FINRA Series 7 — All Questions

A customer buys 2 listed calls with six months to expiration at a premium of $6.00. How much must the customer pay with their own funds in a margin account?

• a.$900
• b.$1,200✓
• c.$300
• d.$600

A listed option carried long that expires in nine months or less requires 100 percent of its purchase price, so the margin account gives no leverage on it. That is $6.00 x 100 x 2, or $1,200. Fifty percent is the stock rule, and 75 percent applies only to listed options with more than nine months left.FINRA Rule 4210(f)(2)(D)

A customer holds a listed long-dated call (LEAPS) with 18 months to expiration and a current market value of $8,000. What margin must be maintained on the long option?

• a.$4,000
• b.$2,000
• c.$8,000
• d.$6,000✓

A listed put or call carried long with more than nine months to expiration needs margin of at least 75 percent of its current market value, so the broker can lend against the other 25 percent. That is $6,000. The full value is what applies when nine months or less remain, and 50 and 25 percent are the stock initial and maintenance rates.FINRA Rule 4210(f)(2)(D)

A customer writes one uncovered listed call on a stock trading at $48. The call has a $50 strike and the premium is $2. What is the minimum margin under FINRA's formula for a short equity option, counting the premium received as the first component?

• a.$680
• b.$1,160
• c.$960✓
• d.$760

For an uncovered listed stock call the requirement is 100 percent of the option's market value ($200) plus 20 percent of the stock value ($960), reduced by the out-of-the-money amount ($50 strike less $48 stock times 100, or $200). That gives $960. The floor of the option value plus 10 percent of the stock value is only $680, so the formula result governs. Skipping the out-of-the-money reduction gives $1,160, and omitting the premium component or using only the 10 percent floor produces a different figure that does not follow the formula.FINRA Rule 4210(f)(2)(E)(i)

A customer writes one uncovered listed call on a stock trading at $48. The call has a $40 strike and the premium is $9. What is the minimum margin under FINRA's formula for a short equity option?

• a.$960
• b.$1,860✓
• c.$1,060
• d.$1,380

The call is in the money, so no out-of-the-money reduction applies. The requirement is the option's market value ($900) plus 20 percent of the stock value ($960), which is $1,860. The 10 percent floor ($900 + $480) is lower, so it does not govern, and subtracting the in-the-money amount from the requirement is not permitted.FINRA Rule 4210(f)(2)(E)(i)

A customer writes one uncovered listed put on a stock trading at $52. The put has a $50 strike and the premium is $1.50. What is the minimum margin under FINRA's formula for a short equity option?

• a.$1,190
• b.$840
• c.$650
• d.$990✓

The requirement is the put's market value ($150) plus 20 percent of the stock value ($1,040), reduced by the out-of-the-money amount, which is the stock price over the strike times 100, or $200. That gives $990. For a short put the floor is the option value plus 10 percent of the aggregate exercise price, $650, which is lower. Skipping the reduction gives $1,190, and the floor alone is too low.FINRA Rule 4210(f)(2)(E)(i)

A customer sells one listed XYZ 50 call for $5 and buys one XYZ 55 call of the same expiration and underlying for $2 (a credit call spread). What is the maximum potential loss on which the margin is based, before applying the net credit?

• a.$5,500, the aggregate exercise price of the long call
• b.$500, the difference between the strikes✓
• c.$300, the net premium received on the two positions
• d.$200, the cost of the long call

For a spread the margin on the short option is the lesser of the naked requirement or the maximum potential loss, found by netting intrinsic values at every strike in the spread. Between $50 and $55 the short call can lose $5 per share more than the long gains, so the loss is capped at $500, the difference in strikes. The net credit of $300 is cash received and reduces what must be deposited, but it is not the loss figure.FINRA Rule 4210(f)(2)(H)(i)

A customer sells one listed XYZ 50 call for $5 and buys one XYZ 55 call for $2 on the same underlying and with the same expiration. The long option is paid for in full and the short option's proceeds may be applied to the cost of the long and the margin. How much new cash must the customer deposit?

• a.$200✓
• b.$300
• c.$700
• d.$500

The long call costs $200 and the short call is margined at the $500 maximum potential loss, a total of $700. The $500 of premium received for the short call is applied against it, so $200 remains to be deposited. That is the difference in strikes of $500 less the $300 net credit. The full $500 forgets the credit, $300 confuses the credit with the deposit, and $700 ignores the proceeds.FINRA Rule 4210(f)(2)(H)(i)

A customer sells one listed XYZ 50 call for $3 and one XYZ 50 put for $2 on the same stock, currently trading at $50. Use the formula of 100 percent of option value plus 20 percent of the stock value, with no out-of-the-money reduction since both are at the money. What is the margin required on this short straddle?

• a.$1,500✓
• b.$2,500
• c.$2,000
• d.$1,300

For a short straddle on the same underlying the requirement is the margin on the call or the put, whichever is greater, plus the market value of the other option. The call side is $300 + $1,000 = $1,300, the put side is $200 + $1,000 = $1,200, so the call governs and the put's $200 value is added, for $1,500. Adding the two full requirements double counts the stock, and using only the greater side leaves out the other option's market value.FINRA Rule 4210(f)(2)(G)

An investor buys one XYZ 45 call for $3.50. At expiration, what stock price is the break-even point?

• a.$48.50✓
• b.$41.50
• c.$52.00
• d.$45.00

A call buyer recovers the premium only after the stock has risen above the strike by the amount paid, so the break-even is 45 + 3.50 = 48.50. Subtracting the premium gives the break-even for a put, and the strike alone is where the option merely turns in the money, not profitable.FINRA Rule 2360(a)(2), (a)(28)

An investor buys one XYZ 60 put for $4. What is the maximum possible gain on the position, ignoring commissions?

• a.$6,000
• b.$5,600✓
• c.$400
• d.Unlimited

The put's value is greatest if the stock falls to zero, when the put is worth the 60 strike per share. The premium paid is subtracted, so the gain is (60 - 4) x 100 = $5,600. The full strike ignores the cost, the premium is the maximum loss, and the gain is not unlimited because a stock cannot fall below zero.FINRA Rule 2360(a)(2), (a)(28)

An investor buys one XYZ 60 put for $4. At expiration, the position breaks even at a stock price of:

• a.$60
• b.$56✓
• c.$52
• d.$64

A put buyer needs the stock to fall below the strike by the premium paid, so the break-even is 60 - 4 = 56. Adding the premium is the call formula, and the strike by itself is only where the put begins to have intrinsic value.FINRA Rule 2360(a)(2), (a)(28)

An investor writes one uncovered XYZ 50 call for $2. What is the break-even stock price at expiration?

• a.$54
• b.$50
• c.$48
• d.$52✓

The writer keeps the 2 premium until the stock rises above the strike, and the premium offsets the first 2 of losses, so the break-even is 50 + 2 = 52. Subtracting the premium is the short put calculation, and the writer's potential loss above the break-even is unlimited.FINRA Rule 2360(a)(2), (a)(28)

An investor writes one uncovered XYZ 40 put for $3. What is the maximum possible loss, ignoring commissions?

• a.$4,000
• b.Unlimited
• c.$3,700✓
• d.$300

The loss is greatest if the stock goes to zero and the writer must buy it at the 40 strike. The premium received cushions that loss, so the maximum is (40 - 3) x 100 = $3,700. The full strike ignores the premium, the premium is the writer's maximum gain, and the loss is not unlimited because the stock cannot fall below zero.FINRA Rule 2360(a)(2), (a)(28)

An investor buys one XYZ 60 put for $6 and sells one XYZ 50 put for $2. What is the maximum loss on the spread?

• a.$1,000
• b.$200
• c.$400✓
• d.$600

The net debit is 6 - 2 = 4, and that is all the investor can lose if both puts expire worthless: $400. The spread width is the most the position can be worth, not the loss. The width less the debit is the maximum gain, and the short put premium alone leaves out the cost of the long put.FINRA Rule 2360(a)(2), (a)(28)

An investor sells one XYZ 50 call for $4 and buys one XYZ 55 call for $1. What is the maximum loss on the spread?

• a.$300
• b.$200✓
• c.$5,300
• d.$500

The net credit is 4 - 1 = 3. The loss is greatest when the stock is at or above 55, where the spread costs 5 per share, so the maximum loss is (5 - 3) x 100 = $200. The credit is the maximum gain, the width alone ignores the premium received, and the last figure confuses the break-even with a dollar loss.FINRA Rule 2360(a)(2), (a)(28)

An investor sells one XYZ 55 put for $4 and buys one XYZ 45 put for $1. What is the maximum gain on the spread?

• a.$400
• b.$700
• c.$1,000
• d.$300✓

The net credit is 4 - 1 = 3, and the investor keeps all of it if the stock finishes above 55: $300. The spread width is the maximum risk before the credit, the width less the credit is the maximum loss, and the short put premium alone ignores the cost of the protective put.FINRA Rule 2360(a)(2), (a)(28)

XYZ stock trades at $52. An XYZ 45 call trades at a premium of $8.5. What is the time value of the call?

• a.$8.50
• b.$7.00
• c.$15.50
• d.$1.50✓

Intrinsic value is the amount by which the stock exceeds the strike, 52 - 45 = 7. Time value is the premium less intrinsic value, 8.5 - 7 = 1.50. The 7.00 is the intrinsic value itself, and the full premium includes both components.FINRA Rule 2360(a)(2), (a)(28)

An investor writes an XYZ 40 put for $3 and is assigned, buying 100 shares at the strike. Ignoring commissions, what is the investor's net cost per share?

• a.$37✓
• b.$3
• c.$40
• d.$43

The writer buys at the 40 strike but has already received 3 per share in premium, so the net cost is 40 - 3 = 37. Adding the premium is the call buyer's cost, and the strike alone ignores the premium received.FINRA Rule 2360(a)(2), (a)(28)

An investor owns 100 XYZ bought at $45 and writes an XYZ 50 call for $2. The call is exercised. Ignoring commissions, what is the total proceeds per share, counting the premium?

• a.$47
• b.$52✓
• c.$50
• d.$48

The shares are sold at the strike of 50, and the writer also keeps the 2 premium, so the total received is 50 + 2 = 52 per share. Subtracting the premium reverses the direction of the premium, and the strike alone leaves it out.FINRA Rule 2360(a)(2), (a)(28)

An individual investor buys a call, holds it for 5 months, and lets it expire worthless. How is the loss treated for federal income tax purposes?

• a.An ordinary loss deductible in full against wages
• b.A short-term capital loss equal to the premium paid, with the holding period ending on the expiration date✓
• c.A nondeductible capital expenditure, since the option was never exercised
• d.A long-term capital loss, because options on stock are always treated as long-term property regardless of the holding period

An option's cost is a capital expenditure, but if it expires its cost becomes a capital loss and the holder is treated as having sold it on the expiration date. Held for less than a year, the loss is short-term. Options are not automatically long-term, and the loss is not ordinary or nondeductible.IRS Pub. 550, Puts and Calls

An individual who is not in the business of writing options writes a call, collects the premium, and the call expires unexercised. How is the premium taxed?

• a.As ordinary income in the year the premium is received
• b.As a long-term capital gain if the option ran for more than six months
• c.As a reduction of the basis of other holdings in the stock, with no tax at all
• d.As a short-term capital gain in the year the option expires✓

The writer defers the premium until the obligation ends. If the option expires, the full premium is a short-term capital gain, whatever the option's length. It is not taxed when received and it does not become long-term merely because the option ran several months.IRS Pub. 550, Puts and Calls

An investor buys a call, later exercises it, and buys 100 shares at the strike. How does the call's premium affect the tax treatment?

• a.It is added to the basis of the stock acquired✓
• b.It is reported as ordinary income in the year of exercise
• c.It is deducted as a capital loss in the year of exercise
• d.It is subtracted from the basis of the stock acquired

The cost of an exercised call is not deducted at once. It becomes part of the cost of the shares bought, so basis is the strike paid plus the premium. Reducing basis is how the premium received by a put writer is handled, not what a call buyer does.IRS Pub. 550, Puts and Calls

An investor exercises a call on a Monday and acquires 100 shares. When does the holding period of those shares begin?

• a.The day the call was exercised, counting that day
• b.The day the call was purchased, since that date begins the holding period for the stock
• c.The day the option was first listed
• d.The day after the call was exercised✓

The holding period for stock acquired through exercise begins the day after exercise. The time the investor held the option does not count toward the stock's holding period, so shares bought through a call held for a year are not automatically long-term.IRS Pub. 550, Puts and Calls

An investor writes a put, is assigned and buys 100 shares at the strike. How is the premium received treated?

• a.It reduces the investor's basis in the stock bought✓
• b.It is taxed as a short-term capital gain in the year of assignment
• c.It is ordinary income reported when the put was written
• d.It is added to the basis of the stock acquired

The premium of a put that is exercised against the writer is not taxed separately; it lowers the basis of the shares the writer is obliged to buy. If the put had expired, the premium would be a short-term capital gain instead. Adding it to basis is what a call buyer does.IRS Pub. 550, Puts and Calls

An investor sells stock at a loss on June 1 and buys a call on the same stock on June 15. What is the tax result for the loss?

• a.The loss is disallowed under the wash sale rule because the call is an option to buy substantially identical stock within 30 days✓
• b.The loss is allowed only if the call is exercised before year end
• c.The loss is disallowed only if the call is exercised within 30 days
• d.The loss is allowed, because calls are not securities for wash sale purposes

A wash sale occurs when stock is sold at a loss and, within 30 days before or after, the investor acquires a contract or option to buy substantially identical stock. Buying the call itself triggers the rule whether or not it is ever exercised, and the disallowed loss is added to the basis of the replacement.IRS Pub. 550, Puts and Calls

An investor sells stock at a loss and, 20 days later, buys back the same stock. What happens to the disallowed loss?

• a.It is lost permanently and cannot be recovered
• b.It is deductible in full, but only against capital gains
• c.It is carried to the next tax year as a deduction against ordinary income only, up to the amount of the premium paid
• d.It is added to the cost basis of the new shares, and the holding period of the old shares carries over✓

The wash sale rule postpones rather than destroys the loss. The disallowed amount increases the basis of the replacement shares, and the new shares take on the old holding period, so the loss is recognized when the new shares are eventually sold.IRS Pub. 550, Puts and Calls

An investor buys a put on stock owned for less than a year and later sells the put for a gain. What is the effect on the holding period of the stock?

• a.The gain is short-term, and the stock's holding period does not begin until the put is disposed of or expires✓
• b.The stock's holding period is unaffected and keeps running
• c.The gain is long-term, since the put was bought with the stock still held
• d.The put and stock are treated as one position for a combined holding period

Buying a put is generally treated as a short sale, so a gain on the put is short-term if the underlying stock has been held a year or less. The stock's holding period is suspended and begins on the earliest of the date the stock is disposed of, or the put is exercised, sold or expires.IRS Pub. 550, Puts and Calls

A municipal finance professional at a dealer makes a political contribution of $1,000 to a mayor who has dealer selection influence, and the professional is not entitled to vote for the mayor. What is the consequence under MSRB Rule G-37?

• a.The dealer is barred only from negotiated deals and may still bid on competitive sales
• b.The dealer may not engage in municipal securities business with that municipal entity for two years✓
• c.The dealer may not engage in municipal securities business with that municipal entity for one year
• d.The dealer may continue doing business if the contribution is disclosed on Form G-37 within 30 days after the end of that calendar quarter

Rule G-37 imposes a two-year ban on municipal securities business with a municipal entity after a contribution by the dealer, a municipal finance professional or a controlled political action committee to an official with dealer selection influence. The contributor cannot vote for the official, so the voting exception does not apply and the dealer is barred from municipal securities business with the entity for two years. The ban is not cured by disclosing the contribution.MSRB Rule G-37(b)(i)

A municipal finance professional at a dealer is entitled to vote for a county treasurer and contributes $200 to that official's campaign for a single election. How does Rule G-37 treat the contribution?

• a.It falls within the exception only if the contribution is made through the dealer's PAC
• b.It falls within the de minimis exception, since the total for the election does not exceed $250 and the contributor can vote for the official✓
• c.It falls within the exception only if the professional is also a registered principal
• d.It triggers the two-year ban, because every contribution to an issuer official does

The exception covers a contribution by a municipal finance professional who is entitled to vote for the official, so long as all contributions to that official in total do not exceed $250 per election. The professional's principal status and the use of a PAC are irrelevant, and the $200 contribution does not trigger the ban.MSRB Rule G-37(b)(ii)(A)

A municipal finance professional who lives in the municipality contributes $400 to the campaign of a city official with dealer selection influence in one election. The professional can vote for the official. What is the result under Rule G-37?

• a.The ban applies only if the dealer was an underwriter of the city's most recent issue
• b.It is allowed, because the contributor is entitled to vote for the official, whatever the amount
• c.The contribution exceeds the $250 per-election limit, so the ban on business with the city applies✓
• d.It is allowed, because a contributor who is entitled to vote for the official may give up to $500 per election

The right to vote protects a contribution only up to $250 per election in total. Anything above that amount, even by a voter, falls outside the exception and triggers the two-year ban. The dealer's prior role with the issuer does not matter.MSRB Rule G-37(b)(ii)(A)

Under MSRB Rule G-20 as amended for dealers that are FINRA members, what is the annual limit on gifts or services given to a person in relation to the municipal securities activities of that person's employer?

• a.$100 per person per year
• b.$250 per person per election
• c.$300 per person per year✓
• d.There is no limit if the gift is not tied to a sales target

Rule G-20 bars gifts or services worth more than $300 per person per year when they relate to the municipal securities activities of the recipient's employer, an amount aligned with FINRA Rule 3220. The $100 figure is the older, lower limit. The $250 number belongs to Rule G-37 contributions, and a gift with no sales target is still subject to the limit.FINRA Rule 3220; MSRB Rule G-20

A customer buys municipal bonds in a regular-way transaction on a Wednesday. Under MSRB rules, when is settlement due?

• a.Three business days after the trade date, which is Monday
• b.The same day, because municipal securities trades are required to settle for cash
• c.The first business day after the trade date, which is Thursday✓
• d.The second business day after the trade date, which is Friday, unless the dealer elects otherwise

For regular-way municipal transactions the settlement date is the first business day following the trade date. A cash trade settles on the trade date, and the dealer may agree otherwise only if the parties expressly agree at the time of the trade. Two and three business days are older conventions.MSRB Rule G-15(b)(ii)

As a general matter, within what time after the time of trade must a dealer report a municipal securities transaction to the MSRB's trade reporting system during the system's business hours?

• a.By the end of the next business day
• b.As soon as practicable but no later than 15 minutes after the time of trade✓
• c.Within 60 minutes after the time of trade
• d.By the end of the trade date

The RTRS procedures require a trade to be reported as soon as practicable but no later than 15 minutes after the time of trade, with defined exceptions such as list-offering-price and takedown transactions, which are reported by end of day. A same-day or next-day deadline applies only to those exceptions.MSRB Rule G-14 RTRS Procedures

Which of the following must a dealer disclose to a customer at or before the time of a municipal securities trade under MSRB Rule G-47?

• a.Only information that the dealer deems to be adverse to the issuer
• b.All material information known about the transaction and material information about the security that is reasonably accessible to the market✓
• c.Only the information in the official statement
• d.Only information the customer requests

Rule G-47 applies to sales and purchases, whether recommended or unsolicited, and in both primary and secondary transactions. The dealer must disclose material information it knows about the transaction and material information reasonably accessible to the market. The duty is not limited to the official statement or to the customer's questions.MSRB Rule G-47(a)(i)

A dealer sells a new issue of municipal bonds to a customer. By when must the customer receive the official statement, or a written notice that none is being prepared?

• a.No later than settlement of the transaction✓
• b.Within 30 days after the issue date of the bonds
• c.Before the customer places the order
• d.Within five business days after the first interest payment

Rule G-32 requires delivery of the official statement, or a notice that none exists together with any preliminary official statement, by no later than the settlement of the transaction. Delivery before the order and delivery after the issue date are not what the rule requires.MSRB Rule G-32(a)(i)

How often must a dealer provide customers with the notice that it is registered with the SEC and the MSRB and that an investor brochure is available on the MSRB website?

• a.Only when the account is opened
• b.With every confirmation of a municipal trade
• c.At least once every calendar year to each customer who has a municipal position or traded in municipal securities✓
• d.Every quarter, with the account statement

Rule G-10 requires a once-per-calendar-year written notice, which may be delivered electronically, to each customer for whom a municipal securities purchase or sale was effected or who holds a municipal position. It is not tied to every confirmation, and a single notice at account opening would not satisfy it.MSRB Rule G-10(a)

A dealer serves as financial advisor to an issuer for a bond issue. Under Rule G-23, what is the dealer's status on that same issue?

• a.It may act as underwriter without restriction, since financial advisors owe no fiduciary duty
• b.It may not also serve as underwriter or placement agent on that same issue✓
• c.It may underwrite the issue only if it resigns as advisor after the pricing
• d.It may underwrite the issue if it discloses the financial advisory role in writing

Rule G-23 requires dealers to evidence financial advisory relationships in writing and prohibits a dealer from serving as both financial advisor and underwriter or placement agent on the same issue. Written disclosure of the advisory role does not cure the conflict, and resigning as advisor after pricing is not a recognized way around the prohibition.MSRB Rule G-23(d)

A syndicate is formed to underwrite a primary offering of municipal bonds. Unless the issuer agrees otherwise, how must the priority provisions treat customer orders and syndicate members' own account orders?

• a.Members' own-account orders get priority because they bear underwriting risk
• b.All orders are treated pro rata with no priority
• c.The manager may set priorities entirely at its discretion without any written provisions
• d.Customer orders must receive priority over members' own-account orders to the extent feasible and consistent with orderly distribution✓

Rule G-11 requires the syndicate to establish priority provisions, and unless the issuer agrees otherwise they must give customer orders priority over members' own and related account orders, to the extent feasible and consistent with orderly distribution. A provision that leaves priority wholly to the manager's discretion does not satisfy the requirement.MSRB Rule G-11(e)

A dealer sells municipal bonds from its inventory to a customer as principal. What standard applies to the price under Rule G-30?

• a.The aggregate price, including any mark-up, must be fair and reasonable✓
• b.The mark-up may not exceed 5 percent in any single transaction, whatever its size
• c.The price must equal the last price reported to the MSRB
• d.The price must be lower than the price at which the dealer bought the bonds

Rule G-30 requires that a dealer's principal transactions be at an aggregate price, including any mark-up or mark-down, that is fair and reasonable in light of all relevant factors. There is no fixed percentage ceiling and no rule tying the price to the last reported trade or to the dealer's cost.MSRB Rule G-30(a)

The minimum denomination of a municipal bond issue is $5,000. A dealer wants to sell a customer $3,000 par of the issue in a customer transaction. What does Rule G-15 say?

• a.The dealer may sell it because the rule applies only to purchases from customers
• b.The dealer may sell it if the customer signs a waiver
• c.The dealer may not effect the transaction, because it is below the issue's minimum denomination✓
• d.The dealer may sell it if the price is adjusted downward to reflect the smaller odd amount of bonds

Rule G-15 bars a customer transaction in an issue below its minimum denomination for issues sold after June 1, 2002. A narrow exception allows buying a customer's entire small position that is already below the minimum. A waiver or price adjustment does not change this.MSRB Rule G-15(f)(i)

A municipal bond yields 3.60 percent tax-free. For an investor in the 32 percent federal bracket, what taxable yield is equivalent, ignoring state taxes?

• a.11.25 percent
• b.4.75 percent
• c.5.29 percent✓
• d.2.45 percent

The taxable equivalent yield is the tax-free yield divided by one minus the tax rate: 3.60 / 0.68 = 5.29 percent. Multiplying by one minus the rate runs the calculation backward, giving the after-tax yield of a taxable bond. Multiplying by one plus the rate and dividing by the rate itself are not the formula.Federal income tax exemption, 26 U.S.C. 103; IRS Pub. 550

An investor in the 24 percent federal bracket holds a taxable corporate bond yielding 4.80 percent. What tax-free municipal yield would give the same after-tax return, ignoring state taxes?

• a.1.15 percent
• b.6.32 percent
• c.3.65 percent✓
• d.5.95 percent

The after-tax yield of the corporate bond is 4.80 x (1 - 0.24) = 3.65 percent, so a municipal bond must yield at least that to match it. Dividing by one minus the rate would convert a municipal yield into a taxable one, and the other results do not follow from the tax rate.Federal income tax exemption, 26 U.S.C. 103; IRS Pub. 550

Which sale is a short sale under Regulation SHO?

• a.Any sale of a security that has declined in price since the seller bought it
• b.Any sale of a security held for less than one year
• c.A sale of a security the seller does not own, or a sale completed with a security borrowed for the seller's account✓
• d.A sale of a security the seller owns but has not yet received because the purchase of it was made only two days earlier

Rule 200 defines a short sale as a sale of a security the seller does not own, or one that is completed by delivering a borrowed security. A person is deemed to own a security if the person has title or has purchased it, or has entered into an unconditional contract to purchase it but has not yet received it. Holding period and unrealized loss have no bearing on the definition.17 CFR 242.200(a)

A customer who is net long 500 shares of a stock enters an order to sell 500 shares that are held in the account at the broker-dealer. How must the order be marked?

• a.Short
• b.Short unless the customer signs a long affidavit
• c.Long✓
• d.Short exempt

A sell order is marked long only when the seller is deemed to own the security and it is in the broker-dealer's possession or control, or is reasonably expected to be there by settlement. Short exempt is reserved for the narrow cases in Rule 201, and no affidavit requirement applies to a position held in the account.17 CFR 242.200(g)

Before accepting a short sale order in an equity security from a customer, what must a broker-dealer generally have under Regulation SHO's locate requirement?

• a.Borrowed the security, arranged to borrow it, or have reasonable grounds to believe it can be borrowed for delivery when due, and documented that✓
• b.Confirmed that the stock has at least 100,000 shares of daily volume
• c.Received a deposit equal to 50 percent of the sale proceeds
• d.Obtained the customer's written statement that the stock will fall

Rule 203(b)(1) bars accepting a short sale order unless the firm has borrowed the security, entered a bona fide borrowing arrangement, or has reasonable grounds to believe it can be borrowed so it can be delivered when due, with that compliance documented. Trading volume, a customer's view of the price, and a cash deposit are not elements of the locate.17 CFR 242.203(b)(1)

A listed stock closed at $40.00 yesterday. During today's session its price falls to $35.50 on heavy selling. What does the Regulation SHO alternative uptick rule require?

• a.Short selling in the stock is banned for the rest of today only
• b.Nothing yet, because the decline must reach 20 percent
• c.Short sales may be executed only at a price below the national best bid
• d.Short sale orders may not be executed or displayed at or below the national best bid for the rest of today and all of tomorrow✓

A decline of 10 percent or more from the prior close triggers the restriction, and $35.50 is a 11.25 percent drop. Once triggered, trading centers must prevent execution or display of short sale orders at or below the national best bid for the remainder of the day and the following day. It is a price test, not a ban, and the trigger is 10 percent, not 20.17 CFR 242.201(b)(1)

A clearing participant has a fail-to-deliver position that resulted from a short sale. What is the general close-out requirement under Rule 204?

• a.Close out at the end of the month in which the fail occurred
• b.Close out by the end of the settlement date
• c.Close out within 10 settlement days after the settlement date
• d.Close out by borrowing or purchasing securities no later than the beginning of regular trading hours on the settlement day after the settlement date✓

Rule 204 requires a participant with a fail to deliver from a short sale to close it out by borrowing or buying securities of like kind and quantity by the start of regular trading hours on the next settlement day after the settlement date. A longer period of three settlement days applies to a fail resulting from a long sale. Month-end and ten-day periods are not what the rule provides.17 CFR 242.204(a)

A fail to deliver at a clearing agency resulted from a long sale. By when must the participant close it out under Rule 204?

• a.By the end of the settlement date
• b.By the beginning of regular trading hours on the third consecutive settlement day after the settlement date✓
• c.By the beginning of regular trading hours on the first settlement day after the settlement date, as with a short sale fail
• d.By the beginning of regular trading hours on the thirty-fifth settlement day after the settlement date

Rule 204 gives a participant three consecutive settlement days after the settlement date to close out a fail that resulted from a long sale, compared with one settlement day for a fail from a short sale. Closing out on the settlement date itself is stricter than the rule requires, and the extended 35-day period is not part of the rule's text.17 CFR 242.204(a)(1)

Under SEC Rule 15c6-1, which contract settlement cycle applies to most broker-dealer securities transactions unless the parties expressly agree otherwise at the time of the transaction?

• a.Payment and delivery no later than the second business day after the contract date
• b.Payment and delivery no later than the third business day after the contract date
• c.Payment and delivery on the contract date
• d.Payment and delivery no later than the first business day after the contract date✓

Rule 15c6-1(a) prohibits contracts that call for payment and delivery later than the first business day after the contract date, unless the parties expressly agree otherwise at the time of the transaction. The second business day is the cycle that applied before the change, and the third and same-day cycles are not the general standard.17 CFR 240.15c6-1(a)

A firm commitment underwriting of securities priced after 4:30 p.m. Eastern time may settle later than the standard cycle. What is the outer limit under Rule 15c6-1 for the exempted firm commitment offering?

• a.The settlement of such trades is never permitted beyond the contract date
• b.The fourth business day after the contract date
• c.The first business day after the contract date, which is the standard cycle for ordinary trades
• d.The second business day after the contract date✓

Rule 15c6-1(c) lets contracts for the sale for cash of securities priced after 4:30 p.m. Eastern time on the date of pricing in a firm commitment offering settle no later than the second business day after the contract date. The shorter first-day cycle is the general rule and the longer fourth-day cycle is not in the rule.17 CFR 240.15c6-1(c)