The series 26 examination covers a very broad range of topics. Many test-takers want to know why they need to know so much information that they are unlikely to use in their role as a variable contract principal. The answer to this question is that by passing the series 26 examination, an individual can be the decision maker at the broker-dealer. In fact, after passing the series 26 exam the individual could start their own broker-dealer. To qualify for membership the individual would either need to obtain the series 27 exam or to hire a financial operations principal. While it is unlikely that many series 26 test-takers are seeking to create their own broker-dealer, they would be in a position to do so. While the largest majority of test-takers have a compliance Department who will continue to handle most complex issues, the series 26 limited principal is empowered to make a wide variety of decisions on behalf of the employing FINRA member firm.
Key takeaways – pace yourself as you go through the material to ensure that you have a comprehensive understanding above all test topics
Will I have to answer a lot of questions based on financial and operational information?
Financial and operational information tends to be an area that gives test-takers a bit of a challenge on the series 26 exam. Most test-takers report seeing between 8 and 10 questions relating to the financial health of a broker-dealer. One of the topics that appears on most exams has to do with the activities of a broker-dealer with a minimum net capital requirement of $25,000. A broker-dealer who has a minimum net cap of $25,000 may transact mutual fund business on a wire basis. This means that the broker-dealer may transmit an investor’s funds electronically to the mutual fund company to purchase mutual fund shares on behalf of the customer. There is one point relating to a $25,000 broker-dealer that many test takers overlook and it appears on the exam fairly frequently. A broker-dealer with a net capital requirement of $25,000 may liquidate or sell stock on behalf of a customer if those funds are immediately reinvested into a mutual fund. You will also see several questions relating to the minimum net capital requirements for introducing or correspondent broker-dealers as well as the financial requirements for a general securities broker-dealer. Most introducing or correspondent broker-dealers have a minimum net capital requirement of $50,000. Meeting this requirement allows the introducing broker-dealer to handle customer securities and to accept checks made payable to the general securities broker-dealer. The introducing broker-dealer is required to forward the checks and securities promptly to the clearing broker dealer. A general securities broker-dealer also known as a carrying firm or clearing firm has a minimum net capital requirement of $250,000. Meeting this capital requirement allows the broker-dealer to maintain custody and to safeguard customer assets. It also allows the general securities broker-dealer to clear and settle transactions with other general securities broker dealers. It’s important to keep in mind that these dollar levels are the minimum requirements to qualify for the corresponding activity. The broker-dealers net capital requirement is driven by the relationship between aggregate indebtedness to net capital.
Key takeaways – ensure that you know the minimum capital requirements for broker-dealers to act in various capacities. Additionally, a complete understanding of the relationship between aggregate indebtedness and net capital it’s highly testable.
How do the suitability requirements differ for variable annuities and mutual funds?
Passing the series 26 exam allows the limited principal to supervise a broker dealer’s variable contract and Investment company business. The series 26 exam is going to focus on conducting business in variable annuity contracts and open-end mutual funds. Many questions on the exam will test the supervision of sales practices and the suitability of transactions relating to these products. It’s important to note that the supervision requirement for a variable annuity contract is substantially higher than that for an open-end mutual fund. The more complex the product, the greater the supervisory responsibilities. A variable annuity is far more complex than an open-end mutual fund. As the principal of your firm you will be required to review annuity applications far more closely than applications for an open-end mutual fund. A principal who is presented with an application for a variable annuity contract has seven days to review the contract and to approve or deny the application based on the suitability of the contract for the client. The only time a variable annuity contract should be recommended to a client is if the client has an income objective. This is a huge test point. The investment objective of the client must be income now or income later. Variable annuity contracts are not purchased for growth nor to meet a substantial purchase in the future. Should an individual be seeking to save for retirement and has no other retirement assets, a variable annuity would not be an appropriate recommendation. Variable annuity contracts are used to supplement or augment an investor’s other retirement assets. There are also substantial liquidity and tax implications associated with the purchase of a variable annuity contract. Investors who purchase a variable annuity will generally be subject to surrender charges during the first few years of the contract. If the investor wished to access the money, the investor would be required to pay substantial surrender charges along with income tax on the growth withdrawn. An individual seeking to invest in a mutual fund, may have an income objective or a growth objective and the representative may recommend a mutual fund with a portfolio designed to meet that objective. There are no substantial tax implications relating to the purchase of an open-end mutual fund and mutual funds allow the investor to access their money without penalty.
Key takeaways – make sure you have mastered supervision of variable annuity contracts. Pay particular attention to the costs, tax implications and lack of liquidity.
How much information will be tested on the Bank Secrecy Act?
The series 26 exam will contain a number of different style questions concerning the application of the Bank Secrecy Act. The exam may use the Bank Secrecy Act or the Patriot Act in test questions. It is important to note that the Patriot Act is part of the Bank Secrecy Act and you should treat these two terms as interchangeable when answering questions. Money laundering is a substantial concern for broker-dealers, regulators and the government alike. As such you’ll be faced with a number of questions on your exam concerning this material. The questions may be presented to test your knowledge of the rules or the questions may be designed to test your ability to apply the rules in a variety of situations. Being able to recognize key red flags for money laundering will help you tremendously with this material. Several of the red flags you may be required to identify are the journaling of money between seemingly unrelated accounts, money being deposited into an account and removed quickly and investors who do not seem concerned about costs or profits or losses in an account. Knowing which actions require a broker-dealer to file a suspicious activity report or a currency transaction report is also essential for your exam. Any suspicious activity involving $5,000 or more requires the broker-dealer to file a suspicious activity report. Any deposit of more than $10,000 in currency or a series of smaller deposits that add up to $10,000, would require the broker-dealer to file a currency transaction report. Broker-dealers are also required to maintain a record of international wires exceeding $3,000. However, the international wire itself does not necessarily constitute a suspicious activity.
Key takeaways – be prepared to answer between 4 and 6 questions on the Bank Secrecy Act, anti money laundering requirements at firms and be able to identify key red flags.
What is the best way to prepare for the series 26 exam?
Preparing to take the series 26 exam requires a dedicated and focused study plan. It is best to prepare over the course of four to six weeks. Simply cramming for this exam the week prior to taking the test almost always gets students into trouble. Set up a clear study schedule starting off with 90 minute sessions during the first few weeks. This will help you break the information down into smaller segments as you begin to build your knowledge. For students who have not taken a test in a long time, this will also help you to build your stamina and stay focused during your study sessions. It is important that you read the textbook fully and completely and highlight the key areas. Maintaining organized and detailed notes is a very important part of your exam preparation. Writing down concepts, making notes of the topics you need to clarify and the questions that challenge you will help build the foundation for your study plan. As you read each chapter, watch the corresponding video lecture. This will help reinforce what you have read and help you better understand how the information is going to be tested on your exam. Once you have completed the reading and the video lecture series, take your final exams. Your last week of preparation should consist of taking final exams, referring back to your notes and the key areas of the video lectures and your highlighted areas in your textbook.
Key takeaways – a comprehensive study plan is the key to your success of a series 26 exam.
We hope this article has helped you to better prepare for your upcoming series 26 exam.
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