FINRA Series 7 — All Questions

A customer's account holds 800 shares of Keystone Rail, with no pending purchases and no open short position. The customer enters one order to sell 1,200 shares. How must the firm mark the shares?

• a.All 1,200 shares long, because the customer owns the stock and the order is a single order
• b.800 shares long and 400 shares short, since only the net long position counts as owned✓
• c.800 shares long and 400 shares short exempt, because the excess is covered by the customer's position
• d.All 1,200 shares short, because the order is larger than the position held in the account

A person is deemed to own a security only to the extent of its net long position, and a sale order is marked long only if the seller is deemed to own the security sold. The customer owns 800 shares, so 800 can be marked long and the remaining 400 are a short sale. Marking all 1,200 long would overstate ownership. Marking all of the order short ignores the shares actually owned. Short exempt applies only when the Rule 201 exceptions are met, and holding the stock is not one of them.SEC Regulation SHO, 17 CFR 242.200(c) and (g)

Four customers each want to sell 500 shares of Brandt Energy that they do not yet hold in their accounts. Which sale may the firm mark long?

• a.The customer who has exercised call options on 500 shares and awaits delivery✓
• b.The customer who expects to borrow 500 shares from the firm before settlement
• c.The customer who has an open order to buy 500 shares that has not been executed
• d.The customer who holds call options on 500 shares and has not yet exercised them

A person is deemed to own a security when it has an option to acquire the security and has exercised it. A holder who has not exercised the options has only a right to buy, and so does not yet own the shares. A borrower who sells before delivering borrowed stock is making a short sale. An open buy order that has not executed is not an unconditional contract to purchase, so no ownership arises.SEC Regulation SHO, 17 CFR 242.200(b)

A syndicate manager enters a stabilizing bid for a new issue offered by prospectus at $30.00 a share. Which statement about that bid is correct?

• a.It may be made to lift the price above $30.00, to show buyers that the new issue is advancing
• b.It may be made at prices above $30.00 for the first week, because the offering is still being distributed
• c.It may be made at any price the manager chooses, if the prospectus discloses that stabilizing may occur
• d.It may be used only to prevent a price decline, and not above the $30.00 offering price✓

Stabilizing is permitted only to prevent or retard a decline in the market price of the security, and it may not be made at a price higher than the lower of the offering price or the stabilizing bid in the principal market. Using a bid to push the price up is manipulative. Disclosure in the prospectus does not widen the permitted price, and no first-week allowance lets a stabilizing bid exceed the offering price.SEC Regulation M, 17 CFR 242.104(b) and (f)(1)

An issuer sells shares through an underwriter in an at-the-market offering, with the shares sold at prevailing market prices. The underwriter wants to place a stabilizing bid at the last sale price. May it do so?

• a.Yes, if the bid is no higher than the last independent sale price
• b.No, since stabilizing is barred in an at-the-market offering✓
• c.Yes, if the underwriter first discloses the bid to the exchange
• d.Yes, but only in the first 30 days after the offering date

Rule 104 prohibits stabilizing in an at-the-market offering, because the shares are sold at prevailing prices and a stabilizing bid would itself set the price being used. Keeping the bid at or below the last independent sale price does not cure that. Disclosure to the exchange does not create an exception, and the rule has no 30-day permission.SEC Regulation M, 17 CFR 242.104(e)

For the four calendar weeks before the week of a planned buyback, the average daily trading volume reported for Calloway Tools stock was 120,000 shares. Ignoring the once-a-week block exception, what is the most the issuer can repurchase on one day and stay within the Rule 10b-18 safe harbor?

• a.60,000 shares, half of average volume
• b.12,000 shares, a tenth of the average volume
• c.30,000 shares, a quarter of average volume✓
• d.120,000 shares, the entire average volume

The volume condition caps the day's repurchases by the issuer and its affiliated purchasers at 25% of the average daily trading volume, which is 25% of 120,000, or 30,000 shares. A 10% cap would give 12,000 shares. Half of the volume would be 60,000, and the full average would be 120,000, which would make the issuer the entire market for a day.SEC Rule 10b-18(b)(4) and (a)(1)

Wicker Foods has a public float value of $400 million and an average daily trading value of $5 million. Its primary session closes at 4:00 p.m. ET. To stay within the Rule 10b-18 safe harbor on the time condition, when must the issuer stop buying back its shares during the session?

• a.Fifteen minutes before the close, at 3:45 p.m. ET
• b.Thirty minutes before the close, at 3:30 p.m. ET
• c.Five minutes before the close, at 3:55 p.m. ET
• d.Ten minutes before the close, at 3:50 p.m. ET✓

A security with an average daily trading value of at least $1 million and a public float value of at least $150 million is subject to a 10-minute blackout before the scheduled close, so repurchases must stop by 3:50 p.m. A 30-minute blackout, ending 3:30 p.m., applies to all other securities and would apply to a smaller stock. Neither 3:45 nor 3:55 matches any time condition in the rule.SEC Rule 10b-18(b)(2)

On one trading day, an issuer instructs Broker A to repurchase shares in the morning and Broker B to repurchase shares in the afternoon, and all the purchases were solicited by the issuer. Everything else about the repurchases meets the safe harbor conditions. What is the result?

• a.Only the purchases up to 25% of average daily trading volume are within the safe harbor, with the rest outside
• b.None of that day's repurchases is within the safe harbor, because failing one condition removes the whole day✓
• c.Only the purchases made through Broker B are within the safe harbor, because the first broker's trades were complete
• d.All of the purchases are within the safe harbor, because the one-broker condition applies to a full week

Solicited purchases must be effected from or through only one broker-dealer on any single day, and each of the four conditions must be satisfied on a daily basis. Failing any one removes all of the issuer's repurchases from the safe harbor for that day, not just some. The condition is daily, not weekly. The 25% limit is a separate condition, and the day's purchases do not partly qualify under it.SEC Rule 10b-18(b)(1)

An OTC market maker in an NMS stock holds four customer limit orders, each priced to improve its own bid. Which one must the market maker publish immediately under Rule 604?

• a.A plain 300-share limit order with no special handling instructions✓
• b.A 300-share limit order marked all-or-none by the customer
• c.An odd-lot limit order that improves the market maker's bid
• d.A 300-share limit order from a customer who asked that it not be shown

A market maker must immediately publish a bid or offer reflecting the price and full size of each customer limit order that improves its own quote. The rule excepts all-or-none orders, orders from a customer who expressly asks for no display, and odd-lot orders, among others. The first order has no exception, so it must be shown.SEC Rule 604, 17 CFR 242.604(a) and (b)

A member is lead underwriter on a hot IPO and is asked to allocate shares to four accounts. Which allocation does Rule 5131 prohibit?

• a.An account of an executive officer of a company that has never done business with the member
• b.An account of the CEO of a public company that paid the member investment banking fees eight months ago✓
• c.An account in which executive officers of a public company have 20% of the beneficial interest in total
• d.An account of a CEO whose company paid the member fees 14 months ago, with no further banking work expected

The spinning prohibition bars allocating new issue shares to an account in which an executive officer or director of a public company has a beneficial interest if the company is an investment banking client or paid the member for investment banking services in the past 12 months. Eight months falls inside that window. Fourteen months is outside it, and no future business is expected, so that allocation is allowed. The prohibition also does not apply to an account where such insiders hold no more than 25% in total. A company with no banking relationship and no expected one is not covered.FINRA Rule 5131(b)

An IPO's officers and directors are bound by a lock-up agreement. The book-running lead manager decides to release one officer from the lock-up so that he can sell 50,000 shares in the market. What must the manager do, and when?

• a.Notify the issuer and nobody else, because the announcement duty belongs to the issuer
• b.Notify the issuer and announce the release through a major news service on the day it takes effect
• c.Notify the issuer and announce the release at least five business days before it takes effect
• d.Notify the issuer and announce the release through a major news service two business days ahead✓

A lock-up must provide that at least two business days before a release or waiver, the book-running lead manager will notify the issuer and announce the impending release through a major news service. Telling only the issuer leaves out the public announcement. A same-day announcement does not give the two business days of notice. Five business days is longer than the rule requires. The release here is for sales, so the exception for gifts and family transfers does not apply.FINRA Rule 5131(d)(2)

At 8:30 a.m. on the day a new issue begins trading, a customer who missed the allocation asks to buy 500 shares in the secondary market before the opening. Which order can the firm accept?

• a.A limit order, since a new issue cannot be bought at the market before trading starts✓
• b.A market order, because the order is entered before the opening and will fill at the opening
• c.A market order, if the customer signs a disclosure about the price risk of the opening
• d.No order of any kind, until the shares have traded in the secondary market for 30 days

A member may not accept a market order to buy shares of a new issue in the secondary market before trading in those shares begins. A limit order protects the customer from an opening price far above the offering price, and it remains available. Entering the order before the open is exactly the situation the rule addresses. A signed disclosure does not lift the bar. The 30-day period is the window used to define flipping and does not restrict customer orders.FINRA Rule 5131(d)(4)

A broker-dealer is about to effect a customer's purchase of a penny stock that has an inside bid and offer. When must the firm disclose those quotations to the customer?

• a.Orally after the trade is executed, at about the time the confirmation is mailed
• b.Only if the customer asks for the quotations before placing the order, and then only orally
• c.Only on the written confirmation, which counts as the single required disclosure
• d.Orally or in writing before the trade, and in writing by the time the confirmation is sent out✓

The firm must give the inside bid and offer quotations before effecting the transaction, either orally or in writing, and must also provide them in writing no later than the written confirmation. The confirmation alone comes too late for the first requirement. An oral disclosure after the trade also comes too late. The duty does not depend on the customer's request, and the firm must keep a record of the disclosure.SEC Rule 15g-3(a) and (b)

A firm is about to approve a new customer's account for trading listed options. By what point must the firm have delivered the current Options Disclosure Document (ODD) to that customer?

• a.At or before the time the account is approved for options trading✓
• b.With the confirmation of the customer's first options transaction
• c.Within 15 days after the account is approved, along with the signed options agreement
• d.Only when the customer first places an order to write an uncovered option

Rule 2360 requires delivery of the current ODD at or prior to the time the account is approved for trading OCC-issued options. The confirmation-time deadline is real, but it applies only to later amendments of a document the customer already holds. The 15-day period belongs to the account agreement and the verification of background information, not to the ODD.FINRA Rule 2360(b)(11)(A)(i) and (b)(16)(A)

A customer received the Options Disclosure Document when the account was approved. Later, the ODD is amended for a category of options the customer trades. When must the firm send the amendment?

• a.Not later than the time a confirmation is delivered for a transaction in the category of options the amendment covers✓
• b.Before the firm accepts any further options order from that customer
• c.Not at all, since delivery of the original document satisfied the requirement
• d.Within 30 days after the amendment is filed with the SEC

Each amendment must be distributed to customers who already received the ODD no later than the confirmation of a transaction in the affected category of options. Having delivered the original document does not end the duty. The rule sets no pre-order hold and no calendar-day deadline measured from the SEC filing.FINRA Rule 2360(b)(11)(A)(i)

A firm approves a new individual customer for options trading, and the customer's background and financial information is not already in the account agreement. Within how long must the firm send that information to the customer for verification?

• a.At the end of the quarter in which the account is approved
• b.Within 30 days after the account is approved for options trading by a principal
• c.Within 10 business days after the customer's first options trade
• d.Within 15 days after the account is approved for options trading✓

Verification must go out within 15 days after approval, and again within 15 days after the firm learns of a material change in the customer's finances. The customer is given the chance to correct or complete the information, and silence is treated as verification. A 30-day or quarter-end schedule is longer than the rule allows.FINRA Rule 2360(b)(16)(C)

A branch manager who is not a Registered Options Principal (ROP) or Limited Principal-General Securities Sales Supervisor approves a customer's options account. Within how long must the approval or disapproval be submitted to a qualified principal?

• a.Within 5 business days after the account is approved for trading
• b.Within 15 calendar days
• c.Within 10 business days✓
• d.By the end of the next quarter

When the branch manager lacks the ROP or Limited Principal-General Securities Sales Supervisor qualification, the decision must go to a person who has it within ten business days. The 15-day figure appears elsewhere in the rule, for verification of customer information and the account agreement, which makes it the tempting wrong answer here.FINRA Rule 2360(b)(16)(B)

FINRA's options rule restricts exercises of option contracts of a particular class. Over what period are a customer's exercises counted against the exercise limit?

• a.Any single trading day only
• b.Any five consecutive business days✓
• c.Any rolling period of 30 days, including weekends
• d.The calendar quarter in which the exercise falls

The exercise limit is measured by the number of contracts of one class exercised within any five consecutive business days, and it is tied to the position limit that applies to that class. It is not a one-day, monthly or quarterly measure.FINRA Rule 2360(b)(4)

Under FINRA's options rule, how often must a firm send account statements to a customer who has an open options position but had no entry in the account during the prior month?

• a.Once a year, with the year-end tax documents
• b.Only when the customer requests a statement in writing
• c.At least monthly, whether or not there was any account activity
• d.At least quarterly✓

Statements go out at least monthly to customers with an entry during the preceding month and at least quarterly to customers with an open option position or a money balance. A customer with an open position but no monthly activity therefore falls under the quarterly schedule. Monthly statements are required only when there was an entry, and an annual or on-request schedule is far too loose.FINRA Rule 2360(b)(15)(A)

A corporation asks its broker-dealer to sell (write) call options on the corporation's own common stock for the company's account. How does FINRA's options rule treat the request?

• a.It is allowed if the board of directors approves it in writing
• b.It is allowed if the calls are fully covered by shares of its own stock that the corporation holds in its treasury
• c.It is allowed only for options that expire in nine months or less
• d.A member may not enter a transaction writing a call for the account of the issuer of the underlying security✓

The rule flatly prohibits a member from writing a call option for the account of the corporation that issued the underlying stock. Being covered, having board approval or choosing a short expiration does not create an exception.FINRA Rule 2360(b)(13)

A customer without a discretionary agreement gives a representative time-and-price discretion on an order for 5 XYZ calls. Unless the customer signs and dates a written statement saying otherwise, how long does that discretion remain in effect?

• a.For 30 days from the date it was granted
• b.Until the option expires
• c.Until the order is executed or cancelled, however many days that takes
• d.Until the end of the business day on which the customer granted it✓

Discretion over only the time or price of an order for a definite number of contracts in a specified security is not a full discretionary account. The rule limits it to the day it was granted unless the customer gives a signed, dated written instruction to the contrary, and any exercise must be shown on the order ticket.FINRA Rule 2360(b)(18)(A)(ii)

A branch office receives a written customer complaint about an options transaction. How soon must the branch forward it to the office that keeps the member's central options-complaint file?

• a.Within 24 hours of receipt
• b.Not until the next quarterly compliance review
• c.Not later than 30 days after the branch receives it✓
• d.Only if the customer alleges a loss of more than $10,000

A firm doing options business keeps one central log of options-related complaints and each branch must send its complaints there within 30 days, while also keeping a copy at the branch. The rule has no dollar threshold and does not wait for a quarterly review.FINRA Rule 2360(b)(17)(A)

Under FINRA's options rule, which branch office may transact an options business without a principal supervisor qualified as a Registered Options Principal or Limited Principal-General Securities Sales Supervisor?

• a.A branch with fewer than ten registered representatives, with no other condition
• b.A branch with no more than three registered representatives, if the options activity is appropriately supervised by a qualified principal✓
• c.Any branch whose options business is limited to buying calls and puts
• d.Any branch located in the same state as the firm's headquarters

The qualified-supervisor requirement does not apply to a branch of three or fewer registered representatives, but only if a qualified principal appropriately supervises the options activity. A branch's size, not the strategies it offers or where it sits, drives the exception, and the cutoff is three, not ten.FINRA Rule 2360(b)(20)(B)

A registered representative recommends that a customer make an opening purchase of an option contract. In addition to general suitability, what must the representative reasonably believe at the time of the recommendation?

• a.That the customer has the knowledge and experience to evaluate the risks of the transaction and can financially bear them✓
• b.That the customer has already traded the same option class at least once
• c.That the customer's annual income exceeds $50,000
• d.That the customer has held a margin account for at least one year

For a recommended opening options transaction the representative needs a reasonable basis to believe the customer can evaluate the risks, because of knowledge and experience in financial matters, and is financially able to bear them. The rule sets no fixed income level, minimum account age or prior trade in the same class.FINRA Rule 2360(b)(19)(B)

A customer is short one XYZ 60 call and, in the same account, long one XYZ call of the same class. Under FINRA's definition of covered, which long call makes the short call covered?

• a.The long call with a 55 strike✓
• b.A long XYZ 55 put
• c.The long call with a 65 strike and the same expiration date
• d.A long XYZ 60 put

A short call is covered by a long call of the same class, unit for unit, only if the long call's strike is equal to or lower than the short call's strike. The 55 call qualifies because it would let the writer buy at or below the price at which the writer might be assigned. A higher strike leaves a gap that the writer could lose on, and a put does not protect a short call.FINRA Rule 2360(a)(10)

A customer is short one XYZ 50 put and, in the same account, long one XYZ put of the same class. Under FINRA's definition of covered, which long put makes the short put covered?

• a.The long put with a 45 strike and the same expiration date
• b.A long XYZ 50 call
• c.The long put with a 55 strike✓
• d.A long XYZ 55 call

A short put is covered when the account holds a long put of the same class, unit for unit, with a strike equal to or higher than the short put's strike. The 55 put lets the holder sell at a price at least as high as the strike at which the short put may be assigned. A lower strike would leave exposure, and calls do not cover a short put.FINRA Rule 2360(a)(10)

A standard stock option contract giving the right to buy 100 shares is adjusted for a 3-for-2 stock split so that it now covers 150 shares. For the purposes of the options rule, how many contracts does it count as?

• a.One and one-half contracts, because it now covers 150 shares
• b.Two contracts, since the share count rose above 100
• c.Zero contracts until the adjusted terms are re-listed
• d.One contract, for as long as it stays outstanding✓

A contract that granted the right to purchase or sell 100 shares when written continues to be treated as one contract throughout its life, even though adjustments for splits or stock dividends change the number of shares it covers.FINRA Rule 2360(a)(23)

XYZ January 50 calls and XYZ January 55 calls are best described as:

• a.The same class of options but different series✓
• b.Both the same class and the same series
• c.The same series of options but different classes
• d.Different classes and different series, since the strike and expiration both differ

A class is all options of the same type on the same underlying security, so both are calls on XYZ. A series also requires the same exercise price and expiration, and the strikes differ. This is why the two contracts are different series within one class.FINRA Rule 2360(a)(3) and (a)(30)

XYZ March 50 calls and XYZ March 50 puts are best described as:

• a.Different series of one class, differing only by expiration
• b.The same class, because the underlying security, strike and month match
• c.The same series, because the strike prices and the expiration dates match
• d.Different classes, because one is a call and the other is a put✓

A class of options consists of all contracts of the same type, put or call, covering the same underlying security. Calls and puts on the same stock are therefore different classes, and since a series sits inside a class they cannot be the same series either.FINRA Rule 2360(a)(3)

Under FINRA's options rule, which of the following is excluded from the definition of an option?

• a.A straddle
• b.A registered warrant✓
• c.A call on a listed stock
• d.A put on a listed stock

The definition covers any put, call, straddle or other option or privilege that is a security, but it excludes tender offers, registered warrants, rights, convertible securities and options written by the issuer of the underlying security. A straddle is a combination of a put and a call and remains within the definition.FINRA Rule 2360(a)(21)

What distinguishes a FLEX equity option from a standardized listed equity option?

• a.It is issued by the corporation whose stock underlies it, rather than by the OCC
• b.It cannot be exercised before expiration
• c.It is not issued or cleared by the OCC
• d.The parties may negotiate contract terms within the exchange's rules✓

A FLEX equity option is issued, or subject to issuance, by the OCC but lets the parties negotiate terms such as strike and expiration, consistent with exchange rules. It is not an OTC option cleared outside the OCC, and an option written by the underlying issuer would fall outside the options rule altogether.FINRA Rule 2360(a)(16)

Which of the following must a firm that writes uncovered short options for the public include in its written procedures?

• a.Specific minimum net equity requirements for initial approval and maintenance of accounts writing uncovered options✓
• b.A rule that no customer may write uncovered options for more than 90 days
• c.A fixed ceiling of 100 contracts for each uncovered writer
• d.A requirement that uncovered writers also hold the underlying stock in the account

The written procedures must include suitability criteria, written Registered Options Principal approval of accounts, designated ROPs for exceptions, specific minimum net equity requirements, and the special risk statement. Fixed time limits, a flat contract ceiling and a stock holding requirement are not part of the rule, and holding the stock would make the write covered rather than uncovered.FINRA Rule 2360(b)(16)(E)(ii) and (iv)

A customer wants a representative to exercise discretion over option trades in the customer's account. Which condition applies under FINRA's options rule?

• a.Any general discretionary authorization covers options without further mention
• b.The firm's branch manager may accept the account in writing even without an options qualification
• c.The customer's written authorization must specifically cover options, and a ROP or Limited Principal-General Securities Sales Supervisor must accept the account in writing✓
• d.The customer's verbal instruction is enough if the representative has traded for the customer for over a year

Discretion over options needs a written authorization that specifically mentions options trading and written acceptance by a qualified options principal. A general grant that is silent on options does not count, and long experience with the customer cannot replace the written authorization.FINRA Rule 2360(b)(18)(A)(i)

Under FINRA's options rule, where must a firm keep copies of an options customer's account statements for the most recent six-month period?

• a.At the clearing firm's office only
• b.At the branch office only
• c.At both the servicing branch office and the principal supervisory office with jurisdiction over it✓
• d.At FINRA's district office

Background and financial information, and statements for the most recent six months, must be kept at both the branch servicing the account and the principal supervisory office responsible for the branch, though the supervisory office copy may sit elsewhere if readily accessible. Neither FINRA nor a clearing firm is the designated custodian of these records.FINRA Rule 2360(b)(17)(B)

Which of the following must appear on a written confirmation of an options transaction under FINRA's options rule?

• a.The option's delta and implied volatility
• b.Whether the transaction was an opening or a closing transaction✓
• c.The customer's remaining position limit
• d.The exchange on which the option was executed and the name of the floor broker who filled the order

The confirmation must show the option type, underlying security, expiration month, strike, number of contracts, premium, commission, trade and settlement dates, buy or sell (write), opening or closing, and principal or agency capacity. It must distinguish listed from other transactions by a symbol but need not name the exchange, and Greeks or limit headroom are not required items.FINRA Rule 2360(b)(12)

A customer wants to deliver restricted stock to cover a short call position. What does FINRA's options rule require?

• a.The member may accept the shares only if Securities Act requirements for the shares have been met when accepted and when delivered✓
• b.The member may accept them if the customer certifies the stock was bought at least a year ago
• c.Restricted stock may always be used to cover a short call
• d.The member may accept them whenever the customer is not an officer of the issuer

The rule bars a member from accepting stock that can be sold only after registration or under an SEC exemption unless the applicable Securities Act provisions have been complied with, both on acceptance and on later delivery. A customer's certification of age or insider status does not meet that test.FINRA Rule 2360(b)(14)

A customer with a new margin account buys $40,000 of a margin-eligible stock. Under Regulation T, what is the minimum the customer must deposit, assuming the firm requires no more than the regulatory minimum?

• a.$10,000
• b.$20,000✓
• c.$30,000
• d.$12,000

Regulation T sets the initial requirement for a margin equity security at 50 percent of current market value, so half the purchase is paid in and the firm lends the rest. The 25 percent figure is the FINRA maintenance level for a long position, which applies after the purchase and is not the initial deposit.12 CFR 220.12(a)

A customer sells short 300 shares of a margin stock at $20. Regulation T requires 150 percent of the market value in the account. Counting the sale proceeds toward that total, how much must the customer deposit?

• a.$1,500
• b.$1,800
• c.$3,000✓
• d.$9,000

The Regulation T requirement is 150 percent of the $6,000 short sale, or $9,000. The sale proceeds of $6,000 are credited to the account and count toward it, so the customer deposits $3,000, which equals 50 percent of the short market value. Depositing the full $9,000 forgets the proceeds, and the 30 and 25 percent figures are FINRA maintenance numbers, not the initial requirement.12 CFR 220.12(c)(1); 220.2 (equity)

A customer bought stock on margin and now owes a debit balance of $40,000. Assuming the 25 percent FINRA maintenance minimum and no house requirement, the account first falls below maintenance when the long market value drops below approximately:

• a.$53,333✓
• b.$61,538
• c.$50,000
• d.$80,000

Equity is market value minus the debit, and it must stay at least 25 percent of market value. Setting MV minus $40,000 equal to 0.25 times MV gives MV = $40,000 divided by 0.75, about $53,333. Multiplying the debit by 1.25 is a common slip that treats the 25 percent as a markup on the loan instead of a share of the market value. Dividing by 0.50 uses the initial requirement rather than the maintenance one.FINRA Rule 4210(c)(1)

A margin account holds long stock worth $60,000 with a debit balance of $40,000. Applying the 25 percent maintenance minimum, how much equity is in the account above the maintenance requirement?

• a.$15,000
• b.$20,000
• c.$10,000
• d.$5,000✓

Equity is $60,000 less $40,000, or $20,000. The maintenance minimum is 25 percent of $60,000, or $15,000, so the cushion is $5,000. The total equity ignores the requirement, and the second figure is the shortfall against the 50 percent initial level, which restricts the account but is not the maintenance cushion.FINRA Rule 4210(c)(1); 12 CFR 220.2 (equity)

A margin account holds long stock with a market value of $30,000 and a debit balance of $18,000. The 25 percent maintenance minimum is $7,500 and the Regulation T 50 percent initial figure is $15,000. What is the status of the account?

• a.Equity of $12,000 is below maintenance, so a maintenance call must be issued
• b.Equity of $12,000 exceeds maintenance, so there is no maintenance call, but the account is below the 50 percent initial level and is restricted✓
• c.The account is in violation of Regulation T and must be liquidated on the next business day
• d.Equity of $12,000 exceeds the initial requirement, so the customer may withdraw cash freely

Equity is $30,000 minus $18,000, or $12,000. That is above the $7,500 maintenance minimum, so no maintenance call arises, but it is below $15,000, so the account is restricted: new purchases need the initial margin and the customer cannot withdraw. Falling below the initial level after prices move is not a Regulation T violation and does not force liquidation.12 CFR 220.12(a); FINRA Rule 4210(c)(1)

A customer is short 200 shares of a stock trading at $50. What is the FINRA minimum maintenance margin on the position?

• a.$5,000
• b.$3,000✓
• c.$15,000
• d.$2,500

For a short stock priced at $5.00 or more the maintenance minimum is the greater of $5 per share or 30 percent of market value. Here 30 percent of $10,000 is $3,000, which is more than $5 times 200 shares, or $1,000. The 25 percent level applies to long positions, and the 50 and 150 percent figures are Regulation T initial numbers.FINRA Rule 4210(c)(3)

A customer is short 400 shares of a stock now selling at $4.00 per share. What is the FINRA minimum maintenance margin on the position?

• a.$480
• b.$2,000
• c.$400
• d.$1,600✓

For a stock short and selling below $5.00 the minimum is the greater of $2.50 per share or 100 percent of market value. Market value is $1,600 and $2.50 times 400 shares is $1,000, so 100 percent governs. The 30 percent and $5 per share tests are for stock priced at $5.00 or higher, and 25 percent is the long-position test.FINRA Rule 4210(c)(2)

A customer sold short 100 shares at $40 and deposited $2,000 of initial margin, so the account credit is $6,000. Using the 30 percent maintenance minimum for stock priced above $5, the account first falls below maintenance when the stock price rises above approximately:

• a.$48.00
• b.$40.00
• c.$52.00
• d.$46.15✓

Equity on a short position is the credit less the current market value, and it must be at least 30 percent of that market value. Setting $6,000 minus MV equal to 0.30 times MV gives MV = $6,000 divided by 1.30, or $4,615.38 for 100 shares, about $46.15 per share. Simply adding 30 percent to the sale price ignores the deposit, while the divisors 1.25 and 1.5 are the long maintenance and short initial percentages.FINRA Rule 4210(c)(3)

A customer opens a margin account and buys $3,000 of a margin-eligible stock. Regulation T would require 50 percent. If the firm applies only the regulatory minimums, what is the least the customer must deposit?

• a.$3,000
• b.$1,000
• c.$1,500
• d.$2,000✓

FINRA's initial margin rule requires equity of at least $2,000 for new commitments, though cash need not exceed the cost of the securities bought. Fifty percent of $3,000 is only $1,500, which falls below the minimum, so the $2,000 floor governs. The full $3,000 is more than the rule demands, since cash is limited to the lesser of cost or the floor.FINRA Rule 4210(b)(4)

A customer buys $200,000 current market value of a U.S. Treasury note with two years to maturity in a margin account. What is the FINRA minimum margin on the position?

• a.$6,000
• b.$2,000
• c.$14,000
• d.$4,000✓

For U.S. Government obligations, margin depends on time to maturity: 1 percent under one year, 2 percent from one to under three years, 3 percent from three to under five, 4 percent from five to under ten, 5 percent from ten to under twenty, and 6 percent at twenty years or more. A two-year note falls in the 2 percent band, or $4,000. The 1 and 3 percent bands are the neighbours on either side, and 7 percent is the requirement for other exempted securities such as municipals.FINRA Rule 4210(e)(2)(A)

A customer holds $150,000 current market value of U.S. Treasury bonds with seven years remaining to maturity. What is the FINRA minimum margin on the position?

• a.$6,000✓
• b.$10,500
• c.$4,500
• d.$7,500

A Treasury obligation with five years but less than ten to maturity carries a 4 percent requirement, which is $6,000 on $150,000. Three percent is the band for three to under five years, 5 percent is for ten to under twenty years, and 7 percent applies to other exempted securities such as municipal bonds.FINRA Rule 4210(e)(2)(A)

A customer buys $50,000 current market value of an investment-grade municipal bond in a margin account. What is the FINRA minimum margin for exempted securities other than U.S. Government obligations?

• a.$3,500✓
• b.$12,500
• c.$5,000
• d.$2,500

Municipal bonds are exempted securities, and for exempted securities other than U.S. Government obligations the rule requires 7 percent of current market value, or $3,500. Ten percent is the requirement for non-exempt investment-grade debt such as corporate bonds, and 25 percent is the long stock maintenance level.FINRA Rule 4210(e)(2)(B)

A customer buys $80,000 current market value of an investment-grade corporate bond in a margin account. What is the FINRA minimum margin on the position?

• a.$8,000✓
• b.$16,000
• c.$20,000
• d.$5,600

A non-equity investment-grade debt security that is not an exempted security requires 10 percent of current market value, or $8,000 here. Seven percent is the municipal and agency exempted-security figure, 25 percent is long stock maintenance, and 20 percent applies to lower-rated listed non-equity securities.FINRA Rule 4210(e)(2)(C)(i)

A customer is short corporate bonds with a principal amount of $100,000 and a current market value of $90,000. What is the FINRA minimum maintenance margin on the position?

• a.$22,500
• b.$9,000
• c.$5,000
• d.$27,000✓

For a short bond the maintenance requirement is the greater of 5 percent of principal or 30 percent of market value. Thirty percent of $90,000 is $27,000, which exceeds 5 percent of principal, or $5,000. Using the 5 percent number alone ignores the market value test, and 25 percent is the long stock figure.FINRA Rule 4210(c)(4)

A customer buys $10,000 of an equity security that is not margin eligible. What portion of the market value must be paid for with the customer's own money?

• a.All of it, 100 percent✓
• b.30 percent, the short-sale maintenance rate
• c.50 percent, the Regulation T initial rate
• d.25 percent, the FINRA maintenance rate

A nonmargin, nonexempted equity security cannot support a loan, so Regulation T requires 100 percent of its current market value and FINRA carries a 100 percent maintenance requirement for non-margin-eligible equities held long. The percentages in the other choices only apply to margin-eligible stock.12 CFR 220.12(e); FINRA Rule 4210(c)(6)