FINRA Series 7 — All Questions

A broker-dealer that does not conduct transactions for customers or hold customer accounts must have its AML program independently tested at least:

• a.Every month, by the AML compliance officer herself
• b.Every three years, by a qualified independent person
• c.Every two years, by a qualified independent person✓
• d.Every calendar year, by a qualified independent person

Rule 3310(c) requires annual independent testing on a calendar-year basis, but a member that does not execute transactions for customers or otherwise hold customer accounts need only test every two years. Annual testing is the standard, three years is not a period in the rule, and the compliance officer cannot be the independent tester.FINRA Rule 3310

A director buys 2,000 shares of her company's stock on Wednesday. By when must she file Form 4?

• a.By the end of the following Wednesday, within five business days of the trade
• b.By the end of Wednesday, the same day as the transaction
• c.By the end of Friday, the second business day after the transaction✓
• d.Within 10 days after the end of the month in which the trade occurred

Form 4 must be filed before the end of the second business day after the transaction that changes beneficial ownership. A Wednesday purchase makes Friday the deadline. Same-day filing, five business days and a month-end schedule are not the requirement.Exchange Act Section 16(a)

An investor acquires 12% of a company's registered class of equity securities. The investor must file Form 3:

• a.Only if the investor also becomes an officer or director of the company
• b.Within 45 days after the end of the company's next fiscal year
• c.Within 10 days after becoming a more-than-10% beneficial owner✓
• d.Within two business days after the purchase, as with Form 4

A beneficial owner of more than 10% of a registered equity class is a Section 16 insider and must file an initial Form 3 within 10 days after becoming one. Two business days is the Form 4 deadline for later changes, the 45-day year-end filing is Form 5, and officer or director status is not needed for a 10% holder.Exchange Act Section 16(a)

An officer buys 1,000 shares of her company at $20 on January 10 and sells 1,000 shares at $26 on May 15 of the same year. Who is entitled to the profit and how much?

• a.The issuer, which may recover $26,000, the full proceeds of the sale made in May
• b.The issuer, which may recover $6,000 regardless of the officer's intent✓
• c.No one, because the profit was earned on a sale made after more than 90 days
• d.The SEC, which may collect $6,000 as a civil penalty

Section 16(b) lets the issuer recover profit an insider earns from a purchase and sale within less than six months, whether or not the insider used inside information. The profit is 1,000 x ($26 - $20) = $6,000. The remedy belongs to the issuer, not the SEC; the six-month period, not 90 days, is the test; and only the profit is recoverable, not the proceeds.Exchange Act Section 16(b)

A director adopts a Rule 10b5-1 trading plan on February 2. The company files its Form 10-Q for the quarter in which the plan was adopted on Monday, May 11. The earliest permitted trade under the plan is:

• a.Monday, May 11, once the Form 10-Q has been filed
• b.Wednesday, May 13, because that is later than 90 days after adoption✓
• c.Wednesday, March 4, because a 30-day cooling-off period applies after adoption
• d.Sunday, May 3, 90 days after adoption, regardless of the 10-Q

For directors and officers, the cooling-off period ends on the later of 90 days after adoption or two business days after the 10-Q or 10-K for the quarter of adoption, capped at 120 days. Ninety days after February 2 is May 3, and two business days after May 11 is May 13, which is later and within the cap. A 30-day period applies to other persons, not directors.SEC Rule 10b5-1(c)

A senior officer of an issuer unintentionally gives material nonpublic information to a research analyst. What must the issuer do?

• a.Make public disclosure within five business days of a senior officer learning of it
• b.Nothing, because Regulation FD covers only intentional disclosure
• c.Ask the analyst to keep the information confidential and file a Form 8-K next quarter
• d.Disclose publicly within 24 hours or by the next NYSE open, whichever is later✓

When an issuer discloses material nonpublic information unintentionally to covered persons, Regulation FD requires prompt public disclosure: as soon as reasonably practicable and no later than 24 hours after a senior official learns of it, or the start of the next day's NYSE trading, whichever is later. Intent does not remove the duty, five business days is too slow, and an informal confidentiality request does not substitute for public disclosure.Regulation FD

A municipal finance professional at a dealer contributes $400 to the re-election campaign of a mayor, an issuer official for whom he is entitled to vote. What is the consequence for the dealer?

• a.A two-year ban on municipal securities business with that issuer✓
• b.A permanent ban from all municipal securities business, with any issuer
• c.A one-year ban on municipal securities business with that issuer's offerings
• d.No ban, because contributions up to $500 are allowed for officials a person can vote for

Rule G-37 permits de minimis contributions of up to $250 per election to officials for whom the person is entitled to vote. A larger contribution triggers a two-year prohibition on the dealer engaging in municipal securities business with that issuer. The ban is not one year, the threshold is $250 and not $500, and it applies to the issuer in question, not the whole market.MSRB Rule G-37

A dealer sells a new municipal issue to a customer. By when must the dealer deliver the official statement to the customer?

• a.Only if the customer requests it in writing after settlement
• b.By the settlement of the transaction, when an official statement exists✓
• c.At least 48 hours before the trade is executed
• d.Within 30 days after the issue's first interest payment date

Rule G-32 requires a dealer selling a new issue to send the official statement, where one exists, to the customer by the settlement of the transaction. Delivery after the first interest payment is too late, the 48-hour preliminary prospectus requirement belongs to equity IPOs, and delivery cannot depend on a later request.MSRB Rule G-32

A tippee avoids a $40,000 loss by selling stock after receiving material nonpublic information from an insider. What is the maximum civil penalty the SEC can seek in court?

• a.$40,000, equal to the loss avoided, which replaces any disgorgement of the profits
• b.$400,000, ten times the loss avoided, in addition to disgorgement of the $40,000
• c.$80,000, twice the loss avoided, in addition to disgorgement of the $40,000
• d.$120,000, three times the loss avoided, in addition to disgorgement of the full $40,000✓

Courts may impose a civil penalty of up to three times the profit gained or loss avoided in an insider trading case, and the violator may also have to give up the gain. For $40,000 avoided, the cap is $120,000. Penalties of one, two or ten times the amount are not the statutory ceiling.Insider Trading Sanctions Act

A firm terminates a registered representative on June 1. What must the firm do about Form U5?

• a.File it before the termination date and send a copy only to the state
• b.File it within 10 days of termination and keep every copy inside the firm
• c.File it at the next annual renewal and give the representative a copy then
• d.File it within 30 days of termination and give the representative a copy✓

A firm must file Form U5 no later than 30 days after a representative's termination and must provide the individual a copy of the filing. A 10-day deadline, filing before termination and waiting until annual renewal are not what the rules call for, and withholding the copy would also violate them.FINRA By-Laws Article V, Section 3

A representative calls a customer at 7:30 p.m. local time. The customer is on the national do-not-call registry, had a transaction with the firm 14 months ago and never asked to be placed on the firm's internal do-not-call list. Under Rule 3230, the call is:

• a.Prohibited, because the national registry always bars calls to any customer who is listed on it
• b.Prohibited, because calls to customers are only allowed after 9 a.m. and before 5 p.m. local time
• c.Permitted only if the customer first gives written consent to receive the call from the firm
• d.Permitted, because a transaction within 18 months creates an established business relationship✓

Telemarketing calls are allowed between 8 a.m. and 9 p.m. in the recipient's time zone. A customer on the national registry may still be called if an established business relationship exists, which means a transaction within the prior 18 months, unless the customer asked to be put on the firm's own list. Written consent is not needed, and the permitted window is not 9 to 5.FINRA Rule 3230

A representative recommends 30 trades in a retail customer's account in two months. Each trade may be reasonable alone, but total commissions are very high compared with the account's value. Which Reg BI obligation is most directly implicated?

• a.The Compliance Obligation, because the firm must register each trade with the SEC
• b.The Disclosure Obligation, because the firm must disclose the commissions before every individual trade
• c.The Conflict of Interest Obligation, because commissions on any recommended trade are always prohibited
• d.The Care Obligation, because a series of recommended trades must not be excessive for the customer✓

The Care Obligation requires a reasonable basis to believe a series of recommended transactions, even if each is in the customer's best interest alone, is not excessive in light of the customer's investment profile. Disclosure is a separate duty, firms do not register individual trades with the SEC, and Reg BI permits commissions but requires managing the conflict.Regulation Best Interest, Care Obligation

Which compensation practice must a broker-dealer eliminate under Reg BI's Conflict of Interest Obligation?

• a.A bonus paid to representatives only for selling one fund family in a three-month window✓
• b.A flat salary paid to all representatives regardless of the products they recommend
• c.A year-end bonus based on total assets gathered across all product types and accounts
• d.A commission schedule that pays the same rate on all equity products sold by the firm

Reg BI requires firms to eliminate sales contests, quotas, bonuses and non-cash compensation based on sales of specific securities or specific types of securities within a limited period. A salary, a uniform commission schedule and a bonus tied to general asset gathering do not give that incentive to favor a particular product.Regulation Best Interest, Conflict of Interest Obligation

Before or at the time of a recommendation to a retail customer, the broker-dealer must disclose in writing:

• a.Only the representative's commissions on the specific security that is being recommended
• b.All material facts about the relationship, such as capacity, fees, costs and conflicts✓
• c.A complete history of the representative's customer complaints for each of the last ten years
• d.The firm's net capital and balance sheet for its most recently completed fiscal year

The Disclosure Obligation requires full and fair written disclosure of material facts about the scope and terms of the relationship, such as the capacity in which the firm acts, fees and costs, and conflicts of interest. Limiting disclosure to commissions on one security is too narrow, and complaint history and net capital are not part of this obligation.Regulation Best Interest, Disclosure Obligation

After the initial 15 business day hold and the first 10 business day extension on a disbursement from a senior customer's account, the firm has reported its belief of exploitation to a state securities regulator. What further extension does Rule 2165 allow?

• a.A further 30 business days, if the matter was reported to a state regulator, agency or court✓
• b.No further extension, because a temporary hold cannot exceed 15 business days in total
• c.A further 90 business days, if the customer's trusted contact agrees to the extension
• d.A further 30 business days, even if the firm has not reported the matter to any authority

Rule 2165 allows an initial hold of 15 business days, 10 more if the firm's internal review supports a reasonable belief of exploitation, and a further 30 business days if the firm has reported or notified that belief to a state regulator, agency or court. Without such a report the 30-day extension is unavailable, a trusted contact cannot authorize an extension, and the 15-day period can be extended.FINRA Rule 2165

A customer asks his representative whether the firm has filed a Suspicious Activity Report about his account. What should the representative do?

• a.Deny the filing, to avoid alerting the customer to the firm's compliance concerns
• b.Confirm the filing, because the customer is the person that the report concerns
• c.Confirm the filing only if the customer agrees not to move the account elsewhere
• d.Decline to confirm or deny it and refer the question to the AML compliance officer✓

The existence of a SAR is confidential and may not be disclosed to the subject, including by confirming it. The representative should refuse to answer and escalate to compliance. Confirming it breaks the confidentiality rule even with conditions attached, and a false denial would be dishonest as well as unnecessary.31 U.S.C. 5318(g)(2)

A Texas company plans an intrastate offering under Rule 147A and wants to advertise it on a public website. Which statement is correct?

• a.Sales to out-of-state buyers are allowed if they are accredited
• b.General advertising is barred, since the offering is limited to one state
• c.General advertising is allowed, but all sales must be to residents✓
• d.The company qualifies if its principal office is in Texas, wherever it operates

Rule 147A allows general solicitation and general advertising, which is what distinguishes it from Rule 147. All sales must still be made only to residents of the state, or to persons the issuer reasonably believes are residents. The issuer must also be doing business in the state under at least one test, such as deriving at least 80% of its consolidated gross revenues there, so an office alone is not enough. Buyer accreditation does not replace the residency requirement.17 CFR 230.147A(b), (c) and (d)

An investor buys shares in a Rule 147A offering. During the six months after the issuer sold the shares to her, to whom may she resell them?

• a.Only to residents of the state of the issuer✓
• b.Only to qualified institutional buyers (QIBs)
• c.Only to accredited investors wherever they live
• d.To any buyer, since the original sale was exempt

Rule 147A limits resales for six months from the date of the issuer's sale to the purchaser: they may be made only to persons resident within the issuer's state. The shares are not freely resalable in that period even though the original offering was exempt. Accredited-investor status and QIB status do not change the in-state requirement.17 CFR 230.147A(e)

A non-reporting issuer has filed a registration statement that includes a price range and wants to send investors a free writing prospectus during the waiting period. Which requirement applies?

• a.It replaces the prospectus, so none need be delivered to investors
• b.It must be accompanied or preceded by the latest statutory prospectus✓
• c.It may not be used until SEC staff has reviewed and approved the document
• d.It may be used only after the registration statement has become effective

A non-reporting or unseasoned issuer may use a free writing prospectus only after a registration statement containing a price range has been filed, and the free writing prospectus must be accompanied or preceded by the most recent statutory prospectus, which may be furnished by hyperlink. The issuer must file an issuer free writing prospectus by the time it is first used, but the SEC does not approve it first. It does not replace the prospectus, and it may be used in the waiting period, before effectiveness.17 CFR 230.433

A U.S. company that is not an Exchange Act reporting issuer sells its common stock to non-U.S. persons in an offshore transaction under Regulation S, with no directed selling efforts in the United States. What distribution compliance period applies?

• a.40 days
• b.Six months
• c.One year✓
• d.Two years

Equity securities of a non-reporting domestic issuer fall in Category 3 of Regulation S, which carries a one-year distribution compliance period; it is six months if the issuer is a reporting issuer. The 40-day period applies to debt securities and to Category 2 securities. Two years was the old Rule 144 holding period for restricted stock and is not a Regulation S period.17 CFR 230.903

A registration statement is declared effective without the offering price. The issuer then files a prospectus with the pricing information. By when must it be filed to avoid a post-effective amendment?

• a.Within 30 calendar days after the offering is priced
• b.Within 45 calendar days after the registration statement is declared effective
• c.Within 5 business days after the price is set
• d.Within 15 business days after the effective date✓

Rule 430A allows price-related information to be left out of the registration statement at effectiveness. The prospectus supplying it must be filed within 15 business days after the effective date; otherwise a post-effective amendment is required. A shorter period such as 5 business days from pricing, and longer calendar-day periods such as 30 or 45 days, are not the Rule 430A deadline.17 CFR 230.430A

A registered representative emails a market commentary recommending a stock to 20 retail customers during a 30-day period. How is the message classified and supervised?

• a.As a retail communication that the firm must file with FINRA before it is first used
• b.As a retail communication that a principal must approve before use
• c.As an institutional communication, sent only to customers
• d.As correspondence, supervised under Rule 3110(b) without pre-approval✓

Under Rule 2210 a retail communication is a written communication distributed to more than 25 retail investors within 30 calendar days. A message to 20 retail customers is correspondence, which is supervised under Rule 3110(b) but does not require prior principal approval or a FINRA filing. The message is not institutional, because retail customers received it, even if they are existing customers.FINRA Rule 2210(a)(2) and (b)(1)(D)

A member that has been in business for years creates a brochure that promotes a specific family of registered mutual funds to retail investors. When must it be filed with FINRA?

• a.It need not be filed; the sponsor files it
• b.Within 30 calendar days after first use
• c.At least 10 business days before first use
• d.Within 10 business days after first use✓

Retail communications that promote a specific registered investment company or family of funds must be filed within 10 business days of first use. A pre-use filing is required of new members in their first year and for certain rankings and comparisons and security futures. The member that uses the piece is responsible for the filing, and the 30-day period is not in the rule.FINRA Rule 2210(c)(3)

A retail communication states, 'Invest $10,000 in the XYZ Growth Fund today, and we project you will have $50,000 in ten years.' May the firm use it?

• a.Yes, if it is clearly labeled as a hypothetical estimate and not a promise
• b.No, because the rule bars predicting or projecting investment performance✓
• c.Yes, if a principal approves the piece in writing before it is first used
• d.Yes, if the assumed return is set below the fund's long-term average return

Rule 2210(d)(1)(F) bars communications that predict or project performance. The exceptions cover a hypothetical illustration of mathematical principles that does not predict the performance of a specific investment, certain planning tools and research price targets. A projection for a named fund is outside them, and neither a label, a conservative assumption nor principal approval cures it.FINRA Rule 2210(d)(1)(F)

A fund advertisement carries the headline 'Best Growth Fund in America.' The fund ranked third among 120 funds in its category in a ranking from a recognized ranking entity. Is the headline permitted?

• a.Yes, if the ranking entity, period and criteria are disclosed in the ad
• b.Yes, if the fund also ranks near the top in its category in later periods
• c.No, since 'best' may be claimed only by a fund that ranked first✓
• d.Yes, since a top-three rank in a recognized ranking supports the claim

Under Rule 2212, an investment company ranking may not suggest that a fund is the best unless it actually ranked first in its category. Disclosing the entity, category, period and criteria is required for any ranking but does not make an untrue headline acceptable, and a high rank or later strong periods do not change the first-place requirement.FINRA Rule 2212

A retail communication about a collateralized mortgage obligation says its yield compares favorably with that of a bank certificate of deposit of similar maturity. What is wrong with it?

• a.The comparison would be allowed only if the CD rate is current
• b.Only the yield may be compared, since maturity differs between them
• c.Communications about CMOs may not compare them with any other investment✓
• d.Comparisons are allowed once the CMO is shown to carry government backing

Rule 2216 prohibits communications about collateralized mortgage obligations from comparing a CMO to any other investment vehicle, including a CD, because the cash flows, prepayment risk and average life are not comparable. A current CD rate, a yield-only comparison or a government backing does not lift the prohibition.FINRA Rule 2216

A firm's brochure describes a variable annuity as a liquid, short-term holding that works like a mutual fund. Which statement about the brochure is correct?

• a.It is proper, since annuities invest in mutual fund sub-accounts
• b.It is improper only if the brochure leaves out the surrender charge schedule
• c.It is proper, as long as the brochure also names the issuing insurance company
• d.It is improper, since it may not imply a mutual fund or a liquid holding✓

Rule 2211 governs communications about variable life insurance and variable annuities. They must identify the product accurately, and may not suggest it is a mutual fund or that it is a short-term, liquid investment. That the underlying sub-accounts resemble funds does not make the contract a fund, and naming the insurer does not cure a misleading description.FINRA Rule 2211

A member was co-manager of a secondary offering of ABC Corp. common stock. The issuer is not an emerging growth company. What is the minimum quiet period before the member's analysts may publish research on ABC?

• a.3 days after the offering✓
• b.10 days after the offering
• c.25 days after the offering
• d.15 days after the offering

Rule 2241 sets a quiet period of at least 3 days after a secondary offering for a member that acted as manager or co-manager. The longer period of at least 10 days applies after an initial public offering when the member was an underwriter or dealer. The 15-day and 25-day periods belong to earlier rules and do not apply.FINRA Rule 2241(b)(2)(I)

A registered representative joins a public chat thread on a social media site and recommends a stock in real-time replies. What does Rule 2210 require?

• a.A copy of each post must be filed with FINRA within 10 business days
• b.A principal must approve each post before it is made on the platform
• c.Nothing is required, because social media falls outside supervision duties
• d.No principal pre-approval, but the posts must be supervised as correspondence✓

Retail communications on an online interactive electronic forum are exempt from the principal pre-approval requirement, but the firm must supervise them in the way it supervises correspondence under Rule 3110(b). Static content, such as a profile or a posted article, is not interactive and does need approval. Social media is not outside supervision, and the posts are not subject to a filing requirement.FINRA Rule 2210(b)(1)(D)

A broker-dealer shares customers' nonpublic personal information with nonaffiliated parties only under the processing and servicing exceptions, and has not changed its privacy policies. Must it send annual privacy notices?

• a.Yes, but only to customers who have opted out of information sharing
• b.No, because the notice is required only when the customer relationship begins
• c.No, since it shares only under the exceptions and its policies are unchanged✓
• d.Yes, once in any 12 consecutive months for as long as the customer has an account

Regulation S-P requires an initial notice no later than when the customer relationship is established and an annual notice at least once in any 12 consecutive months. The annual notice is not required if the firm shares nonpublic personal information with nonaffiliated parties only under the exceptions in the rule and its policies have not changed since the last notice. The reason is the exception, not that notice is limited to the start of the relationship.17 CFR 248.5 and 248.14

A service provider to a broker-dealer discovers unauthorized access to customer information. Under Regulation S-P, which statement about the notification deadlines is correct?

• a.The provider notifies the firm within 30 days, and the firm notifies customers within 72 hours
• b.The provider tells the firm within 72 hours; the firm tells customers within 30 days✓
• c.The provider tells the firm within 10 days; the firm tells customers within 60 days
• d.The provider notifies the firm at once, and the firm notifies customers at its next annual review

Regulation S-P requires a service provider to notify the covered firm as soon as possible and no later than 72 hours after becoming aware of a breach. The firm remains responsible for notifying affected customers as soon as practicable, but not later than 30 days after becoming aware of the unauthorized access. The other pairs misstate those periods or defer notice to a later review.17 CFR 248.30

A broker-dealer closed a customer's account. For how long must it keep the identifying information it collected for that customer under its customer identification program?

• a.Five years after it was first collected
• b.Five years after the account is closed✓
• c.Three years after the account is closed
• d.Six years after the account was opened

Under the customer identification program rule, the identifying information the firm obtained (name, date of birth, address and identification number) must be kept for five years after the account is closed. Records of the documents relied on, the methods used and how discrepancies were resolved are kept for five years after the record is made. Three years and six years are not the periods in this rule.31 CFR 1023.220(a)(3)

A customer who signed no predispute arbitration agreement files a written request to arbitrate a dispute with her broker-dealer over its securities business. Must the firm arbitrate?

• a.Yes, but only if the customer has first completed mediation with the firm
• b.No, arbitration requires the member's consent once the dispute has arisen
• c.No, a member is bound only by a signed predispute arbitration agreement
• d.Yes, because the customer's request obligates the member under the Code✓

FINRA Rule 12200 requires a member or associated person to arbitrate a dispute with a customer if the customer requests it, or if a written agreement requires it, as long as the dispute arises in connection with the member's business. The customer's election alone is enough, with no agreement and no consent by the firm, and there is no dollar threshold.FINRA Rule 12200

A member firm learns that one of its registered representatives has been convicted of a felony, which makes him statutorily disqualified. Within what period must the firm amend his Form U4?

• a.At the time of the next annual review
• b.Within 60 days of learning all the facts
• c.Within 10 days of learning the facts✓
• d.Within 30 days of learning the facts

A Form U4 must be kept current through amendments, generally filed within 30 days of learning the facts. When the amendment involves a statutory disqualification, the deadline shortens to 10 days. Sixty days is not a deadline in the rule, and an amendment cannot wait for an annual review.FINRA By-Laws, Art. V, Sec. 2(c)

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 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)

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)