well greetings test Acres this is uh Dean Tenney coming to you from my studio here in fabulous Las Vegas and it's time for another installment on the explications of the NASA exam I keep getting people saying Dean what happened to G which has 10 or 11 questions I said well I haven't done it yet just completed a 65-66 class and I usually use those classes as kind of a prod to do some more work on the on the channel so uh here we go here we go with the 10 or 11 questions uh based on section g of the NASA test specifications so disclose first disclosure we need to be aware of this capacity so you know we're all considered broker dealers but in any one transaction we're either going to be a broker or a dealer where you're going to act in our broker agency capacity or are dealer principal capacity let me give you an example of that by the way this uh I said when you open an account with me at Morgan Stanley over Merrill Lynch or UBS I said where are you a broker dealer but any one transaction you do with as a UBS and some transactions you'll be uh will be acting as your broker as your agent we're going to contact another firm and do the trade for you and you're going to owe us a commission so when we act in our broker dealer or broker agency capacity we charge commissions we're acting as your agent and I say in other transactions you do with us we'll be acting in our dealer principal capacity and we'll be charging a markup or markdown you'll be buying it from our inventory we're selling indoor inventory if you're selling indoor inventory mark down and if you're buying from RM and Dwayne markup in each and every transaction we will disclose capacity that will be disclosed on the confirmation so uh very testable as you open account with me at Morgan Stanley and some transactions to do with us at Morgan Stanley will be acting in our broker agency capacity charging a commission and contacting some other firm other transactions you do with us we'll be entering our dealer principal capacity charge you a markup on markdown and each and every transaction on the confirmation will disclose capacity to you and very important will never be a broker in a dealer in the same trade I mean how could I act as uh you know your agent in negotiations with myself about a markup so we can either be one or the other we cannot be both we cannot be both um now if it's an investment advisor you need written discretion for that I mean this is the normal course of business for broker dealers but if investment advisors who are going to be acting as uh principles or agent need to make sure that's disclosed as well but the main one here is about you know it's not in the normal course of business for investment advisory firms to be acting as principals or agents so investment advisor that too needs to be disclosed and uh you need a written disclosure of that that they're written disclosure for Investment Advisors the happening as an agent principal now when we mean again this is a capacity and remember your the investment advisory form is a fiduciary so you know we don't we expect to be paid by you know fees not transactions so that's why that needs to have a disclosure and that'd be uh prior to completion of the trade all right so we're talking about uh disclosures and other disclosure is what we call a cross an agency cross-transduction so as an investment advisory firm I say when given the opportunity to save money uh you know not take your orders our orders from our buy and sell orders to a market maker or to a broker would to save money we'd like to be able to an agency cross and so in an agency cross we tell you when we open the account that this is something we like to do and so for example if the bid is uh 15 and the ask is 15 and I have an investment advisory client who wants to buy and somebody wants to wants to sell it looks like you know if I take this to the market maker the customer wants to sell is going to receive 15. and the customer who wants to buy is willing to pay uh 16. so again what I'm going to do instead is say hey why don't we do a cross at 15.50 you know that way my investment advisor client who's selling gets 50 cents more than they otherwise would have got and the customer who's buying pays 15 50 50 cents less than they otherwise would have paid and the only uh loser here the only loser here is um is the market Maker Now one thing I can't do is I can't do cannot recommend both sides of the train and then remember I also have to tell you that make written disclosure to you that this is what we like to do and when given the opportunity when these situations arise we'd like to do it now when the situation does arise uh I'm going to have to also get uh again um written disclosure before completion of the trade so say hey that situation has arisen and written disclosure before completion of the Dragon okay so we're talking about disclosures a uh broker dealers have to disclose conflicts of interest and conflicts of winning interest would require include proprietary uh products you know who would look at I didn't know about Morgan Stanley as a their own mutual fund uh family and again uh that's not a bad thing I found that out because they had one of the top performing growth funds and if I'm a Morgan Stanley broker and I'm recommending you Morgan Stanley proprietary products I need to disclose that to you uh the problem with proprietary products is they may not be portable I mean it's not testable but you know the Morgan Stanley fund if you leave Morgan Stanley may not transfer to Schwab or Fidelity or you know Maryland's whatever the case may be I have to uh disclosed of any additional incentives I get from getting you involved in the product so I say hey last year I was a top producer I hope to be a top producer this year but it's not about you know the trip this year to why it's about you helping your financial goals now both NASA and uh finra frown on sales contests and you know uh but you know we can have them they can't be about a particular product like it could be for mutual fund production but not like an actual particular uh fund uh we have to tell you about uh whether we took them public because if so it's likely our research reports are going to be favorable so you know favorable research after bringing the company by the way it doesn't have to be favorable but you know just disclose to you in research reports uh whether we were the company that had a banking relationship yeah actually has or has had the underwrite relationship like for example I'm the company I'm the broker dealer that took them public or was part of The Syndicate that did so okay so investment advisor uh conflict so we're talking about conflicts and disclosures so let's talk now about an investment advisors and some conflicts disclosures that we need to make for that relationship uh I disclose ownership in the recommended products so you say Dean do you eat your own cooking do you have ownership and the security you recommend to me now the answer can be yes or no just needs to disclose now if it's no then you know it's got to be because I have some reason like you know that my investment objectives are different than yours and so no I don't own the recommended securities you know but if you know if so then yeah so disclosure so don't be careful it doesn't have to be that I do or don't it's just a disclosure and uh reasons uh disclose any gifts or any additional incentives or you know any recommended products or things I want to put into your portfolio um I'll tell you whether I'm an agent of a broker dealer or not so am I both an investment advisor rep some of us are simply investment advisor reps you know fee based only but some of us are both agents of a broker dealer and an investment advisory and we have to tell you whether we're an agent of the broker dealer of a broker dealer and whether we're going to go use that broker dealer for the products and services and additional compensation right so you can see I told you about 10 or 11 questions here so this is a kind of a big uh part about that uh again am I a captive agent of the broker dealer meaning I can only recommend to you proprietary products if a captive agent of the broker you what that means is you know I'm a Morgan Stanley broker and it's going to be Morgan Stanley uh disclosed to you or they can execute through other broker dealers can you or can you or cannot you can can or cannot use another broker dealer for execution yeah my in uh investment advisor when I was a practitioner I said no you can't use other broker dealers I'm only set up to be using Schwab for execution and custody so again we disclose to you whether or not you can use other broker dealers uh you know or not and then we set any additional compensation we receive besides you know our investment advisory fee or you know the being the agent of the broker dealer and then I said remember we disclose our trades if they're inconsistent so if I I can have trades personal trades of inconsistent again that's okay I just have to have some reason about why my personal trades are inconsistent with the advice I'm giving giving you and I gave you the reason here right one major reason would be you know my investment you know objectives are different than you you have inconsistent with trades recommended to customer uh NASA so NASA has a template for model sleep fee disclosures it is for a model it's a template or model damn for broker dealer fee disclosure and you can use it any way you want but you know if you don't use this you better make sure you make the same uh disclosures you would have made had you used the template now we're not talking about broker dealer fees here uh for uh you know investment advice we're talking about fees Associated uh the broker dealer charges some of those might be uh issuance of a stock certificate you know you know what are the additional charges you're gonna you may encounter in this relationship excuse me uh we might charge to uh this one for us me to account transfer fee if you want to leave us and go somewhere else we might charge for a um my charge for a uh wiring of funds we might charge you uh to um uh by the way this says 66 test specifications but I'm going to put in the 65 playlist because it's the exact same test specification so there is no difference in the 65 and 66 in terms of what I'm discussing right now uh margin account interest we're going to charge you based on the debit balance right that credit agreement and we might charge you Postage and handling though and they're kind of frost me you know we give you 30 day notice and we're going to change in these fees so you can decide whether or not that is actually a deal breaker for you or not uh you know in terms of doing things with us that is not going to include that's not going to include the supper fees which would be commissions when we act as an agent so let's just put down here this is not included in that document because this is elsewhere and this would be on the confirmation not in this model feed disclosure and that would not include would be commissions because those would show up on your confirmation or or markups or markdowns you know we might even have an annual fee for your account and maintain that fee perhaps and maybe we charge you for safe keeping perhaps okay so uh those are some of the required disclosures uh that we uh we're not talking about fees again for that so let's talk about some unlawful representation some unlawful representations that you should not make it looks like I'm uh messing up my number two was uh unlawful representations it's saying three because I messed up the so let me change this to there we go oh come on okay back in business so one thing you can't do is you can't infer any uh approval of your qualifications by any regulatory body let me get my red out again any regulatory uh approval can infer or imply so I joke there's two nasty words approve and guarantee are kind of words you better be real careful about using uh imply approval we can infer employee approval of qualifications by any regulatory body what that means is by SEC the state administrator um you know the uh finra body uh what else can't you do uh you can't infer that your registration same for your registration so Regis representation or representation you know that's the same kind of a word and then you know on the disclaimer and every perspectives we should know of the front page of every perspective says the SEC neither uh passes neither proves nor disapproves of any Securities offering they neither pass upon the adequacy or the accuracy of the information contained here herein any claim to the contrary is a criminal offense a criminal offense all right so let's talk about um uh performance guarantees those are big No-No let's get out of our red again uh performance guarantees uh it's unethical to guarantee any kind of a result my crystal ball is broke so you know we're not supposed to do that now we have to be real careful if we use the word guarantee so there are certain situations and uh which we can use the word guarantee so unethical to guarantee performance and uh well we got to be real careful of is uh making sure that if we use that word let's make sure we're clear about you this is a use or just want to make that clear so you know maybe perhaps maybe perhaps uh we have a parent company that's guaranteeing the debt of a subsidiary so you know in that case I could make it very clear that the parent company is guaranteeing the debt of when it's a subsidiary so just be careful about you know what is being guaranteed has guaranteed a debt of a subsidiary I say this is a guaranteed Bond if I say it's a guaranteed Bond I got to make it clear to you that it's guaranteed by the parent company and the guarantee is only as good as the guarantor right so you know certain situations we can also use that as it relates to U.S treasury Securities for example so we just got to be a little careful about that we've got to be a little careful about that one all right so that leads us to uh number four let me get out of my pen here number four and uh this explication and uh number four is going to be about client contracts client contracts and uh brochures right so client contracts and customer agreements so in our investment advisory contract foreign we're going to spell out back my red the services to be performed we're going to spell out the duration of the contract we're going to spell out the advisory fee and how that's being computed now remember usually most of us do it as a assets under management the percentage and if there's going to be you know performance kind of Base fee then there's additional uh you know rules and disclosures for that for computing that advisory fee uh the amount of a prepaid fee that will be returned and remember there's other rules you get tested on about you know how much I can charge more than 500 for you know more than six months that kind of stuff I'll just warn you about that uh very important let's put this in all caps no waiver of uh performance fees no no waiver fees for underperformance I can't say oh let me down I let myself down I let you down so you know I'm going to waive my fees no no no no no um very very testable let's put this in all caps too uh assignment of the investment advisory contract only with the consent of the investment advisory client that is very very testable you know you can't that's one of the dangers of buying an investment advisory firm or whether or not the clients will agree to the assignment of that contract right so assignment only with the consent of the client then they give you you know scenarios where there's either a change in control or you know the investment advisory firm gets uh bought out so they give you examples of like a a majority interest change let's put down here change and control now if it's not a change in the draw it's just notification that's not considered assignment but if there's you know a change in control majority interest then it it triggers this so you know what I'm saying is it doesn't have to necessarily mean we sold our investment advisory firm uh for May to firm B it could be that firm A's partnership has changed in such a way that there's a new majority ownership so for example I own 30 a retiring partner I buy their 30 now I ain't on 60 I was not a controlling uh partner now I am so that's changing control again it requires a consent uh of that if it's just a you know uh not and that's not the case now um in terms of the investment advisory contract being in written form so this is one of those little areas depending on your test prep provider uh you know I say under uniform Securities act and that's what you're getting a test on uniform Securities active template it must be in written form is required under the uniform Securities act so that's the one I'm going to do there's every once while you'll run into somebody and say oh it's not required under the investment you know uh advisor Act of 40. but you know I I just think it's silly because that's not what you're going to be tested on right and then remember we're going to have use either form a DAV part two a and 2B as our brochure so let's put that in there more ADV part two as is the brochure or we can use a brochure if we want but you know uh you're going to use your own version it's got to have everything in there so uh 2A 2A describes the firm and to be describes the personnel so we're going to give people that draw short draw sure now if we give them the brochure you know if I'm soliciting the client and I give them the brochure so maybe it's like Dr Jones and you know I show up with Dr Jones and I haven't given him the brochure 48 hours in advance I have not delivered in the brochure 48 hours in advance and you know he says hey let's get busy on this thing let's get busy on this and uh managing the money and he's trying to read this thing and he says Dean I can say he's struggling a little bit with that and I say well listen you I know you're kind of trying to read this whole thing it's you know it's it's almost possible for you to read this in a timely fashion and you might want to check it with your attorney and since I didn't give you the brochure you know 40 hours in advance you have five days to resend so you know what I'm trying to tell him is he has like a five day free look period if you will uh to uh to do that right okay uh material changes in that brochure you know in the brochure it means material changes uh you know in The Firm because that's how we're going to disclose that and so if there are material changes in our investment advisory uh we're going to make that uh to our clients each client within 120 days material changes will trigger delivery of updated brochure Within 120 days of year end our fiscal I should say fiscal year I don't have any investment advisory firms anymore that have a uh you know fiscal urine that is different now they don't Regulators just don't go for that as much as they used to yeah we always offer that by the way the brochure also has to be free you know we can't charge people for our brochure or make them reimburse us for a very short you know some of us have some pretty expensive uh you know uh uh stuff uh you know that we send to people so we can't make them reimburse this or that and remember we're going to have to include a uh balance sheet uh under uniform Securities act it's going to be for more than 500 dollars but that uniform Securities act if we're charging more than five hundred dollars and uh wanting to be paid six months in advance six months or more in advance and it's going to be more than uh again I would like to know everything but the state is more important than the feds and for feds that'll be more than twelve hundred dollars under the investment advisor Act about 40. now a lot of you are taking your uh investment advisor representative exam because you want to sell rap accounts where we're going to wrap the products and services of the broker dealer into a fee and you know we have to have a brochure that tells the client what's included in the brochure you know what's including the rap fee and what is not included in the uh route fee you know so the rappers sure what is included and what is excluded okay then the last thing here in terms of uh this number four which is client contracts and uh customer agreements is the solicitors brochure so you know some federally covered investment advisors hire solicitors as third party uh to raise money for them and so if a solicitor has been hired by a federally covered investment advisor there has to be a brochure that tells you the name of the solicitor I spent a large part of my career that's my just my damn thing telling me that we're past 30 minutes I try and bring these explications in under 30 minutes and it looks like I'm not successful so uh you want to take a break we're almost done but you know it is what it is so the name of the solicitor uh the name of the investment advisor who am I hiring who have I been hired to raise money for so in my case the solicitor was Gone with global Investments uh the name of the advisor was Carlisle a federally covered investment advisor so I tell you who I'm you know raising money for and you know we'll make sure you're not confused about you know who I'm representing you know I've been hired so it's unlikely by the way I'm gonna tell you I don't like the federally covered investment advisor because they you know uh are paying me the nature of that relationship so as I've been hired uh by the federally covered investment advisor they're going to pay you're going to pay them 2 and 20. two percent of assets under management 20 of the profits and so they're going to give you uh the first two percent to us as a third party solicitor uh for raising the money so there we're going to tell you is Again by the way I'm going to give you also the brochure for the investment advisory so you're going to get my brochure as a solicitor the brochure or the federally covered investment advisor I want you to sign acknowledging you read that and you know you understood it because they're getting you know the federally covered advisor is going to send you documentation to sign that I did this correctly and then uh are you paying any higher compensation through using the third party solicitor in my case the answer is no but it could have been yes I could have said yes it is going to cost you more money all right so we said this is a pretty Target Rich section on your uh NASA exam and so the last thing we want to talk about is our last category here is correspondence and advertising and that includes social media emails and upside upsides uh you know excuse me websites and here the main test question is the regulatory authorities have said over and over again they're more concerned with content let me get my red hair than they are delivery so you don't really care so much about how we're doing this and you know whether it's Facebook or LinkedIn or whatever it is and all firms are going to have to have wsps written supervisory procedures about correspondence advertising to include social media email and websites and and needless to say that can't be deceptive and misleading deceptive or misleading and as we said you know we have to make it clear if we're ever giving you tools to uh use for this stuff you know at what point is it a recommendation on what point is it a library you know like a library of research reports or an investment analysis tool and what is not and again this says series 66 test specifications I'm going to put in the 65 playlist because it's the exact same test specification the only difference is that on the 66 you get 10 questions in this category and on your 6d5 you get 11 questions in this category so that is the only distinction so I hope I'm making that clear I'm going to be really upset if I haven't communicated effectively and u65 start sending me comments saying oh it's a 66. it does not matter you know for the most part in the over areas they overlap the only distinction is how many questions is found in the category from 65 to 66 and usually the 65 has more no surprise okay so regulatory concerns we've talked about the uh social media in terms of uh that and then broker dealers you know a little different uh because we're handling perspectives and so you can't highlight or no let's put that in caps no highlight or altering a prospectuses again how many Brokers I've seen you know I'll read this you know I got a little behind with an arrow over saying you know read this absolutely not absolutely not uh investment advisor advertising as a you know a little more uh you know uh sticky than is the other uh stuff and so uh if we're going to use uh past performance we better say it's not indicative of future results okay what else I think that's pretty much uh we talked about wsbs in terms of the firm telling you what its policies and procedures are for whether you're going to be able to participate on social media and what circumstances which LinkedIn or Facebook or whatever the case may be I would review in your paid study materials uh testimonials and the rules for testimonials investment advisors that changes of the April this year I'm not going to put it here because it's not part of an explication it's more of an update and I'd send that to you as well okay so I hope you're finding these helpful and I will be posting this in the 66 playlist and the 65 playlist and like I say when you see some section missing in this explication we're closing in on getting it complete just let me know and that prods me to you know continue to fill this thing out talk to you later bye bye