FINRA Series 7 — All Questions

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)

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)

Under Regulation NMS Rule 611, what must a trading center have in place?

• a.A requirement that all customer orders be executed within one second
• b.Written policies and procedures reasonably designed to prevent trade-throughs of protected quotations in NMS stocks✓
• c.A requirement that every order be routed to the exchange with the lowest access fee
• d.A complete ban on every execution at a price other than the midpoint of the national best bid and the national best offer

The order protection rule requires trading centers to establish, maintain and enforce written policies and procedures reasonably designed to prevent trade-throughs of protected quotations, subject to listed exceptions such as a system malfunction at the displaying center, non-regular-way contracts and single-priced opening or closing transactions. It is not a speed rule or a midpoint-pricing rule, and routing is not decided by fees alone.17 CFR 242.611(a)

Which of the following transactions is excepted from the trade-through prohibition of Rule 611?

• a.A transaction executed after 3:00 p.m. Eastern time
• b.A transaction executed by a retail customer for less than 100 shares
• c.A transaction in a stock priced above $50 per share
• d.A transaction that was not a regular way contract✓

Rule 611(b) lists exceptions that include a system failure at the displaying center, a non-regular-way contract, and single-priced opening, reopening or closing transactions. Order size, share price and time of day are not exceptions.17 CFR 242.611(b)(2)

An issuer repurchases its own common stock under the Rule 10b-18 safe harbor. Daily volume limits for the issuer's purchases generally may not exceed what share of the security's four-week average daily trading volume, unless a block exception applies?

• a.25 percent✓
• b.10 percent
• c.50 percent
• d.100 percent

The Rule 10b-18 volume condition generally limits an issuer's purchases on any single day to 25 percent of the security's four-week average daily trading volume, with a block purchase allowance in the rule. The safe harbor protects the issuer from manipulation liability when its conditions are met; it is not a requirement.17 CFR 240.10b-18(b)(4)

An issuer's stock has a four-week average daily trading volume of 800,000 shares. Ignoring the block exception and any alternative cap, what is the most the issuer may buy on one day under the Rule 10b-18 volume condition?

• a.200,000 shares✓
• b.120,000 shares
• c.80,000 shares
• d.400,000 shares

The limit is 25 percent of four-week ADTV, so 800,000 x 0.25 = 200,000 shares. Using 10 or 50 percent, or some other fraction, applies a figure that is not in the rule.17 CFR 240.10b-18

A broker-dealer using the basic method of Rule 15c3-1 has net capital of $200,000 and has been in business for several years. What is the most aggregate indebtedness it may carry?

• a.$2,000,000
• b.$3,000,000✓
• c.$4,000,000
• d.$1,600,000

Under the aggregate indebtedness standard a firm may not permit aggregate indebtedness to exceed 1500 percent of net capital, a 15-to-1 ratio. $200,000 x 15 = $3,000,000. The 800 percent ratio applies only during the first twelve months of business, so using it would understate the limit.17 CFR 240.15c3-1(a)(1)(i)

A newly registered broker-dealer using the aggregate indebtedness standard has been in business for four months. What ratio of aggregate indebtedness to net capital applies?

• a.No more than 1500 percent of net capital, a 15-to-1 ratio
• b.No more than 800 percent of net capital, an 8-to-1 ratio✓
• c.No more than 2000 percent of net capital, a 20-to-1 ratio
• d.No ratio applies until the firm has been registered for one full year

For the first twelve months after commencing business, the aggregate indebtedness limit is 800 percent of net capital. After that it is 1500 percent. There is no grace period without a ratio, and 2000 percent does not appear in the rule.17 CFR 240.15c3-1(a)(1)(i)

What minimum net capital must a broker-dealer maintain if it carries customer accounts and holds customer funds or securities, assuming it does not qualify for the lower tiers?

• a.$250,000✓
• b.$100,000
• c.$5,000
• d.$1,000,000

A firm that carries customer accounts and receives or holds funds or securities for those persons must keep at least $250,000 of net capital. The $100,000 figure is the dealer minimum, which also applies to firms writing options off an exchange, and $5,000 is the minimum for firms that only do limited kinds of business.17 CFR 240.15c3-1(a)(2)

What is the minimum net capital for a firm that is a dealer under Rule 15c3-1, such as one that writes options off an exchange?

• a.$5,000
• b.$250,000
• c.$100,000✓
• d.$25,000

A dealer must maintain net capital of at least $100,000, and the term includes any broker-dealer that endorses or writes options otherwise than on a national securities exchange. The $250,000 figure applies to firms carrying customer accounts, and $5,000 applies to firms with limited activity.17 CFR 240.15c3-1(a)(2)(iii)

A company director adopts a Rule 10b5-1 trading plan. What cooling-off period applies before any trades under the plan may occur?

• a.No waiting period, because the plan is written
• b.The later of 90 days after adoption or two business days after the company discloses financial results for the quarter in which the plan was adopted, subject to a 120-day maximum✓
• c.A fixed 30 days after adoption
• d.A fixed 120 days after adoption, with no other condition

For directors and officers, no trades may occur until the later of 90 days after the plan's adoption or two business days after the filing of the Form 10-Q or 10-K covering the quarter of adoption, subject to a maximum of 120 days after adoption. A written plan is not exempt from the waiting period, and 30 days is not the rule.17 CFR 240.10b5-1(c)(1)(ii)(B)

A dealer sells shares to a customer in a registered offering and relies on the SEC's access-equals-delivery approach instead of sending a final prospectus. By when must the dealer give the purchaser either the final prospectus or a notice that the sale was made under a registration statement?

• a.Within thirty calendar days after the registration statement becomes effective
• b.Not later than two business days after the sale is completed✓
• c.Before the customer pays for the shares, so the notice is on hand when the purchase is settled
• d.Only when the customer asks for it in writing, because the notice is optional for dealers

Rule 173 requires the underwriter or dealer to provide the final prospectus or the notice not later than two business days following the completion of the sale. The purchaser may also request a copy of the final prospectus. A fixed calendar period tied to effectiveness is not the rule, and the notice is not left to the customer to ask for.17 CFR 230.173(a)

A communication about a new issue is limited to the information that SEC Rule 134 allows. When may it be published, and what may it contain?

• a.It may be published only after the effective date, and it may compare the issuer's results with those of its competitors in the same industry
• b.It may be published after the filing, and it may recommend the shares to investors who want growth
• c.It may be published only after a registration statement has been filed, and it may state the security's price and the intended use of proceeds✓
• d.It may be published at any time before filing, and it may predict the issuer's earnings for the next two years

Rule 134 covers a limited communication, like a tombstone ad, published only after a registration statement containing a section 10 prospectus has been filed. It can include items such as the name of the issuer, the title and amount of the security, its price or price range, and a brief description of the use of proceeds. Earnings projections, recommendations and competitor comparisons are not among the permitted items.17 CFR 230.134

A private company issues stock options under a written compensatory plan in reliance on Rule 701. At its latest balance sheet date the company has total assets of $12 million, and the amount outstanding of the class being sold is $9 million. What is the most it may sell under Rule 701 in a consecutive 12-month period?

• a.$3,150,000
• b.$1,000,000
• c.$1,800,000✓
• d.$1,350,000

Rule 701 caps sales in any consecutive 12-month period at the greatest of $1,000,000, 15% of total assets, or 15% of the outstanding amount of the class. Here 15% of $12 million is $1,800,000, 15% of $9 million is $1,350,000, and the greatest of the three figures is $1,800,000. The $3,150,000 figure adds the two percentages together, which the rule does not allow.17 CFR 230.701(d)(2)

An issuer prices an offering and uses a prospectus that includes pricing information omitted from the effective registration statement under Rule 430A. By when must it be filed with the SEC under Rule 424(b)(1)?

• a.No later than the second business day after the offering price is determined or the prospectus is first used, whichever is earlier✓
• b.Before the offering price is set, so that the SEC can review the price in advance
• c.No later than the fifth business day after the registration statement becomes effective
• d.Within thirty calendar days after the first confirmation is sent to a purchaser

Rule 424(b)(1) requires a Rule 430A prospectus to be filed no later than the second business day following the earlier of the pricing date or the date of first use after effectiveness. The fifth-business-day period applies to other prospectus forms that are filed under Rule 424(b)(3), and not to a prospectus that contains the omitted pricing information.17 CFR 230.424(b)(1); 17 CFR 230.430A

Under Regulation T, a customer buys a listed stock in a margin account on a Tuesday, with no holidays that week. The standard settlement cycle is one business day. By which day must the firm obtain full payment for the purchase, absent an extension?

• a.Thursday, two business days after the purchase date
• b.Friday, three business days after the purchase date✓
• c.The following Monday, since the payment period is five business days
• d.Wednesday, the settlement date of the trade under the one-day cycle

Regulation T defines the payment period as the number of business days in the standard settlement cycle plus two business days. With a one-day cycle that is three business days, so a Tuesday purchase must be paid for by Friday. Settlement occurs on Wednesday, but the Regulation T payment period is longer than the settlement cycle.12 CFR 220.2 (payment period); 12 CFR 220.8(b)(1); SEC Rule 15c6-1(a)

Which equity-market test can qualify an issuer as a well-known seasoned issuer (WKSI) under SEC Rule 405, assuming it meets the other registrant requirements?

• a.A public float of at least $75 million of common equity held by non-affiliates of the issuer
• b.A market capitalization of at least $700 million counting every share, including those held by its officers
• c.A listing on a national securities exchange for at least five consecutive years
• d.A worldwide market value of at least $700 million of common equity held by non-affiliates✓

Rule 405 sets the equity test at $700 million or more of worldwide market value of outstanding voting and non-voting common equity held by non-affiliates. Shares held by affiliates are excluded from the measurement, so a figure that counts them does not meet the test. Exchange listing time is not part of the definition, and a $75 million float is a different, lower threshold.17 CFR 230.405 (definition of well-known seasoned issuer)

An issuer plans to use an issuer free writing prospectus in a registered offering. When must the issuer file it with the SEC, unless an exception applies?

• a.At least five business days before the date of first use, so that the SEC can review it
• b.Only after the offering has closed and the final confirmations have been sent
• c.No later than the date the free writing prospectus is first used✓
• d.Within thirty days after the registration statement becomes effective

Under Rule 433(d)(1), an issuer free writing prospectus must be filed by a means reasonably calculated to result in filing no later than the date of first use. It is not subject to an advance review period, and waiting until the offering closes would let it be used with no public record.17 CFR 230.433(d)(1)(i)(A)