FINRA SIE — Securities Industry Essentials — All Questions

A member's research department is about to publish a downgrade of XYZ. The trading desk learns of it and today sells part of the firm's XYZ inventory ahead of publication. Which statement is correct?

• a.It violates Rule 5280, because it used non-public advance knowledge of the report✓
• b.It is permitted, because the report was going to be published within one trading day
• c.It is permitted, because the firm traded only for its own account and not for customers
• d.It violates Rule 5280 only if the desk sold short rather than from inventory

Rule 5280(a) prohibits a member from establishing, increasing, decreasing or liquidating an inventory position in a security, or in a derivative of it, based on non-public advance knowledge of the content or timing of a research report in that security. Trading for the firm's own account is the conduct the rule targets, no time window excuses it, and reducing an existing long position is covered as much as selling short. Rule 5280(b) also requires information-flow policies between research and trading.FINRA Rule 5280(a)

A firm's trader learns that a customer will sell 250,000 shares of ABC within the hour, which is likely to depress the price. Before that order is executed or reported, the trader buys put options on ABC for the firm's own account. Which statement is correct?

• a.It is permitted, because the order to be executed was placed by the firm and not by a customer
• b.It is permitted, because Rule 5270 reaches only orders in the common stock of the issuer itself
• c.It is permitted if the trader sells the puts again before the block trade is publicly reported
• d.It violates Rule 5270, because the rule covers related financial instruments such as options✓

Rule 5270 bars a member or associated person from executing an order in a security, or in a related financial instrument such as an option or other derivative, while holding material non-public information about an imminent block transaction, until that information is public or stale. A 250,000-share order is well above the 10,000-share level generally treated as a block. The rule applies to accounts in which the member has an interest, so a proprietary order is covered, and later unwinding the position does not cure the violation.FINRA Rule 5270(a) and (c)

A member accepts a retail customer's order to buy 300 shares of DEF at a $20.00 limit and holds it without executing it. The member then buys 1,000 shares of DEF for its own account at $19.95. Under Rule 5320, what must the member do immediately afterward?

• a.Execute the customer's 300 shares at the $20.00 limit price
• b.Execute the customer's 300 shares at $19.95 or a better price✓
• c.Execute all 1,000 shares for the customer at a $19.95 price
• d.Nothing, because the member bought below the customer's limit price

Rule 5320(a) bars a member holding a customer order from trading the same side for its own account at a price that would satisfy the order unless it immediately executes the customer order, up to the size and at the same or a better price than its own trade. The proprietary price of $19.95 would satisfy the $20.00 limit, so the customer's 300 shares must be filled at $19.95 or better. Filling at $20.00 gives the customer a worse price than the firm obtained, the size is capped at the customer's 300 shares, and buying below the limit is what triggers the duty.FINRA Rule 5320(a)

A trader buys a thinly traded stock in a series of purchases timed to push its price higher so that other investors will be drawn into buying, and then sells her own shares into the rise. Under Section 9(a)(2) of the Exchange Act, what element makes the series of transactions unlawful?

• a.That she sold her own shares at a profit after the price rose
• b.Her purpose of inducing other investors to buy the stock✓
• c.That she used non-public information about the issuer's earnings
• d.That the stock she bought was thinly traded on its primary market

Section 9(a)(2) makes it unlawful to effect, alone or with others, a series of transactions in a security that creates actual or apparent active trading or raises or depresses the price, for the purpose of inducing the purchase or sale of the security by others. The inducement purpose is the element that separates manipulation from ordinary trading. Profit is not an element, a thin market is only the setting, and inside information is a different offense under Section 10(b).Securities Exchange Act Section 9(a)(2)

A member could execute a customer's market order in a listed stock directly at the best market. It instead routes the order through a broker's broker that provides the member with free services. Does this satisfy the member's best-execution duty?

• a.No, because service reciprocation is no excuse for interposing a third party✓
• b.Yes, because the customer's order was still filled at a price within the quotes
• c.Yes, because routing through a broker's broker is acceptable for a market order
• d.No, because the member did not obtain the customer's consent to the routing

Rule 5310(a)(2) forbids interjecting a third party between the member and the best market in a manner inconsistent with the duty to use reasonable diligence to obtain the most favorable price. Using a broker's broker is not routinely acceptable for a market order: under Rule 5310(b) the member must show circumstances in which it could not execute directly and needed the third party to secure an execution advantageous to the customer. Rule 5310(c) adds that channeling orders through a third party as reciprocation for service or business does not relieve the member of its obligations. A fill inside the quotes does not satisfy the duty, which is to seek the most favorable price reasonably available, and the customer's consent does not turn a reciprocal arrangement into best execution.FINRA Rule 5310(a)(2), (b) and (c)

The SEC finds that an employee of a broker-dealer traded on material nonpublic information in a personal account. It seeks a civil penalty from the firm only because the firm employed him. The firm had no reason to expect the misconduct and had kept the policies the law requires. Is the firm subject to the penalty?

• a.No, because employing the trader alone does not make the firm liable for the penalty✓
• b.Yes, because an employer is automatically liable for its employees' trades
• c.Yes, because the firm carried the account the employee used to trade
• d.No, because the penalty can be imposed only on the person who traded

Section 21A(b)(2) says no one is subject to the penalty solely by reason of employing the violator. A firm can be penalized as a controlling person only if the SEC shows it knew or recklessly disregarded that the employee was likely to commit the violation and failed to take appropriate steps, or that it knowingly or recklessly failed to maintain the policies the law requires and that failure substantially contributed to the violation. Liability is therefore not automatic, and carrying the account adds nothing. The penalty is not limited to the trader, because a controlling person can be reached when those conditions are met.Exchange Act Section 21A(a)(1)(B) and (b)

An employee buys 2,000 shares of GHI at $30 while knowing of an unannounced buyout. After the news is released, GHI trades at $41 for a few minutes, then at $36 a reasonable period after the release, and at $34 a month later. Using the Section 21A measure of profit gained, what is the most the SEC can seek as a civil penalty from the employee?

• a.$24,000, three times the $8,000 profit at the $34 price
• b.$36,000, three times the $12,000 profit at $36✓
• c.$66,000, three times the $22,000 profit at the $41 spike
• d.$12,000, the profit itself, with no multiple, at $36

Section 21A(e) measures profit gained as the difference between the purchase price and the trading price a reasonable period after the information becomes public. That is $36 minus $30, or $6 per share, and 2,000 shares gives $12,000. Section 21A(a)(2) caps the penalty at three times that profit, which is 3 x $12,000 = $36,000. The brief $41 spike and the later $34 price are not the measuring point, and the penalty is not limited to the profit itself.Exchange Act Section 21A(a)(2) and (e)

A non-executive employee of a public company learns on Monday of an unannounced acquisition. On Tuesday she adopts a written Rule 10b5-1 plan to sell shares starting 45 days later. She sells on that date under the plan, and the acquisition is announced two weeks after the sale. Does the plan give her the affirmative defense?

• a.Yes, because the 30-day cooling-off period had passed before the first sale
• b.No, because only directors and officers may use a Rule 10b5-1 plan
• c.Yes, because she is neither a director nor an officer of the company
• d.No, because she adopted the plan after she became aware of the information✓

Rule 10b5-1(c)(1) protects a trade only if, before becoming aware of the information, the person had entered into the binding contract, given the instruction or adopted the written plan. She adopted hers a day after learning of the acquisition, so the defense is unavailable even though she followed the plan. The 30-day cooling-off period that applies to a person who is not an officer or director is an additional condition, not a substitute for adopting the plan before awareness. Non-officers can use such plans, so being an ordinary employee neither removes the awareness test nor bars the defense by itself.Exchange Act Rule 10b5-1(b) and (c)(1)

Several shareholders of a mutual fund registered under the Investment Company Act are employees of broker-dealers. The fund places an order for an initial public offering of common stock with an underwriting member. May the member sell the new issue to the fund?

• a.Yes, but only if restricted persons own no more than 10% of the fund's shares
• b.Yes, because a registered fund is exempt, with an eligibility representation✓
• c.No, because the fund's restricted-person shareholders have a beneficial interest in it
• d.Yes, but only after each shareholder certifies that none is a restricted person

Rule 5130(c)(1) exempts a registered investment company from the general prohibition, so the broker-dealer employees among its shareholders do not bar the sale. The 10% limit belongs to a different exemption, Rule 5130(c)(4), which applies to accounts that do not fit a specific category. The exemption does not remove the precondition in Rule 5130(b): before selling a new issue to any account, the member must in good faith have obtained, within the prior 12 months, a representation that the account is eligible or, for a conduit, that its purchases comply with the rule.FINRA Rule 5130(b) and (c)(1)

A member last sold a new issue to a hedge fund's account on May 4, 2026, and has sold it nothing since. Counting from that sale, what is the earliest date through which the member must keep the records on whether the account was eligible?

• a.May 4, 2028, two years after the last sale
• b.May 4, 2032, six years following the last sale
• c.May 4, 2027, one year after the last sale
• d.May 4, 2029, three years after the last sale✓

Rule 5130(b) requires a member to keep a copy of all records and information on whether an account is eligible to purchase new issues for at least three years following its last sale of a new issue to that account. Three years after May 4, 2026 is May 4, 2029. One and two years fall short of the minimum, and six years is the retention period used by other rules, such as the six-year retention of profit-sharing authorizations after an account closes, not by Rule 5130.FINRA Rule 5130(b)

A representative obtained the written authorizations required to share in the profits and losses of a customer's account, and the account is now closed. How long must the member preserve those authorizations?

• a.Until the date the account is closed and the arrangement ends
• b.At least six years after the date the sharing began
• c.At least three years after the last profit-sharing payment
• d.At least six years after the date the account is closed✓

Rule 2150 Supplementary Material .03 requires a member to preserve the written authorizations, from the employer and from the customer, for at least six years after the date the account is closed. The period runs from closing, not from the start of the arrangement or the last payment, and the authorizations must outlast the account rather than lapse when it closes. The three-year figure belongs to Rule 5130 records, which is a different rule.FINRA Rule 2150(c)(1) and Supplementary Material .03

On Thursday, March 5, 2026, a firm places a temporary hold on a disbursement from the account of a 72-year-old customer because it reasonably believes she is being financially exploited. The week has no holidays. By what date must the firm give notice of the hold and the reason to the parties authorized on the account and the trusted contact person, unless they are unavailable or suspected of the exploitation?

• a.Friday, March 6, one business day after the hold
• b.Monday, March 9, two business days after the hold✓
• c.Saturday, March 7, two calendar days after the hold
• d.Tuesday, March 10, three business days after the hold

Rule 2165(b)(1)(B) requires notice not later than two business days after the member first placed the hold. Counting business days from Thursday, March 5, Friday March 6 is the first and Monday March 9 is the second, because Saturday and Sunday are not business days. Two calendar days would end on a Saturday, Friday is only one business day, and Tuesday adds a third day that the rule does not allow.FINRA Rule 2165(b)(1)(B)

A registered representative retires and leaves the securities industry. Under a written contract entered into in good faith while he was registered with the firm, the firm keeps paying him commissions on accounts of customers he used to serve. The contract bars him from soliciting new business, opening new accounts or servicing those accounts. Is the payment permissible?

• a.Yes, but only for the first year of continuing commissions after he retires
• b.Yes, because it fits the retiring-representative exception to the rule✓
• c.No, because commissions may be paid only to persons currently registered with the firm
• d.Yes, but only if he keeps servicing those accounts for customers after retiring

Rule 2040(b)(1) lets a member pay continuing commissions to a retiring registered representative on accounts of continuing customers, provided a bona fide contract was entered into in good faith while he was registered and it prohibits him from soliciting new business, opening new accounts or servicing the accounts. The arrangement must also comply with the federal securities laws. Servicing the accounts would take the payments outside the exception, and the rule sets no one-year limit. The general ban on paying unregistered persons does not apply to this exception.FINRA Rule 2040(b)(1)

A person who recently left a member firm, and who remains subject to FINRA's jurisdiction, does not respond to a Rule 8210 request for documents and testimony in an investigation. FINRA sent the request to the residential address shown in the CRD and had no knowledge that it was out of date. He says he never saw it. Has he violated Rule 8210?

• a.Yes, but only after FINRA obtains a court order directing him to comply with the request
• b.No, because a request is binding on him only if he signs a receipt for the notice itself
• c.Yes, because the notice is deemed received at his CRD address, and not complying violates the rule✓
• d.No, because Rule 8210 reaches only persons who are currently registered with a member

Rule 8210(d) deems a notice received by a formerly registered person when it is mailed or otherwise transmitted to his last known residential address in the CRD, absent actual knowledge by FINRA staff that the address is out of date. Rule 8210(c) then provides that no member or person shall fail to provide information or testimony or to permit inspection. Not seeing the notice, not signing for it, or not being registered any longer does not excuse him, and nothing in the rule makes compliance depend on a court order.FINRA Rule 8210(c) and (d)

A member's trader phones a customer and urges a purchase of a thinly traded stock by falsely claiming that a large fund will buy the whole float tomorrow. The stock happens to fit the customer's profile. Does the conduct violate FINRA rules?

• a.Yes, because inducing a purchase through deception violates Rule 2020 even for a suitable stock✓
• b.No, because Rule 2020 covers only transactions the member effects for its own account
• c.Yes, but only if the customer actually loses money on the purchase after the claim
• d.No, because a recommendation that fits the customer's profile cannot violate FINRA rules

Rule 2020 provides that no member shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance. A false claim about a pending purchase by a large fund is such a device, and the rule is about how the purchase was induced, so suitability does not cure it. The rule reaches inducing customers as well as the member's own trades, and a violation does not depend on whether the customer ends up with a loss.FINRA Rule 2020

Which type of account is not subject to required minimum distributions during the original owner's lifetime?

• a.A SEP IRA
• b.A SIMPLE IRA
• c.A Roth IRA✓
• d.A traditional IRA

The IRS says required withdrawals apply to IRAs including SEP and SIMPLE IRAs and to employer plans, but not to Roth IRAs or designated Roth accounts while the owner is alive. Beneficiaries of Roth accounts are, however, subject to the RMD rules.IRC 408A(d)(1)

A customer bought 300 shares of a stock this morning and, before they have been delivered to her account, enters an order to sell those 300 shares. How does Regulation SHO treat the sale?

• a.She is deemed to own the shares because she has purchased them but has not yet received them, so it can be marked long✓
• b.It must be marked short, because she does not yet have the shares in her account
• c.It must be marked short exempt, because the purchase has not yet settled
• d.It cannot be accepted, because she does not hold title

Under Rule 200(b), a person is deemed to own a security if she has purchased it, or entered into an unconditional contract binding on both parties to purchase it, even though she has not yet received it. A sale order may be marked long when the seller is deemed to own the security and it is reasonably expected to be in the firm's possession or control by settlement.17 CFR 242.200(b)

A woman inherits 100 shares that her father bought for $20 per share. The shares were worth $90 per share on the date of his death, and she sells them for $95 per share. What is her gain per share?

• a.$75, because she takes over her father's $20 cost basis and pays tax on the gain
• b.$5, because her basis is the fair market value on the date of death✓
• c.$70, because the gain is measured from the $25 gift-tax value of the shares
• d.$0, because inherited property is never taxed when sold

Property acquired from a decedent generally takes a basis equal to its fair market value at the date of death. Her basis is therefore $90, not her father's $20, and her gain is $95 minus $90, or $5 per share. The step-up removes the appreciation that occurred during her father's lifetime from taxable gain.26 U.S.C. 1014(a)

A cash account customer buys and sells the same shares before paying. Within the payment period the customer's check clears, and the sale proceeds were not withdrawn before then. What happens to the 90-day freeze?

• a.It does not apply, because full payment cleared and the proceeds were not withdrawn first✓
• b.It applies in full for 90 calendar days, because the stock was sold before it was paid for
• c.It applies for 30 calendar days instead of 90, because the customer later paid in full
• d.It applies only if the customer uses a second broker-dealer to complete the sale of the stock

The 90-day freeze does not apply if, within the payment period, full payment is received or a check in payment has cleared and the sale proceeds were not withdrawn before the payment or clearance. The freeze targets selling before paying, not a timely payment.12 CFR 220.8(c)(2)(i)

A 401(k) participant turned 73 this year but is still working for the plan sponsor, and the plan allows delayed required minimum distributions until retirement. When is the first RMD generally due?

• a.April 1 following the year she turns 73, whether or not she is still working
• b.December 31 of the year she turns 73
• c.April 1 following the year she turns 70 1/2
• d.April 1 following the later of the year she turns 73 or the year she retires✓

For a 401(k), profit-sharing or other defined contribution plan, the IRS sets the required beginning date as April 1 following the later of the year the participant reaches age 73 or retires, if the plan allows delaying until retirement. For IRAs the date is April 1 after the year the owner turns 73, with no retirement delay.IRC 401(a)(9)

A 45-year-old with $100,000 of adjusted gross income (AGI) has $14,000 of unreimbursed medical expenses and takes an IRA distribution to pay them. The 10% additional tax exception for unreimbursed medical expenses applies to which portion?

• a.All $14,000, because the expenses are for medical care
• b.The part above 10% of AGI, which is $4,000
• c.The part of the expenses above 7.5% of AGI, which is $6,500✓
• d.Nothing, because medical expenses are never an exception before age 59 1/2

The IRS exception covers unreimbursed medical expenses only to the extent they exceed 7.5% of AGI. Here 7.5% of $100,000 is $7,500, so $14,000 minus $7,500 leaves $6,500 that can be withdrawn without the 10% additional tax. The distribution is still subject to regular income tax.IRC 72(t)(2)(B)

A cash account customer buys $3,000 of stock, then cancels the purchase before paying in order to fix a clerical error made by the firm. How does Regulation T treat the cancellation for the 90-day freeze?

• a.Any cancellation is a sale, so the freeze starts at once
• b.It is a sale, but the freeze is shortened to 30 days
• c.It is a sale only if the amount exceeds $1,000
• d.A cancellation to correct an error is not treated as a sale, so the freeze is not triggered by it✓

Regulation T treats cancellation of a transaction as a sale for purposes of the 90-day freeze, but not when the cancellation is made to correct an error. A cancellation to fix a genuine error therefore does not by itself trigger the freeze.12 CFR 220.8(c)(1)

A public employee takes an early distribution, before age 59 1/2, from his governmental 457(b) plan balance that came entirely from his own salary deferrals. What is the 10% additional tax treatment?

• a.The 10% additional tax applies to the full distribution, including the amount that was deferred from his pay
• b.The distribution is fully tax-free to him if he is separated from service in or after the year he turns 55
• c.The distribution is taxed at 25% like a SIMPLE IRA's first two years, with no exceptions for the plan
• d.The 10% additional tax does not apply to the deferral portion, though income tax is still due✓

The IRS states that distributions from a governmental 457(b) plan are not subject to the 10% additional tax, except for amounts attributable to rollovers from another type of plan or IRA. Ordinary income tax still applies to pre-tax money withdrawn.IRC 457(b)

A victim of domestic abuse by a spouse takes money from her IRA in 2026. What is the largest amount that can be withdrawn without the 10% additional tax under that exception?

• a.The greater of $10,000 or 50% of the account
• b.The lesser of $10,000 or 50% of the account✓
• c.$5,000 per child living in the household
• d.The lesser of $22,000 or the account balance

The IRS exceptions table allows a distribution to a victim of domestic abuse by a spouse or domestic partner of up to the lesser of $10,000 or 50% of the account. The $22,000 figure belongs to the separate disaster recovery exception. As with other exceptions, income tax can still apply.IRC 72(t)(2)(K)

A broker acting as agent on a customer's stock purchase must disclose the amount of remuneration it receives from the customer on the confirmation. Which arrangement is an exception to that requirement?

• a.Commissions that are lower than the firm's standard schedule for similar trades on the same day
• b.Any trade of fewer than 100 shares, however the customer pays the firm for executing the order
• c.Remuneration paid under a written agreement with the customer that is set other than on a transaction basis✓
• d.Remuneration received in a transaction that settles through a clearing agency, rather than directly with the firm

Rule 10b-10 requires an agent to disclose the amount of any remuneration received from the customer, unless the remuneration is determined under a written agreement with the customer otherwise than on a transaction basis, such as a flat annual advisory fee. Discounted commissions and odd-lot sizes do not remove the duty.17 CFR 240.10b-10(a)

After the birth of her second child, a woman takes money from her IRA to pay birth expenses. What is the most per child that can be withdrawn without the 10% additional tax under the birth-or-adoption exception?

• a.$5,000 total across all of her children
• b.$10,000 per child
• c.$2,500 per child, per parent
• d.$5,000 per child✓

The IRS exceptions table allows distributions of up to $5,000 per child for qualified birth or adoption expenses to avoid the 10% additional early-distribution tax. The limit is applied child by child, not as one family total. Ordinary income tax can still apply to the distribution.IRC 72(t)(2)(H)

A 74-year-old IRA owner forgets to take the required minimum distribution for the year and does not correct it within the correction window. What is the standard excise tax on the amount that should have been withdrawn but was not?

• a.25% of the amount not distributed✓
• b.10% of the amount not distributed
• c.50% of the amount not distributed
• d.15% of the account balance

The IRS says that if required distributions are skipped or too small, a 25% excise tax applies to the amount not distributed as required, reduced to 10% if the shortfall is corrected within two years. The tax is applied to the shortfall, not to the whole account balance.IRC 4974

A worker takes a distribution from a SIMPLE IRA 14 months after she first participated in her employer's SIMPLE IRA plan, before age 59 1/2 and with no exception available. What additional tax applies?

• a.A 25% additional tax, because the distribution came within the first two years of participation✓
• b.A 10% additional tax, the same as the tax that applies to any traditional IRA owner under 59 1/2
• c.No additional tax, because SIMPLE IRAs are exempt from early-withdrawal rules
• d.A 15% additional tax, split between the owner and the employer who sponsors the SIMPLE plan

The IRS notes that a distribution from a SIMPLE IRA within the first two years of participation incurs a 25% additional tax instead of the usual 10%. After the two-year period the ordinary 10% additional tax applies, unless an exception such as age 59 1/2 is met.IRC 72(t)(6)

A customer in a cash account buys stock and fails to pay in time, owing $800 on the trade. What does Regulation T allow the broker-dealer to do about the unpaid amount?

• a.Nothing, because the firm must always liquidate any unpaid amount, however small it is
• b.Disregard it at its option, because a sum due not exceeding $1,000 may be ignored✓
• c.Disregard it only if the customer pays the amount within the next 90 calendar days
• d.Disregard it only with prior written approval from the Federal Reserve Board's staff

Regulation T generally requires a creditor to promptly cancel or liquidate any transaction not paid in full within the time allowed, but it permits the creditor, at its option, to disregard any sum due from the customer that does not exceed $1,000. The option belongs to the firm, not to the customer.12 CFR 220.8(b)(4)

An investor's basis in a stock is $12 per share. The company pays a nondividend distribution of $2 per share. How is the distribution treated?

• a.It is a qualified dividend that is taxed at preferred rates in the year in which it is received
• b.It is a return of capital that reduces her basis to $10 and is not taxed until her basis is recovered✓
• c.It is a short-term capital gain, because it is paid out of the company's principal and she held less than a year
• d.It is tax-exempt, has no effect on her basis, and never has to be reported on her return

A nondividend distribution is a return of capital, the part of the payment not paid out of earnings. It is not taxed when received but reduces the shareholder's basis, which here falls from $12 to $10. Once the basis reaches zero, any further nondividend distribution is reported as a capital gain.IRS Publication 550, Nondividend Distributions

A customer is short 600 shares of a stock now trading at $3 per share in a margin account. Under FINRA Rule 4210, what is the minimum maintenance margin on the position?

• a.$1,500, the $2.50-per-share amount alone
• b.$540, which is 30% of the market value
• c.$1,800, because for stock below $5 the requirement is the greater of $2.50 per share or 100% of market value✓
• d.$3,000, the $5-per-share amount used for higher-priced stock

For stock sold short at less than $5.00 per share, Rule 4210 sets minimum maintenance at the greater of $2.50 per share or 100 percent of current market value. Here $2.50 times 600 is $1,500, but 100 percent of the $1,800 market value is greater. The $5 floor and 30 percent test apply to short stock priced at $5 or more.FINRA Rule 4210(c)(2)(B)

An investor buys a LEAPS call for $800 in January of one year and lets it expire worthless in February of the following year, 13 months later. How is the loss treated?

• a.As a short-term capital loss, because options are always treated as short-term property by the IRS
• b.As a deductible business expense in the year she bought it, up to the full premium that she paid
• c.As a long-term capital loss of $800, because the holding period ends on the expiration date✓
• d.As no loss at all, because only options that are exercised can ever create a loss

If a purchased option expires, its cost is a capital loss, either long-term or short-term depending on the holding period, which ends on the expiration date. Thirteen months is more than one year, so the $800 loss is long-term. The cost of an option is a capital expenditure and cannot be deducted when paid.IRS Publication 550, Puts and Calls (holders)

A 38-year-old realizes she over-contributed to her IRA. She withdraws the excess contribution before the extended due date of her tax return. How are the earnings on that excess treated for the 10% additional tax?

• a.The returned contribution avoids the 10% additional tax, but the earnings on it do not get that exception✓
• b.Both the contribution and its earnings avoid the 10% tax
• c.Neither is subject to the 10% tax, because both are returned to her
• d.The 10% tax applies to the contribution, but the earnings are exempt

The IRS exceptions table covers returned IRA contributions if they are withdrawn by the extended due date of the return, but it excludes the earnings on those returned contributions from the exception. The earnings are generally taxable and can face the 10% additional tax if she is under 59 1/2.IRC 408(d)(4)

Which of the following lists the only three marks Regulation SHO allows on a broker-dealer's sell orders in equity securities?

• a.Long, short, and short covered
• b.Long, short, and hedged
• c.Long, short, and short exempt✓
• d.Long, margin, and short exempt

Rule 200(g) requires a broker-dealer to mark all sell orders of any equity security as long, short, or short exempt. A short exempt mark is used only when the circuit-breaker exceptions in Rule 201(c) or (d) are met.17 CFR 242.200(g)

An investor writes one 50 put and collects a $3.00 per share premium. The put is exercised, and she buys 100 shares at $50.00. What is her tax basis in the stock?

• a.$5,300, because the premium is added to the purchase price
• b.$4,700, because the premium received reduces the cost of the stock✓
• c.$5,000, because the premium was already taxed when she received it
• d.$4,850, because the premium is split between the stock and the option

When a put the investor wrote is exercised and she buys the underlying stock, she decreases her basis in the stock by the premium she received: $5,000 purchase price less $300 premium is $4,700. Her holding period for the stock begins on the date she buys it, not on the date she wrote the put.IRS Publication 550, Puts and Calls (writers)

A margin customer has never signed anything allowing the firm to lend her securities. The firm wants to lend her margin securities that are eligible for pledging or lending. What does FINRA Rule 4330(a) require?

• a.Nothing, because the margin agreement makes all margin securities available for lending
• b.Only a notice sent to the customer within 30 days after the loan is made
• c.The firm must first obtain the customer's written authorization to lend them✓
• d.Only the approval of the firm's financial and operations principal in writing

FINRA Rule 4330(a) provides that no member shall lend securities held on margin for a customer that are eligible to be pledged or loaned unless the member has first obtained a written authorization from the customer permitting the lending. A notice afterward does not substitute for advance written authorization.FINRA Rule 4330(a)

FINRA's rules require a member to make certain books and records but specify no retention period for one of them, and the Exchange Act rules do not either. For how long must the member preserve that record?

• a.At least three years
• b.At least two years in an easily accessible place
• c.Until the next FINRA examination
• d.At least six years✓

FINRA Rule 4511(b) says that members shall preserve for at least six years those FINRA books and records for which there is no specified period under FINRA rules or the Exchange Act rules. The records must also be kept in a format and media that complies with SEC Rule 17a-4.FINRA Rule 4511(b)

For 2026, a participant in a traditional 401(k) plan is age 62. Under the SECURE 2.0 provision for participants aged 60 through 63, what is the maximum catch-up contribution she may make, in addition to the regular elective deferral limit?

• a.$8,000, the same catch-up as for every participant aged 50 or older in the plan
• b.$11,250, which replaces the usual $8,000 catch-up for her age group✓
• c.$4,000, which is the catch-up amount that applies for a SIMPLE 401(k) plan
• d.$24,500, which is the regular limit on elective deferrals for all participants

For 2026 the elective deferral limit for traditional and safe harbor 401(k) plans is $24,500, and participants aged 50 or older may add a catch-up of $8,000. Under SECURE 2.0, participants aged 60, 61, 62 or 63 have a higher catch-up limit, $11,250 for 2026. The $4,000 figure applies to SIMPLE 401(k) catch-ups, and $24,500 is the base deferral limit.IRS: 401(k) plan overview; 2026 limits

A customer's confirmation covers an odd-lot purchase on which an odd-lot differential or equivalent fee was paid. What does Rule 10b-10 require the confirmation to say about it?

• a.Nothing, because odd-lot fees are never mentioned on confirmations
• b.The exact fee in dollars and the name of the contra broker
• c.That the order was filled at the national best bid or offer
• d.Whether an odd-lot differential or equivalent fee was paid, with the amount available on oral or written request✓

Rule 10b-10(a)(3) requires the confirmation to state whether any odd-lot differential or equivalent fee has been paid in connection with an order for an odd-lot number of shares, and that the amount will be furnished on oral or written request. The amount itself need not be printed.17 CFR 240.10b-10(a)(3)

Under the emergency personal expense exception, how many penalty-free distributions can a participant take in a calendar year, and for how much?

• a.One distribution per calendar year, up to $10,000 regardless of the vested balance in the account
• b.Two distributions per calendar year, each up to $1,000 or the vested balance above $1,000, if smaller
• c.One distribution per calendar year, up to the lesser of $1,000 or the vested balance above $1,000✓
• d.Unlimited distributions as long as each is for a documented emergency, with the plan sponsor's approval

The IRS exceptions table lists one distribution per calendar year for personal or family emergency expenses, up to the lesser of $1,000 or the vested account balance over $1,000, for distributions made after 2023. The exception waives the 10% additional tax; the amount is still generally taxable income.IRC 72(t)(2)(I)

A 50-year-old retiree wants to draw from his IRA before age 59 1/2 without the 10% additional tax by taking a series of substantially equal periodic payments (SEPP). Which statement describes this exception?

• a.It is available only for employer plans, and does not apply to IRAs under any circumstances
• b.It is an exception that applies to both IRAs and qualified plans, if the payments follow an IRS-approved method✓
• c.It requires the payments to be exactly equal to the plan's required minimum distribution each year, with no other method allowed
• d.It applies once the owner takes a single lump-sum withdrawal of the entire account balance

The IRS list of exceptions includes an equal-payments exception under Section 72(t)(2)(A)(iv) that is available for both qualified plans and IRAs. The payments must be a series of substantially equal payments calculated under an IRS-approved method, not a lump sum.IRC 72(t)(2)(A)(iv)

A customer closes her account in June 2026. For how long must the firm keep the account cards and records that relate to the terms and conditions of the opening and maintenance of that account, under SEC Rule 17a-4(c)?

• a.At least three years after the account is closed
• b.At least six years after the account was opened
• c.Only until the account is closed
• d.At least six years after the account is closed✓

SEC Rule 17a-4(c) requires a broker-dealer to preserve for at least six years after the closing of a customer's account any account cards or records that relate to the terms and conditions of opening and maintaining the account. The clock runs from closing, not from opening.17 CFR 240.17a-4(c)

An investor writes a call option on a stock she does not own and receives a $400 premium. The call expires worthless 14 months later (it was a LEAPS contract). How is the $400 taxed?

• a.As ordinary income in the year she received the premium, since options never create capital gains
• b.As a long-term capital gain, because the option was outstanding for more than one year
• c.It is not taxed, because it only reduces the basis of a stock that she never bought
• d.As a short-term capital gain recognized when the option expires, even though 14 months passed✓

A writer does not include the premium in income when received. It is held in a deferred account until the obligation expires, is exercised or is closed out. If the obligation expires, the premium is a short-term capital gain, regardless of how long the writer was obligated. Long-term treatment depends on the holding period of stock, which a writer of an uncovered call does not have.IRS Publication 550, Puts and Calls (writers)

A 33-year-old who has never owned a home wants to withdraw money from a traditional IRA toward a first home purchase. Up to what amount can avoid the 10% additional tax under the first-time homebuyer exception?

• a.$5,000
• b.$25,000
• c.The full account balance
• d.$10,000✓

The IRS exception for qualified first-time homebuyers covers up to $10,000 of IRA distributions. The amount withdrawn is still included in income unless it is a qualified Roth distribution; the exception removes only the 10% additional tax. The exception is listed for IRAs but not for employer plans such as a 401(k).IRC 72(t)(2)(F)

A representative wants to draw money from a customer's bank checking account by submitting a draft to the customer's bank to pay for a securities purchase. Under FINRA Rule 4514, what must the representative first have?

• a.The customer's oral permission recorded on the firm's phone line, with a supervisor's signature on the record
• b.The approval of the firm's principal, even without the customer's signature, if the account has traded before
• c.A copy of the customer's most recent bank statement on file, plus the firm's own internal record of the request
• d.The customer's express written authorization, which can be the customer's signature on the instrument✓

FINRA Rule 4514 bars a member or associated person from obtaining or submitting for payment a check, draft or other negotiable paper drawn on a customer's checking, savings or similar account without the customer's express written authorization, which may include the customer's signature on the instrument itself.FINRA Rule 4514

A customer holds 800 shares of a stock in one account and has a short position of 300 shares in the same stock. Under Regulation SHO, for how many shares is she deemed to own the stock when she enters a sell order?

• a.500 shares, because ownership is only to the extent of her net long position✓
• b.800 shares, because the long position is what she holds in the account at the firm
• c.300 shares, because the short position controls her ownership for the purpose of the mark
• d.1,100 shares, because the long and short positions are added together for the mark

Rule 200(c) provides that a person is deemed to own securities only to the extent that she has a net long position. With 800 long and 300 short, her net long position is 500 shares, and only that amount can support a sale marked long.17 CFR 242.200(c)

An investor owns 100 shares with a $35 per share cost basis and writes a call with a $40 strike for a $3 per share premium. The call is exercised and she delivers the shares. What is her total gain, ignoring commissions?

• a.$500, because the premium is taxed separately and is not part of the stock sale
• b.$300, because only the premium received is a gain and the stock sale itself is ignored
• c.$200, because the premium received reduces the sale proceeds of the stock
• d.$800, because the premium increases the amount realized on the sale of the stock✓

When a call the investor wrote is exercised and she sells the underlying stock, the premium is added to the amount realized on the sale. Proceeds are $4,000 from the strike plus $300 premium, or $4,300, against a $3,500 basis, leaving an $800 gain. Whether the gain is long-term or short-term depends on how long she held the stock.IRS Publication 550, Puts and Calls (writers)

An investor pays a $2.50 per share premium for a call with a $60 strike and later exercises it, buying 100 shares. What is her basis per share in the stock?

• a.$60.00, because the premium paid is treated as a separate capital loss on the call
• b.$62.50, because the cost of the call is added to the basis of the stock✓
• c.$57.50, because the premium paid reduces the cost of the stock she acquired
• d.$62.50 only if she held the call for more than one year before exercising it

A buyer's cost of a call is a capital expenditure that cannot be deducted. If the call is exercised, the cost is added to the basis of the stock bought, so the basis is the $60 strike plus the $2.50 premium. The holding period for the stock starts at exercise, and the length of time the call was held does not change the basis.IRS Publication 550, Puts and Calls (holders)

A customer who lives in a federally declared disaster area and sustained an economic loss takes a qualified disaster recovery distribution from her IRA. What is the dollar cap on the amount that is exempt from the 10% additional tax?

• a.$10,000
• b.$22,000✓
• c.$5,000
• d.$50,000

The IRS lists a disaster recovery distribution of up to $22,000 to a qualified individual who sustained an economic loss because of a federally declared disaster where she lives. The $10,000 and $5,000 figures belong to the first-time homebuyer and birth-or-adoption exceptions.IRC 72(t)(2)(M)

A 44-year-old pays her daughter's college tuition with money taken from a traditional IRA. A colleague has the same need but would draw on his 401(k) plan instead. How does the 10% additional tax exception for qualified higher education expenses apply?

• a.It applies to the 401(k) withdrawal, but not to the IRA withdrawal, even if paid to the school
• b.It applies to the IRA withdrawal, but it is not available for a 401(k) distribution✓
• c.It applies to both, as long as the money is paid directly to the school by the owner
• d.It applies to neither, because the exception exists only for withdrawals from 529 plans

In the IRS table of exceptions, qualified higher education expenses appear as an exception for IRAs, including SEP and SIMPLE IRAs, but not for qualified plans such as a 401(k). Even when the exception applies, the withdrawal remains taxable as ordinary income to the extent it is pre-tax money.IRC 72(t)(2)(E)