General Securities Representative Examination

Retail communications are any written (including electronic) communications distributed or made available to more than 25 retail investors within any 30-calendar-day period. Retail communications require principal pre-approval before first use and must be filed with FINRA within 10 business days of first use.

Institutional communications are written communications distributed or made available only to institutional investors (banks, insurance companies, registered investment companies, or entities with total assets of at least $50 million). These do not require principal pre-approval but are subject to supervision and review procedures. A third category, correspondence, is written communication sent to 25 or fewer retail investors within 30 calendar days and requires supervisory review but not pre-approval.

FINRA's suitability rule (Rule 2111) requires that a broker-dealer or associated person have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer, based on the customer's investment profile including age, financial situation, tax status, investment objectives, investment experience, time horizon, liquidity needs, and risk tolerance.

The SEC's Regulation Best Interest (Reg BI) raises the standard beyond suitability, requiring broker-dealers to act in the retail customer's best interest at the time a recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the customer's interest. Reg BI includes four component obligations: disclosure, care, conflict of interest, and compliance. While not a fiduciary standard, it is a higher standard than the traditional suitability requirement.

General obligation (GO) bonds are backed by the full faith and credit and taxing power of the issuing municipality. Their creditworthiness is evaluated based on the issuer's debt-to-assessed-value ratio, per capita debt, collection rate of taxes, and overall economic health of the community. Voter approval is typically required for issuance.

Revenue bonds are backed by the revenue generated from a specific project or facility, such as a toll road, hospital, or airport. They are not backed by taxes and do not require voter approval. Revenue bond analysis focuses on the feasibility study, debt service coverage ratio, rate covenant, and additional bonds test. Revenue bonds typically carry higher yields than GO bonds of similar credit quality because they rely on a single revenue source.

For call options, the breakeven point equals the strike price plus the premium paid. For example, if an investor buys a call with a $50 strike price and pays a $3 premium, the breakeven is $53. The stock must rise above $53 for the buyer to profit at expiration. The call writer's breakeven is the same -- above $53, the writer begins to lose money.

For put options, the breakeven point equals the strike price minus the premium paid. For example, if an investor buys a put with a $50 strike price and pays a $2 premium, the breakeven is $48. The stock must fall below $48 for the buyer to profit at expiration. Remember: call up, put down -- add premiums for calls, subtract premiums for puts.

Class A shares charge a front-end sales load (paid at the time of purchase), which reduces the amount initially invested. Class A shares typically offer breakpoint discounts for larger investments and have lower ongoing 12b-1 fees. They are generally most suitable for long-term investors making larger investments.

Class B shares charge a back-end load known as a contingent deferred sales charge (CDSC), which decreases over time and eventually disappears (typically after 6-8 years). Class B shares have higher 12b-1 fees and often convert to Class A shares after the CDSC period expires. They are no longer widely offered by most fund companies.

Class C shares charge a level load, typically a 1% annual 12b-1 fee with a small back-end load that expires after one year. They do not offer breakpoint discounts and are generally most suitable for shorter-term investors who want to avoid paying a large upfront sales charge.

Most securities settle on a T+1 basis, meaning the transaction settles one business day after the trade date. This applies to stocks, corporate bonds, municipal bonds, ETFs, and most other standard securities. The SEC shortened the settlement cycle from T+2 to T+1 effective May 28, 2024, to reduce counterparty risk and improve market efficiency.

Options also settle T+1. Government securities (Treasury bills, notes, and bonds) settle T+1 as well. Cash trades settle same day (T+0). When-issued securities have no set settlement date until the issue date is determined. Understanding settlement timing is critical for determining ex-dividend dates, margin requirements, and customer payment obligations.