information to a new firm, he or she must afford customers an opportunity to opt out.  The new firm is considered an outside "unaffiliated third party," and unless a customer must receives notice and a chance to stop the transfer, any transfer or disclosure would constitute a serious violation of both federal law and the SEC's Regulation S-P.

SERIES 6 ASKS ABOUT SETTLEMENT OPTIONS ON LIFE INSURANCE

There are several different types of settlement made available by insurance companies upon the death of the insured.  Of course, there is always a lump sum payment to the beneficiary.  However, other settlement options seem more favorable to the insurance company, such as depositing the life insurance proceeds into a checking account held by the insurance company.  Then the beneficiary may write "checks" upon the balance, in the meantime leaving the balance to be invested by the insurance company.  The account is credited with interest.

If you are planning to take the Series 6, you must be familiar with the common types of life insurance settlement upon the death of the insured.

SERIES 6 ASKS QUESTIONS ABOUT CONTRACTUAL PROVISIONS OF VARIABLE UNIVERSAL LIFE POLICY

If you are going to sit for the Series 6 exam, make sure that you are familiar with various contract provisions of a typical variable universal life (VUL) policy.  You may want to take the time and list some of the provisions from a prospectus of a VUL offering.

For example, what happens in the event of suicide?  How about misstatement of age or gender?  Can the insurer reduce the death benefit for an insured who reaches an advanced age?

SERIES 6 ASKS ABOUT SEP PLANS AND SIMPLE PLANS

Taking the Series 6?  Make sure you know the difference between SIMPLE plans and SEP plans

SIMPLE stands for a "savings incentive match plan for employees."  It is permitted for companies only where there is not more than 100 employees.

SEP stands for "simplified employee pension."  There must be a written formal agreement to set one up.  The employer must establish a SEP-IRA account for each eligible employee.  For year 2013, an employer's contributions to his employee's SEP-IRA cannot exceed 25 percent of the employee's compensation or $51,000.

PS  Watch for Bob Eder's forthcoming book, Study for the Series 6 Exam.

SERIES 6 ASKS QUESTIONS ON MONETARY AND FISCAL POLICY

The Series 6 exam asks questions on the difference between monetary policy and fiscal policy, so you should know the differences between the two.

Fiscal policy is the budgetary policy of the U.S. government.  It is largely controlled by Congress.  Congress has the power of the purse.

Monetary policy, on the other hand, is controlled by the Federal Reserve Board, or the Fed.  The Fed, by its monetary policy, controls the amount of money on hand at banks and held by individuals and businesses.  Monetary policy also involves the control of interest rates.

SERIES 6 ASKS ABOUT BONUS/ENHANCEMENTS WITH VARIABLE ANNUITIES

If you are going to take the Series 6 exam, you must need to familiarize yourself with the meaning of "bonus/enhancements" as it relates to variable annuities.

A typical bonus would be when an annuitant puts in a lump sum of, say, $20,000, the variable annuity would add, for example, an extra five percent bonus, amounting to an extra $1,000.

But the SEC warns that these types of "bonus/enhancements" often are accompanied by increased expenses in other areas.  There is no free lunch.

PS Watch for Bob Eder's forthcoming book, Study for the Series 6 Exam.

SERIES 6 APPLICANTS MUST KNOW EXPENSES & CHARGES ON VARIABLE ANNUITIES

A common problem often detected by FINRA and state securities authorities is the switching of variable annuity contracts by reps for clients who have no idea that they could very well be subject to additional expenses and charges.

For example, most variable annuity contracts impose a "surrender charge" if a holder redeems the annuity for its cash value within the first five or seven years.  A typical surrender charge may be 7 percent the first year, 6 percent the second, declining to zero after seven years.

When Widow Barbara is enticed to switch ABC Annuity which she has owned for the last 10 years for XYZ Annuity, she subjects herself anew to another 7 years of surrender charges.

Furthermore, XYZ Annuity may carry higher expenses than ABC.  Its mortality expenses, to pay for death benefits, may be much higher.  The advisory fee on its investment portfolio may also be higher.

Comparing ABC to XYZ, there may be no justifiable reason for switching when one looks at the higher expenses.

SERIES 6 EXAM ASKS ABOUT QUANTITY DISCOUNTS BASED ON HOLDINGS IN RELATED ACCOUNTS

The SEC and FINRA are concerned that many Series 6 reps do not carefully monitor their customers' holdings of mutual funds, with the result that, in some cases, customers fail to obtain discounts on front-end sales loads for new purchases of shares.

Shares of the same mutual fund or those of mutual funds in the same family should be taken into account when a person initiates a new purchase of shares, because most funds allow a substantial sales charge discount when a person purchases new shares.  A Series 6 rep should consider other accounts of his customers, such as IRA accounts, joint accounts, 529 Plan accounts, and/or trust accounts, and see if these accounts contain shares of the same fund or same family.  All these shares could very well count towards earning a reduced sales charge.

Furthermore, a sponsor of a mutual fund family may also sponsor variable annuities.  Purchase of these annuities usually can also be aggregated with purchases of new shares to arrive at a point where the sales charge drops.

If the SEC and FINRA are concerned about the lack of diligence on the part of mutual fund reps in awarding reduced sales charges, it is a good bet that the Series 6 Exam will contain questions on this very subject.

SERIES 6 ASKS QUESTIONS ON WHEN TO ACCORD A PURCHASING CUSTOMER A REDUCED SALES CHARGE ON MUTUAL FUNDS

If you plan on sitting for the Series 6 exam, you should expect questions on when a person may obtain a reduced sales charge or quantity discount on the purchase of mutual fund shares.

Normally when a person invests an amount of money equaling or exceeding a breakpoint, he qualifies for a reduced sales charge on the entire purchase.  As an example, if XYZ Fund has its first breakpoint at $25,000, at which point the sales charge drops from 5.75 percent to 4.00 percent, a person who invests $30,000 in one lump sum will pay a sales charge of $1,200.

The SEC has found that many broker/dealers fail to give a customer a reduced sales charge when due.  This is because the brokerage firm does not check to see if the customer owns shares in related funds which are part of the same family.  Furthermore, some representatives are not aware that family members of the customer may own shares that should be aggregated with the new purchase when considering whether the customer has reached a new breakpoint.

PS  Watch for Bob Eder's forthcoming book, Study for the Series 6 Exam.

SERIES 6 ASKS ABOUT REGULATIONS ON PRIVACY OF CUSTOMER DATA

Be sure to prepare yourself for Series 6 questions on rules and regulations requiring privacy of data obtained from mutual fund customers, specifically SEC Regulation S-P.

What are the customer's rights when a financial firm, such as a brokerage firm, wants to share certain financial information about the customer with another firm?  Can the customer opt out of any sharing?

Suppose the brokerage firm wants to share customer data with an outside firm that handles mailing and communications on behalf of the brokerage firm?  Does the customer have a right to opt out? 

You should be prepared to answer the above questions when you sit for the Series 6.

PS  Watch for Bob Eder's forthcoming book, Study for the Series 6 Exam.

SERIES 6 EXAM ASKS QUESTIONS ABOUT MUTUAL FUND SHAREHOLDER'S COST BASIS

The Series 6 exam asks questions about a mutual fund shareholder"s "tax basis."  Tax basis is often referred to as "cost basis," or simply "basis."  An applicant needs to be familiar with these terms.

Take a situation where Henry purchases shares of XYZ Fund at the offering price of $10.00.  Given that XYZ Fund has a front-end load of five percent, the NAV is $9.52.  Is Henry's tax basis $10.00 or is it $9.52?

What happens to Henry's basis if he exchanges shares of the XYZ Fund for shares of ABC Fund?

Suppose Henry receives a gift of 1,000 shares of DFG Fund from Uncle Bert when DFG Fund shares are worth $20.00 each.  Uncle Bert paid $8.00 per share.  What is Henry's cost basis?

What effect on Henry's basis if DFG Fund pays out a distribution of dividends and capital gains, which Henry immediately reinvests?  How will that effect Henry's basis?

As you can see, there are many possible questions on the Series 6 dealing with a shareholder's cost basis, tax basis, or basis.  Don't go into the Series 6 without being familiar with these concepts.

PS Watch for Bob Eder's forthcoming book, Study for the Series 6 Exam.

SERIES 6 ASKS ABOUT PIPELINE THEORY ON MUTUAL FUND TAXATION

The Series 6 exam asks about the "pipeline" or conduit theory regarding distributions paid by a mutual fund to its shareholders.  This theory explains how shareholders of a mutual fund are not subject to triple taxation on those dollars paid to them by a mutual fund representing dividends.  As an example, suppose ABC Fund owns 100 different stocks, each one of them paying dividends to ABC Fund.  If ABC Fund pays out at least 90 percent of the dividends it receives from companies in its portfolio, then it itself is not subject to pay any tax on these dividends.  It is considered a "regulated investment company."  Imagine that there is a pipeline or conduit connecting the companies in the mutual fund's portfolio with the shareholders of the mutual fund.  The pipeline bypasses the mutual fund, thus eliminating any need for the mutual fund to pay taxes.

SERIES 6 ASKS QUESTIONS ON 1035 EXCHANGES

The Series 6 asks about 1035 exchanges allowed under the tax code.  There must be a true exchange of similar policies.  For a 1035 exchange, Mrs. Jones cannot surrender her old annuity for cash, and then use the cash to purchase a new annuity.  No, she must exchange her old annuity for a new annuity.  Furthermore, the annuitant must be the same on the new annuity as listed on the old annuity.  And finally, the exchange must involve similar property, not, for example, an annuity exchanged for a real estate parcel.

PLAN TO TAKE THE SERIES 6 EXAM? KNOW TAX TREATMENT OF VARIABLE LIFE INSURANCE, 1035 EXCHANGES, SURRENDERS FOR CASH VALUE

Are you planning to sit for the Series 6 exam soon?  Then you need to know the tax treatment of variable life insurance policies.

For example, what happens during the life of the variable insurance?  How are earnings, interest, capital gains and dividends treated?  Are they taxed every year or only when any payout occurs?  Suppose the insured dies, are the life insurance proceeds included in the estate of the decedent?  Are they taxed as ordinary income to the beneficiaries?

What happens if the insured makes a full or partial surrender of the policy for its cash value?

And how about 1035 exchanges, where the owner/insured exchanges one life policy for another?  Will IRS impose tax at the time of the exchange?

All these questions are covered by the Series 6 exam.

SERIES 6 ASKS ABOUT WASH SALES

Are you planning to take the Series 6 exam?  Then make sure you are familiar with the "wash sale" rule.  This IRS rule states that a taxpayer may not take advantage of a capital loss if he or she re-purchases the same security, the identical very same security, within a period of 30 days, counted either before or after the date of the sale that established the loss.

PS Watch for Bob Eder's forthcoming new book, Study for the Series 6 Exam.

SERIES 6 CANDIDATES—KNOW TREATMENT OF CAPITAL LOSSES

If you plan to sit for the Series 6 exam in the near future, make sure that you understand how to treat net capital losses, both short-term and long-term.  For example, James works for a brokerage firm, and earns $150,000 per year.  For the current year, James has long-term capital losses of $50,000.  He also has short-term capital gains of $10,000.  May James offset the gains with some of the losses?  If so, what happens next?  May he offset some of his employment income with some of the losses?  If so, how much?  These are the types of situations that you need to have down firmly for the test.

PS Watch for Bob Eder's forthcoming book, Study for the Series 6 Exam.