Series 66 Study Notes (Comprehensive Chapterwise Summary with Formulas)
Chapter 1 – Laws, Regulations, and Guidelines Overview
Purpose of Series 66 material: to prepare for the Uniform Combined State Law Examination (USA) with emphasis on both state and federal securities regulation.
Key regulatory vocabulary and scope:
State and Security definitions per the Uniform Securities Act (USA) and NASAA rules.
State vs Federal registration and enforcement bodies; primary regulators: state Administrators (often called Securities Commissioner) and NASAA; federal regulators: Securities and Exchange Commission (SEC).
Exempt vs non-exempt securities and exemptions from registration; the concept of notice filing for federal covered securities.
Major terms (definitions as per transcript):
State: includes any state, commonwealth, territory, possession of the United States, plus the District of Columbia and Puerto Rico.
Security: includes common stock, bonds, options, variable annuities, etc.; non-exempt securities require registration.
Person: broad definition under the USA; includes individuals, corporations, partnerships, issuers, and Administrators.
Issuer: any person who issues or proposes to issue a security.
Broker-Dealer (BD): a firm in the business of effecting transactions for others or for its own account; a broker locates counterparties and earns commissions; a dealer deals from its own inventory.
Agent: two types
Agent of a BD: non-clerical individuals representing a BD in effecting securities transactions.
Agent of an issuer: non-clerical individuals representing the issuer in effecting securities transactions with the public.
Investment Adviser (IA) and Investment Adviser Representative (IAR): IA provides securities-related advice for compensation; IAR is a partner, officer, director, or other associated person who provides advice or manages client accounts.
NASAA: North American Securities Administrators Association; updates NASAA model rules and content for the Series 66 and USA.
State vs Federal Regulations:
USA is a model law used by states to craft their own laws; the exam emphasizes USA framework, not every state’s specific modification.
Federal acts referenced: Securities Act of 1933 (1933 Act), Securities Exchange Act of 1934 (34 Act), Investment Advisers Act of 1940 (IA 1940), Investment Company Act of 1940, NSMIA (1996), Dodd-Frank Act.
NSMIA: eliminates duplication by creating federal coverage categories and allowing notice filings; creates federal covered securities and federal covered advisers.
Dodd-Frank Act: broad impact across financial regulation; discussed at the end of Chapter 1.
Four-part Howey Test (defining what is a security):
Investment of money
In a common enterprise
With the expectation of profits
To be primarily from the efforts of others
The test helps distinguish securities from non-securities and guides registration exemptions. ext{Howey: } egin{cases} ext{Investment of money}\ ext{In a common enterprise}\ ext{With the expectation of profits}\ ext{To be derived from the efforts of others} \ ext{(four elements)} \ ext{Thus, if all four hold, instrument is a security.} \end{cases}
Chapter 1 Summary (key takeaways):
Distinguish state (USA) vs federal regulation (Acts + SEC).
Identify whether registration is required at the state or federal level; understand exemptions and NASAA rules.
Recognize regulators: State Administrators, NASAA, SEC; notice filing for federal covered securities; exemptions interplay.
Chapter 1 Quiz: practice to reinforce definitions and the state vs federal framework.
Chapter 2 – State Registration of Securities
Core goal: understand what constitutes a security, which investments are securities, and the three main ways to register a security in a state.
Four-part Howey test (revisit): same 4 elements apply to determining if an instrument is a security for state registration purposes.
Investments that ARE securities (highlights):
Stocks, notes, bonds, debentures, investment contracts, interests in profit-sharing arrangements, and variable annuities/life contracts, among others.
Investments that are NOT securities (highlights):
Insurance/endowments/annuity contracts (non-variable), IRAs/Keogh, commodity futures, currencies, collectibles, primary residences in condos used for residence (investment condo needs special consideration).
Identifying a Security – practical examples and a chart contrasting securities vs non-securities (Howey-based):
Examples include ADRs, bonds, investment contracts, VIATICAL investments, whiskey warehouse receipts, REITs, condensations of real estate investments, etc.
Registration of Securities in the USA: three primary methods
Registration by Filing (Notification)
Registration by Coordination
Registration by Qualification
Key requirements across methods:
Filing for a federal filing already completed for a similar class; the issuer must meet certain financial thresholds and public offering criteria.
Filing documents include name, form of organization, offering description, and a copy of the prospectus (for filing).
Effective date: registration becomes effective at the same time as federal registration for coordination; for filing, the effective date is aligned with the SEC’s registration, with a 5-day on-file requirement before effective date.
Expiration: registration expires one year after effective date; must be renewed or re-registered.
Registration by Filing (Notification) specifics:
Reserved for well-established corporations that meet stringent net worth and public offering criteria; registration statement with the state, etc. Note: Many states eliminated Notification under revised USA 2002; some still test on it.
Registration by Coordination specifics:
The same offering is registered under the Securities Act of 1933; filing with the state occurs along with copies of the latest prospectus, articles of incorporation, underwriting agreements, etc. Effective at federal registration if requirements are satisfied.
Registration by Qualification specifics:
Used for intrastate offerings or when no federal registration occurs; becomes effective only when the Administrator determines. Requires comprehensive disclosures (issuer, officers and directors, capitalization, debt, etc.).
Registration Exemptions (Exempt Securities and Exempt Transactions) – key points:
Exempt Securities include U.S. government and municipal securities, Canadian government securities, not-for-profit securities, banks and similar financial institutions, insurance company securities, certain short-term notes, etc.
Federal Covered Securities: securities exempt from state registration due to NSMIA (e.g., securities listed on a national exchange, mutual funds, Regulation D Rule 506 private placements). Notice filing may be required for some federal covered securities.
Exempt Transactions: various isolated non-issuer transactions, private placements, transactions with institutional buyers, certain types of private buyers and exemptions for specific arrangements; focus on terms like non-issuer, unsolicited, fiduciary, control relationships, issuer–underwriter relationships.
Notice Filing: not registration, but states may require notice filing for certain federal covered securities (e.g., mutual funds).
Chapter 2 – Chapter Summary: main takeaways include the Howey test, viatical investments, and the three registration methods; outline of exemptions and notice filing.
Chapter 2 – Chapter Quiz available on STC site.
Chapter 3 – State Regulations Governing Broker-Dealers and Agents
Overview: general registration requirements apply to broker-dealers, agents, investment advisers, and IARs; differences between BD/agent vs IA/IAR regulatory treatment.
General Registration of Financial Professionals
Process begins with an application containing: personal info, history, employment, business activities, disciplinary, bonds, and control persons.
If information changes, amendments must be filed promptly (often within 30 days).
Consent to Service of Process (designates state regulator as agent for service of process) is filed with initial registration.
Filing fees apply; successor firms may continue with existing registration and pay fees only when renewal is due.
Examinations: regulators may require examinations; waivers exist for some categories (e.g., CFAs).
Exclusions from BD definition: agents, issuers, and certain bank-related entities; bank holding companies are not excluded.
The Central Registration Depository (CRD) and IARD:
BD and agents register via CRD (Form BD, Form U4, and Form U5) through CRD.
Investment Advisers use IARD (ADV Parts 1 & 2, etc.). IARD handles ADV filings, notices, and public disclosure.
State Registration of Broker-Dealers
Net capital: states may require net capital, but cannot exceed SEC minimums.
Advertising and Sales Literature: all advertising and sales literature must be filed with the Administrator, except for exempt securities/transactions or federal covered securities.
Recordkeeping: varies by record type; 3-year easy access rules for many items; 6 years for others; lifetime for corporate records.
Order Memorandums/Trade Tickets: required to document orders with details such as account, date, instructions, discretionary status.
Special Examinations: regulators can perform exam; cooperate with other states and SEC.
Broker-Dealer Exclusions and Canadian Dealers
Exclusions: BD definitions exclude agents, issuers, and certain banks/bank-holding affiliates; a BD with no office in a state and dealing only with institutions or non-residents may avoid registration; or dealing solely with existing clients.
Canadian BD and Agents: limited registration; subject to antifraud provisions; cannot solicit new clients in the U.S.
State Registration of Agents
Agents of a BD must register via Form U4; U5 required on termination; dual registration allowed with Administrator approval.
Automatic registration for partners, officers, and directors when BD registers; others must register manually.
Post-Registration for Agents; Finders
Post-registration amendments for material events; finders: compensated for introducing issuers to investors; finders may be exempt if no transaction-based compensation is paid.
Summary – Chapter 3:
File forms via CRD/IARD; understand the BD vs IA framework; know the differences in capital, advertising, and recordkeeping rules; know Canadian BD exemptions; know U4 and U5 processes.
Chapter 4 – State Regulations Governing Investment Advisers and IA Representatives
General idea: investment advisers are regulated at state level if not SEC-registered; IARD filings for Form ADV Part 1 and 2; IARs register via Form U4 through CRD; continuous reporting requirements.
General Registration of Investment Advisers
Form ADV Part 1: disclosures about business, ownership, clients, employees, business practices, affiliations, and disciplinary history. May require Disclosure Reporting Pages (DRPs) for felonies, SEC actions, civil actions, etc.
Form ADV Part 2: brochure-like disclosures to clients; must be narrative, plain-English; Part 2A (Brochure) and Part 2B (Brochure Supplement) are common.
ADV-Related Filings:
ADV 1A: general disclosures for SEC/state registration
ADV 1B: state-specific questions and DRPs; ADV-W/W: withdrawal; ADV-E: independent auditor reporting if custody; ADV-NR: non-residents; ADV-H: hardship.
Wrap Fee Program Appendix (Appendix 1) and the Wrap Brochure for wrap accounts; Form ADV-E is auditor-signed for custody attestations; Form ADV-W for withdrawal; Form ADV-H for hardship.
IAR Registration and Continuing Education
IAR registration via Form U4 through CRD; termination via Form U5; ongoing CE requirements under NASAA model rules; in multi-state registrations, home state CE requirements apply.
Financial, Custody, and Recordkeeping Requirements for IAs/IARs
Custody: defined as having control or possession of client funds; IAs with custody must use qualified custodians and provide client notifications.
Net Worth/Financial Requirements: NASAA minimum net worth for advisers varies by custody/discretion levels; many states require a minimum net worth and can waive certain requirements if custody is not present.
Recordkeeping: five-year retention; some records must be kept at a principal office for the first two years.
Exclusions and Exemptions from State IA Registration
Exclusions from IA Definition: IARs; banks/savings institutions; professionals whose investment advice is incidental (LATE: Lawyers, Accountants, Teachers, Engineers);
Exclusions for Broker-Dealers: BD exclusions apply if advice is within BD business and there’s no “special compensation” for advice; wrap accounts negate BD exclusion for IAs.
FCAs (Federal Covered Advisers): SEC registration only; states may require notice filing for offices or clients in the state; state regulation may still impose stop orders in case of violations.
State Registration of Investment Adviser Representatives
IARs must register in states where they operate; home state CE requirements apply; separation/termination triggers U4/U5 updates.
Chapter 4 Summary – Key concepts
ADV Part 1/Part 2 structure; notice filings for FCAs; custody rules; NASAA minimum financial requirements; state-specific exemptions; U4/U5 processes; IARD/CRD differences.
Chapter 5 – Federal Regulations Governing Investment Advisers
IA Act of 1940 basics: a uniform framework for registration of investment advisers; ABC test for IA definition (Advice, Business, Compensation).
Federal Covered Advisers (FCAs)
FCAs include: advisers with $110M+ AUM; advisers to registered investment companies; advisers operating in 15+ states; internet advisory businesses; pension consultants with $200M+ assets; newly formed advisers who expect to reach thresholds within 120 days.
FCAs are registered with the SEC; state registration generally not required unless notice filing is triggered by AUM level or other considerations.
SEC Release IA-1092
Uniform interpretation of IA definition; includes: financial planners, pension consultants, and certain sports/entertainment representatives; expands the ABC test to include the business, compensation, and the relationship to securities investment advice.
ERAs and Exemptions
Exempt Reporting Advisers (ERAs) include Private Fund Adviser Exemption, Venture Capital Fund Adviser Exemption, Foreign Private Adviser Exemption; ERAs file ADV Part 1 and Part 2 but are not fully registered; they file annual amendments and disclosures per SEC rules.
Additional topics
Statutory Disqualifications from Registration; Brochure Rule (disclosures to clients); SEC’s role in enforcing IA rules; public information availability via IAPD; the role of the SEC in court proceedings.
Regulation of wrap programs; advertising standards, and performance-based fee rules with exemptions for qualified clients.
Chapter 5 Summary – Key ideas
Identify which advisers are FCAs vs state-regulated IAs; understand ERAs; the SEC’s Release IA-1092; custody and fraud provisions; advertising rules and wrap fee program disclosures; the role of IAPD and the difference in the public disclosure requirements between FCAs and state-registered IAs.
Chapter 6 – Investment Advisory Practices
Fiduciary Duty
IAs and IARs are fiduciaries; must act in the best interest of clients; must disclose conflicts of interest; avoid self-dealing; consider the Uniform Prudent Investor Act (UPIA) approach to diversification and the risk/return trade-off.
Uniform Prudent Investor Act (UPIA) vs Traditional Prudent Man Rule
UP I A emphasizes portfolio-level prudence, diversification, risk/return trade-offs, and delegation to competent third parties; emphasis on the entire portfolio rather than individual investments.
SEC’s View of Fiduciary Duty
Loyalty, reasonable and objective basis for advice, best execution when directing trades, and fair dealing; obligations to disclose conflicts and provide disclosures for material matters.
Soft-Dollar Arrangements (Section 28(e), 1934 Act)
Allow advisers to receive services from brokers in exchange for directing client trades; safe harbor requires: (i) advisory discretion, (ii) broker provides services to aid in investment decision-making, (iii) cost/benefit of the services is reasonable relative to commissions.
Allowed items: research reports, portfolio analysis software, data services, etc.; prohibited items include benefits to the adviser’s staff or marketing/advertising expenses that do not directly benefit clients.
The “due diligence” requirement and disclosures regarding soft-dollar arrangements.
Suitability and Duty to Inquire
Know Your Customer; Know Your Product; must gather client background, income, net worth, investment goals, time horizon; cannot assume client details; the suitability standard for IAs requires consideration of client-specific needs; for broker-dealers, FINRA’s suitability standard applies (reasonably basis, customer-specific, and quantitative standards).
Client Investment Guidelines and Restrictions; Consultations with Other Professionals
Firms may consult with other professionals (attorneys, accountants, insurance agents) to provide full financial planning; client confidentiality must be maintained unless consent given; engagement with other professionals is required to ensure comprehensive service.
Chapter 6 Summary – Key ideas
Understand fiduciary duties, UPIA, and the practical implications for investment advice; soft-dollar rules; suitability standards for IAs and IARs; client consultations and referrals; internal controls and governance around conflicts of interest.
Chapter 7 – Prohibited Practices
Core idea: the USA prohibits fraudulent and unethical practices to protect investors; this includes BD/agents and IA/IARs.
Fraudulent and Misleading Activities – BD/Agents
False/misleading statements; guarantees of profits; misrepresentation about registration or approvals; misstatement of earnings; etc.
Inside Information and Market Manipulation
Inside information usage (insider trading) is illegal; market manipulation (pegging, capping, painting the tape) prohibited; front running and shadowing prohibited; misrepresentation of trades and false reporting.
Trading and Suitability-related Prohibitions
Churning; excessive/unsuitable recommendations; commingling client and firm assets; misappropriation; selling away; failure to follow client instructions; non-disclosure of control relationships; exercising discretion without written authorization where applicable.
Advertisements and Testimonials
Restrictions on advertisements; use of testimonials; the SEC’s stance on endorsements; rules around third-party ratings; entanglement/adoption of third-party content; the need for pre-approval of social media content; disclosure requirements for testimonials.
Pay-to-Play
Pay-to-play rules for public funds; limitations on contributions by those who influence investment awards; disclosure requirements for solicitors and testimonials.
Digital/social media and cyber preparedness
Firms must have supervision and compliance policies for social media use; third-party content disclosures; cyber risk management and data protection.
Chapter 7 Summary
Distinguish between fraudulent vs unethical activities; understand the enumerated prohibited practices; be able to identify violations in client communications, trade conduct, and advertising.
Chapter 8 – Administration of the USA
Administrators’ powers and responsibilities
The state Administrator can enforce the USA via four tools: (1) orders, (2) registration actions, (3) civil actions, (4) criminal actions.
Jurisdiction and Offers
Offers and sales within a state fall under that state’s jurisdiction; jurisdiction includes offers originated in one state and directed to another, or offers directed to residents in the state.
Investigations and Subpoenas; Cease and Desist; Injunctions
Administrators may investigate, issue subpoenas, and compel testimony; cease and desist orders can be issued without a hearing; injunctions are court-based remedies for ongoing violations.
Cancellations and Withdrawals; Civil and Criminal Proceedings
Registrations can be cancelled or withdrawals filed; criminal penalties come from courts; civil liability can be sought via civil actions; statute of limitations applies differently for civil vs criminal actions.
SIPC and MSRB
SIPC provides limited insurance for customer assets in the event of broker-dealer insolvency; MSRB regulates municipal securities professionals and markets.
Chapter 8 Summary
Understand the inspectorial powers, jurisdictional rules, enforcement tools, and the interplay of civil/criminal processes; know the relevant time limits and remedies.
Chapter 9 – Federal Securities Acts
Overview: history and key provisions of the 1933 Act and the 1934 Act; primary federal regulators (SEC); the role of the 1934 Act in governance of trading markets.
Securities Act of 1933 (the '33 Act) – primary goals and mechanics
Registration of new issues to prevent fraud; requirements include a registration statement, prospectus; due diligence defenses; civil/criminal penalties; liability for misstatements/omission in registration statements; due diligence responsibilities of underwriters.
Exemptions from federal registration: Regulation D (private placements), Regulation A (small offerings); Rule 506 private placements; private placements with accredited investors; non-accredited investors up to 35; 506(c) broads solicitation exemptions under JOBS Act 2012; 13D/13G and other reporting requirements for institutional investors.
Exemption vs liability: even exempt securities remain subject to antifraud provisions.
Securities Act of 1934 (the '34 Act) – governance of secondary markets, SEC’s regulatory powers, and reporting requirements for issuers.
The role of exchanges, broker-dealers, SROs; SEC authority to suspend trading; insider trading prohibitions; anti-money laundering (AML) requirements; MSRB regulatory scope (municipal securities).
Anti-Fraud and Market Structure
Insider trading prohibitions; corporate governance rules; 12b-1 and mutual fund regulation under the Investment Company Act; Exchange Act provisions that govern institutional investment managers (13F).
Other Federal Acts and Rules discussed in Chapter 9
AML requirements; USA PATRIOT Act; Do Not Call; the role of MSRB.
Chapter 9 Summary
Recognize the three major federal acts ('33 Act, '34 Act, IA Act 1940) and their main consequences; understand the role of the SEC; know the major exemptions and reporting provisions; understand the interplay with NASAAUSA frameworks.
Chapter 10 – Investment Advisory Clients
Regulation BI (Beneficiary: Reg BI)
The Reg BI framework requires fiduciaries to act in the best interest of retail clients when making recommendations, and to provide Form CRS (Client Relationship Summary) describing the relationship with the client.
Form CRS is required by broker-dealers for retail clients; IARs and IAs must adhere to compliance expectations about labeling themselves as advisers; Reg BI applies to retail clients and the required disclosures.
Client Profiles and Financial Considerations
The client’s occupation, income, tax situation, risk tolerance, time horizon, and non-financial considerations (age, family status, ESG preferences) feed the IPS (Investment Policy Statement).
Time horizon: determines risk tolerance and asset allocation; the older the client, the lower the risk tolerance.
Types of Clients and Accounts; Retirement Plans; Education Accounts
Individual accounts; custodial accounts (UGMA/UTMA); joint accounts; TOD/POD arrangements; estates and trusts; IRA types (traditional, Roth); employer retirement plans (401(k), 403(b), 457); ESAs and 529 plans.
ESG Investing and Non-Financial Considerations
ESG concerns can influence investment choices; clients may require exclusions or restrictions.
Retirement and Social Security
Overview of Social Security, Medicare, IRAs, ERISA, and the concept of QDIA (Qualified Default Investment Alternative).
Chapter 10 Summary – Key ideas
Learn to build client profiles, evaluate financial goals, and assess retirement/income needs; understand IPS and applicable accounts and accounts structures; consider ERISA implications.
Chapter 11 – Investment Vehicles
Overview of investment vehicles
Corporate and government debt; mutual funds; ETNs/ETFs; life insurance products (term, whole, universal, variable, variable universal); annuities; real estate (REITs, real estate limited partnerships); SPACs; derivatives; 1035 exchanges.
Common stock and mutual funds concepts
Stock classes; mutual fund share classes (A, B, C) with front-end loads, 12b-1 fees; ETFs and ETF mechanics; ETF vs mutual fund advantages and disadvantages.
Insurance-based products
Life insurance: term, whole, universal, variable, and variable universal; separate accounts; subaccounts; riders; policy loans; surrender values; beneficiary rules.
Annuities: fixed and variable; accumulation and payout phases; death benefits; annuity units; AIR (assumed interest rate) vs guaranteed rates; 1035 exchanges.
Hedge funds, SPACs, REITs, and LPs
Hedge funds: private, often illiquid, high risk; fund-of-funds structures; investor suitability; special tax and regulatory considerations.
SPACs: blank-check companies that raise funds via IPO and search for a private company to merge with; risk/return characteristics; dilution issues.
REITs: real estate investment trusts; different types (equity, mortgage, hybrid); tax characteristics; dividend treatment; liquidity considerations.
Real estate limited partnerships (LPs): tax treatment (pass-through), illiquidity, early-stage tax benefits; limited vs general partner liability.
Derivatives and structured products
Derivatives include swaps, options (calls/puts), futures, forwards; options specifics: intrinsic value, time value, delta/gamma/theta; American vs European options; LEAPs; options strategies (buy/sell calls/puts, spreads, straddles, etc.).
Structured products and ETNs: linked to underlying assets; risks include credit risk of issuer; not insured; tax considerations.
Chapter 11 Summary – Key ideas
Recognize major investment vehicle classes; understand liquidity, tax treatment, and suitability; understand option and futures basics; recognize differences between ETFs, ETNs, and mutual funds; understand insurance-based investments.
Chapter 12 – Portfolio Management and Investment Risk
Time Value of Money and Core Calculations
Time value concepts: future value, present value, IRR, NPV; the Rule of 72; annuity problems; perpetual payments (perpetuity) calculations; discounted cash flow analysis; net present value (NPV).
Future value formula: Pn = P0(1+r)^n; Present value: P0 = rac{Pn}{(1+r)^n}; Perpetuity: PV = rac{Payment}{r}.
Returns, Risks, and Portfolio Theory
Capital Asset Pricing Model (CAPM): Ri = R{RF} + etai (RM - R{RF}); Alpha: ext{Alpha} = Ri^{actual} - Ri^{CAPM}}; Sharpe Ratio: ext{Sharpe} = rac{Rp - R{RF}}{\sigmap}.
Efficient Market Hypothesis (EMH) forms: weak, semi-strong, strong; implications for active vs passive investing.
Modern Portfolio Theory (MPT): diversification, expected return, standard deviation, and correlation; Portfolio optimization; allocation examples.
Expected return and standard deviation as risk metrics; correlation as a diversification metric; Monte Carlo simulations for portfolio outcomes.
Asset classes and investment styles
Asset classes: equities (blue-chip, growth, income, value, etc.), fixed income (corporate, government, municipal, Treasuries), alternatives (real estate, hedge funds, commodities), and cash equivalents.
Investment styles: passive (Indexing, Buy-and-Hold, strategic asset allocation) vs active (sector rotation, tactical asset allocation).
Suitability and client communications
Suitability questions: client objectives, time horizon, risk tolerance, liquidity needs, tax considerations; the role of an IPS (Investment Policy Statement).
Dollar-cost averaging (DCA): fixed-dollar investments over time to reduce price risk; limitations and expectations; evaluating average price per share and total cost.
Time-weighted vs dollar-weighted returns: DWR vs TWR; which is preferred for benchmarking money managers (TWR is often preferred for performance comparisons).
Section on currency risk, inflation protection (TIPS), and other risk types
Inflation risk; purchasing power concerns; TIPS as inflation-hedging bonds; currency risk effects on international investments.
Chapter 12 Summary – Key ideas
Master concepts of time value, CAPM, EMH, portfolio construction, risk assessment, and performance measurement; understand risk metrics and decision tools for client portfolios.
Suitability Workbook – Key Themes and Sample Scenarios
This workbook provides practical guidance on approaching suitability questions across multiple scenarios. It emphasizes:
Know Your Customer (KYC): client objectives, time horizon, liquidity needs, risk tolerance, financial situation, non-financial considerations (age, health, ESG preferences).
Know Your Product (KYP): understanding the investment characteristics and how they align with client needs.
Stepwise approach to solving Suitability questions: charts, examples, and then practice items.
Common decision rules and guidance:
Use of age-based heuristic: 100 minus age approximates growth vs. income allocation; adjust for risk tolerance and time horizon.
Compare multiple investment options for a given objective and test for risk-adjusted returns.
Example problem types and solutions (paraphrased):
Growth vs income choices with a long horizon; growth stocks vs. bonds; choosing a mid-cap stock fund for long-term growth with inflation hedging.
Income-focused questions: preferred stock, investment-grade debentures, or short-duration, high-quality bonds for reliable income.
Immediate annuity vs. IRA-based retirement planning; evaluating lifetime income options for retirees.
1035 exchanges: tax-free insurance-to-insurance or annuity-to-annuity exchanges vs tax penalty considerations.
Summary: The workbook is a practical tool to apply the Chap. 1–12 concepts to real-life suitability questions and refine decision-making.
Formulas and Equations (selected key items)
Howey Test (four-part definition of a security):
ext{Investment of money in a common enterprise with the expectation of profits to be derived from the efforts of others}.Time value of money basics:
Future value: Pn = P0(1+r)^n
Present value: P0 = rac{Pn}{(1+r)^n}
Perpetuity value: PV_{ ext{perpetuity}} = rac{Payment}{r}
CAPM and related measures:
CAPM: Ri = R{RF} + etai (RM - R_{RF})
Alpha: ext{Alpha} = Ri^{actual} - Ri^{CAPM}
Sharpe ratio:
ext{Sharpe} = rac{Rp - R{RF}}{\sigma_p}Rule of 72:
t ext{ years to double} \ t \, ext{approx} = rac{72}{r} ext{ (in percent)}Yield concepts (illustrative): current yield, yield-to-maturity (typical bond context), yield-to-call (if callable).
Bond valuation basics:
Current yield: ext{Current Yield} = rac{ ext{Annual Interest}}{P}
Yield to maturity: IRR of bond’s cash flows; not a simple fixed-rate formula due to embedded cash flows and price changes.
Suitability framework (conceptual): KYC + KYP; use IPS; consider risk tolerance, time horizon, liquidity needs, tax considerations, and client preferences (e.g., ESG).
Real-World Relevance and Connections
The Series 66 body blends state and federal regulatory frameworks to prepare for professional practice in securities: registration, compliance, and ethics.
Foundational principles include the ABC test for IA definitions, the Howey test for securities, and the prudent investment frameworks (UPIA) that drive fiduciary duties.
Ethical and practical implications include avoiding conflicts of interest (soft dollars, pay-to-play), reporting and recordkeeping obligations, and ensuring fair dealing (no churning, no misleading advertising, etc.).
The material ties to professional practice: client profiling, suitability testing, and the design of investment policies that reflect client needs and regulatory constraints.
Quick Reference: Key Acronyms
USA: Uniform Securities Act
NASAA: North American Securities Administrators Association
BD: Broker-Dealer
IA: Investment Adviser
IAR: IA Representative
CRS/Form CRS: Client Relationship Summary
Reg BI: Regulation Best Interest
ADV Part 1/2: Form ADV disclosures
CRD: Central Registration Depository
IARD: Investment Adviser Registration Depository
ERAs: Exempt Reporting Advisers
CSP: (not used; example terms for quick recall)
If you’d like, I can convert these notes into a concise, chapter-by-chapter outline with dedicated flashcards for definitions, key formulas, and practice questions, or expand any section with more granular bullets from the transcript.