Quick Answer
Purchasing power risk, marketability, taxability, callability, convertibility, and maturity are the portfolio exposures behind a recommendation. On top of them sit three disclosures: reasonable and non-discriminatory service charges, a temporary hold for a specified adult, and the mark-up a confirmation must show in dollars and percent.
A trade can clear suitability and still leave the portfolio exposed.
Which One-Liners Win Points?
- Purchasing power risk: inflation erodes the real, constant-dollar value of income and principal while the nominal payment never changes. Fixed income carries the most; common stock less.
- A mix of bonds, preferred stock, common stock, and convertibles pursues downside protection and an inflation hedge together. A convertible is the only component that supplies both on its own.
- Marketability is a property of the security; liquidity need is a property of the customer. Restricted private placement securities are the least marketable.
- Taxation: corporate and bank or money-market interest is fully taxable as ordinary income; Treasury interest is federally taxable but exempt from state and local income tax; municipal interest is excluded from federal gross income, with narrow exceptions. The tax-equivalent yield makes the comparison.
- A call belongs to the issuer, usually at a premium above par, and issuers call when rates fall to refinance. Longer call protection is worth more to an income-dependent customer.
- Conversion ratio = par value / conversion price. Conversion value = conversion ratio x current common stock price.
- Longer maturity means more price risk; shorter maturity means more reinvestment risk. A ladder spreads both across time; a bullet concentrates both at one date.
- Service charges for collection, transfer, appraisal, safekeeping, and custody must be reasonable and not unfairly discriminatory. No fixed dollar cap, and the list is open.
- Specified adult: a natural person 65 or older, or 18 or older whom the firm reasonably believes has an impairment leaving them unable to protect their own interests.
- A hold is permissive, and staying inside the rule gives the firm a safe harbor from the just-and-equitable-principles standard, the improper-use prohibition, and the customer account transfer rule.
- The dollar-and-percentage mark-up disclosure needs four triggers: principal capacity, corporate or agency debt, a non-institutional customer, and a same-day offsetting trade at least as large.
- Every corporate or agency debt confirmation to a non-institutional customer must also reference the Financial Industry Regulatory Authority (FINRA) public trade-data page and state the execution time to the second.
Which Numbers Matter Most?
| Item | Value |
|---|---|
| Notice to authorized parties and trusted contact | within 2 business days |
| Initial temporary hold | up to 15 business days |
| With a supporting internal review | 10 more, 25 business days total |
| With a review plus an outside report | 30 more, 55 business days total |
Memory Aid: 2 to notify, 15 to hold, plus 10 more with a supporting review, plus 30 more with a report to a regulator, agency, or court (up to 55 business days total).
Which Gotchas Trip Students Up?
Exam Tip: Gotchas
- A fixed-rate bond's coupon never changes in nominal dollars, yet its constant-dollar value shrinks every year inflation is positive.
- A municipal bond is not automatically the better holding: a low-bracket customer can net more after tax from a taxable security.
- Laddering eliminates neither price risk nor reinvestment risk. It spreads each across time.
- "Forced" describes the economics, not an act by the issuer. The issuer calls; the holder chooses to convert.
- The three hold periods stack on different conditions: reasonable belief alone, then a supporting internal review, then a review plus an outside report.
- The trade-data page and execution-time requirements travel with the debt type and customer type alone, with no same-day offsetting trade.
One-Breath Recap
Portfolio risk is inflation eroding constant-dollar value, marketability against the customer's liquidity need, a municipal bond that wins only in a high enough bracket, an issuer's call arriving when rates fall, a forced conversion the holder chooses because conversion value beats the call price, and maturity trading price risk against reinvestment risk, which a ladder spreads across time. On top sit service charges that must be reasonable and not unfairly discriminatory, a permissive temporary hold running 2 to notify and 15, 25, then 55 business days, and a dollar-and-percentage mark-up on a same-day-offset principal trade in corporate or agency debt.
Need more than the recap? Read the full Portfolio Risk and Product Disclosures unit.