Series 79 Investment Banking Representative Exam

Correct: According to FINRA Rule 2360(b)(16) and Cboe Rule 9.1, the Options Disclosure Document (ODD) must be furnished to the customer at or prior to the time the account is approved for options trading. Furthermore, for customers approved for uncovered short option transactions, firms are specifically required to provide a written description of the risks involved in such transactions at or prior to the initial approval of the account for such business. Incorrect: The 15-day window mentioned in other options refers to the timeframe for a customer to return the signed options account agreement, not the delivery of the ODD. Providing disclosures only upon request, via a website, or at the time of trade confirmation fails to meet the affirmative delivery requirement mandated at the point of account approval. Regulatory disclosure requirements for high-risk strategies cannot be bypassed through the use of independent research waivers. Takeaway: Firms must deliver the ODD and specific uncovered option risk disclosures at or before the time of account approval to comply with FINRA and Cboe disclosure standards.

Correct: In professional investment banking and credit analysis, evaluating leverage requires a standardized approach to ensure comparability across different entities. Normalizing EBITDA by adding back non-recurring, non-cash restructuring charges provides a clearer picture of the firm’s ongoing operational cash flow available for debt service. Furthermore, adjusting the debt component to include the present value of long-term lease obligations and unfunded pension liabilities is essential because these represent fixed financial commitments that, while sometimes off-balance sheet or categorized differently, impact the firm’s total economic leverage and credit risk profile in the same manner as traditional debt. Incorrect: Prioritizing the Debt-to-Equity ratio using market capitalization is flawed because equity markets are volatile and may not reflect the underlying ability of the company to service its contractual debt obligations through cash flow. Utilizing Reported EBITDA without adjustments fails to account for one-time items that can distort the true earnings power of the company, leading to an inaccurate assessment of its long-term leverage capacity. Focusing solely on Gross Debt to EBITDA while ignoring cash balances (Net Debt) provides an incomplete picture of a firm’s liquidity position, as it fails to recognize the immediate debt-reduction potential of available cash and cash equivalents. Takeaway: Robust leverage analysis requires standardizing EBITDA for non-recurring items and adjusting debt to include all significant economic obligations, such as leases and pension liabilities, to ensure an accurate assessment of debt-service capacity.

Correct: Under Rule 10b-3 and related suitability and KYC requirements (FINRA 2111 and 2360), a broker-dealer cannot employ deceptive devices to facilitate transactions. In a fiduciary scenario, the ROP must ensure that the strategy is consistent with the trust’s legal objectives and the beneficiary’s needs. Relying solely on a trustee’s aggressive stance when it contradicts the trust’s mandate could be viewed as a failure to prevent a deceptive or unsuitable investment recommendation, especially if the representative is pushing a uniform strategy across multiple accounts. Incorrect: Focusing on the representative’s past success does not mitigate the duty to ensure suitability for the specific trust in question. Using total assets under management as a justification ignores the specific risk profile and legal constraints of the individual trust account. Verbal confirmations from a trustee cannot override the legal documentation of a trust’s objectives, and relying on them to bypass capital preservation requirements could be seen as facilitating a deceptive practice. Takeaway: A Registered Options Principal must verify that options strategies align with the underlying legal objectives of a fiduciary account to prevent the employment of manipulative or unsuitable investment devices.

Correct: Under FINRA Rule 2360 and Cboe Rule 9.1, a current Options Disclosure Document (ODD) must be furnished to each customer at or prior to the time the customer’s account is approved for options trading. For accounts involving uncovered short options, the firm must also maintain specific written procedures and ensure the account is approved by a Registered Options Principal (ROP) who is responsible for verifying the customer’s financial sophistication and suitability for such high-risk strategies. Incorrect: The requirement to deliver the ODD is a ‘at or before’ requirement; there is no 15-day grace period for delivery after the first trade. While institutional clients have different suitability profiles, they are not exempt from the fundamental requirement to receive the ODD. Finally, the approval of options accounts, particularly those involving uncovered strategies, is a supervisory function that must be performed by a Registered Options Principal (Series 4) and cannot be delegated to a Series 7 representative. Takeaway: A Registered Options Principal must ensure the Options Disclosure Document is delivered at or before account approval and personally authorize accounts for specific risk levels, including uncovered writing.

Correct: According to FINRA Rule 2360(b)(16) and Cboe Rule 9.1, every options account must be approved in writing by a Registered Options Principal (ROP). This approval must occur at or before the time the firm accepts an options order from the customer. Additionally, the firm is required to deliver the Options Disclosure Document (ODD) to the customer at or before the time the account is approved for options trading. For uncovered options, the firm must also have specific written procedures and ensure the account is suitable for such high-risk strategies. Incorrect: The suggestion that a General Securities Principal can provide tentative approval with a 10-day grace period is incorrect, as the ROP must approve the account before any trading occurs. The claim that the ODD can be delivered within 15 days of account opening is false; delivery must occur at or before the time of approval. While AML compliance is mandatory, an AML Compliance Officer cannot substitute for the ROP in the specific technical approval of an options account, and while firms may set net worth minimums, the regulatory requirement focuses on the ROP approval and ODD delivery. Takeaway: A Registered Options Principal must approve an options account in writing and ensure the Options Disclosure Document is delivered at or before the time of approval.

Correct: Under Cboe Rule 9.1 and FINRA Rule 2360, firms must provide a special written disclosure document to customers approved for uncovered options. Just and Equitable Principles of Trade require that firms act with high standards of commercial honor, which includes ensuring customers are fully informed of the significant risks of uncovered writing before they engage in the activity. The disclosure must be provided at or before the time the account is approved for such transactions. Incorrect: Relying solely on the general ODD is insufficient because uncovered writing requires specific additional disclosures regarding the firm’s minimum equity requirements and risk. Post-trade notification is a violation of the requirement that disclosures be provided at or before account approval for such transactions. Waiving disclosures for institutional clients based on algorithms ignores the specific regulatory mandate to provide written procedures and risk descriptions for uncovered trading to all approved accounts, regardless of sophistication. Takeaway: Just and Equitable Principles of Trade require strict adherence to disclosure delivery timelines, especially for high-risk activities like uncovered options writing.

Correct: Under SEC Rule 14e-4, which governs prohibited transactions in connection with partial tender offers, a person is only permitted to tender securities to the extent of their ‘net long position.’ This net long position is calculated by taking the total shares owned and subtracting any shares the person has sold short or any shares underlying a standardized call option the person has written (shorted) if the exercise price is lower than the tender offer price. Since the client’s short calls are ‘in-the-money’ relative to the tender price, those 1,000 shares must be deducted from the 2,000 shares owned to prevent ‘short tendering.’ Incorrect: Option b is incorrect because simply restricting the account does not satisfy the requirement to tender only the net long position; tendering more than the net long position is a violation of Rule 14e-4. Option c is incorrect because short call positions represent a potential obligation to deliver shares, which reduces the client’s actual ownership for tender purposes; adding them would further inflate the prohibited short tender. Option d is incorrect because the rule does not provide an exemption for spread strategies; the net long position must be accurately calculated regardless of the complexity of the client’s options portfolio. Takeaway: To comply with Regulation 14E, a firm must ensure a client only tenders their net long position, which requires deducting shares underlying short call options if the strike price is below the tender offer price.

Correct: Under FINRA Rule 2360(b)(16) and Cboe Rule 9.1, firms must maintain specific written procedures for the approval of accounts to engage in uncovered short option transactions. These procedures must include criteria for evaluating the customer’s financial situation and investment experience. Additionally, the firm is required to deliver the Options Disclosure Document (ODD) to the customer at or prior to the time the account is approved for options trading. Incorrect: Updating the CIP to include credit scores is a general AML/KYC function but does not address the specific supervisory requirements for uncovered options. Requiring a specific $100,000 balance in a fiduciary account is not a regulatory mandate for uncovered options approval and may not be suitable for all retail clients. Waiving suitability requirements is a violation of FINRA Rule 2111 and Cboe Rule 9.1, as firms cannot contract away their regulatory obligation to ensure investment strategies are suitable for the client. Takeaway: Firms must maintain specific written procedures for uncovered options and ensure the Options Disclosure Document is delivered prior to account approval.

Correct: The investment banking representative’s primary responsibility in a sell-side transaction is to ensure that the financial information presented to potential buyers is both accurate and consistent across all deal documents. By facilitating a technical reconciliation between the proposed EBITDA add-backs and GAAP standards, the banker ensures that the marketing narrative in the Confidential Information Memorandum (CIM) is grounded in financial reality. Furthermore, providing the legal counsel with the specific rationale for these adjustments allows for the drafting of precise ‘representations and warranties’ and necessary qualifiers in the Asset Purchase Agreement (APA). This coordinated approach fulfills the banker’s duty of care and adheres to FINRA Rule 2010 regarding standards of commercial honor, as it prevents the dissemination of misleading financial information and ensures that all professional advisors are aligned on material disclosures. Incorrect: Directing external accountants to adopt specific calculations is inappropriate as it compromises their independent professional judgment and could lead to audit failures or regulatory scrutiny. Maintaining separate workstreams for marketing and legal disclosures is a significant risk, as it often results in ‘disclosure gaps’ where the CIM contains aggressive projections that the legal agreement refuses to warrant, potentially triggering 10b-5 fraud claims. Relying solely on management representations without facilitating a cross-functional review between the accountants and legal counsel fails the due diligence standard expected of an investment banker, as it ignores the professional skepticism required to vet material financial adjustments during a sale process. Takeaway: Investment bankers must act as the central point of reconciliation between the seller’s accountants and legal counsel to ensure that pro forma financial adjustments are transparently disclosed and legally defensible.

Correct: The Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA) specifically requires broker-dealers to establish, maintain, and enforce written supervisory procedures to prevent the misuse of material non-public information (MNPI). This includes creating information barriers (Chinese Walls) between departments and monitoring trading through restricted and watch lists to ensure that those with access to sensitive data do not exploit it. Incorrect: The requirement for account approval timelines is a general FINRA/Cboe conduct rule for options but does not address the specific anti-fraud mandates of ITSFEA. Short-swing profit rules are governed by Section 16 of the Securities Exchange Act of 1934, not the 1988 Act. Verification of the Options Disclosure Document and the 15-day agreement window are standard account opening procedures under FINRA Rule 2360 and are not the primary focus of insider trading enforcement legislation. Takeaway: ITSFEA mandates that firms maintain and enforce rigorous internal controls and information barriers to prevent the illegal use of material non-public information.

Correct: Rule 15c3-5 (the Market Access Rule) requires broker-dealers to implement risk management controls and supervisory procedures that are reasonably designed to ensure compliance with all regulatory requirements on a pre-trade basis. This includes preventing the entry of orders that violate AML or KYC requirements. By implementing automated pre-trade blocks, the firm ensures that accounts with critical documentation deficiencies, such as missing beneficial ownership information required under CIP, cannot execute trades, thereby satisfying both the Market Access Rule and the firm’s AML program requirements under FINRA Rule 3310. Incorrect: Relying on post-trade surveillance is insufficient because Rule 15c3-5 specifically mandates pre-trade controls to prevent the order from being entered in the first place. While the CEO must certify the controls annually, increasing the frequency of certification does not remediate a specific technical control failure in the trading system. Finally, while firms may use third-party technology, the regulatory responsibility for maintaining and supervising these controls remains solely with the broker-dealer providing market access; it cannot be delegated to a vendor to absolve the firm of its compliance obligations. Takeaway: Rule 15c3-5 requires broker-dealers to implement pre-trade regulatory risk controls that prevent order entry for accounts failing to meet essential AML and CIP requirements.

Correct: Rule 135a under the Securities Act of 1933 provides a safe harbor for generic advertising. To qualify, the advertisement must be limited to a general description of the security (options), the nature of the investment company, or the services offered. It must not refer to specific securities or include performance data. Crucially, it must also state from whom a prospectus or, in the case of options, the Options Disclosure Document (ODD) may be obtained. This prevents the advertisement from being classified as an offer to sell a specific security, which would require a full prospectus delivery. Incorrect: Providing a list of top-performing options or any performance data violates the ‘generic’ nature of Rule 135a and would require the communication to be treated as sales literature with different disclosure requirements. Restricting the audience to institutional investors does not remove the requirement to provide ODD contact information if the firm is relying on the generic advertising rule. Focusing on specific tax advantages of index options or providing direct links for immediate execution moves the communication into the realm of specific product solicitation, which is outside the scope of generic, educational advertising. Takeaway: Rule 135a generic advertising must remain strictly non-specific and educational, avoiding performance data and specific security names while always providing a path to the Options Disclosure Document.

Correct: Under Rule 14d-1(g)(2), a bidder is defined as any person who makes a tender offer or on whose behalf a tender offer is made. In scenarios where a third party provides the vast majority of financing and exercises significant control or influence over the terms and direction of the offer, the SEC and courts apply a functional test. This test evaluates whether the third party is the real party in interest. If the entity is found to be a bidder, it must be named in the Schedule TO and provide the required disclosures, including financial statements and information regarding its background and purposes. This ensures that the target company’s security holders have all material information regarding the financial strength and identity of the persons seeking to acquire control. Incorrect: Treating a major financier solely as a financing source under Regulation 14E is incorrect because Regulation 14E provides general anti-fraud protections for all tender offers but does not provide a safe harbor to avoid bidder status under 14D when control elements are present. Limiting the definition of a bidder to the entity that physically transmits materials is a common misconception that ignores the ‘on whose behalf’ language in the regulation, which focuses on the economic and decision-making reality of the transaction. While Tier I exemptions under Rule 14d-1(c) provide relief for certain cross-border offers involving foreign private issuers, they do not permit the omission of a primary bidder’s identity if the offer is otherwise subject to the filing requirements of Regulation 14D. Takeaway: Bidder status under Rule 14d-1 is determined by a functional analysis of who is actually initiating and controlling the offer, rather than just identifying the entity that signs the filing documents.

Correct: According to FINRA Rule 2360 and Cboe Rule 9.1, the Options Disclosure Document (ODD) must be delivered to the customer at or prior to the time the account is approved for options trading. Furthermore, under FINRA Rule 3310 and Cboe Rule 8.12, firms must maintain an AML compliance program that includes a Customer Identification Program (CIP) and procedures for detecting suspicious activity. When a Registered Options Principal identifies inconsistencies between a client’s stated financial profile and their actual funding (red flags), they must conduct due diligence to verify the source of funds and ensure all disclosure and suitability requirements were met at the time of account opening. Incorrect: Mailing the ODD after the account has been approved or after trading has commenced is a regulatory violation, as delivery must occur at or before approval. Suitability waivers do not negate the requirement for accurate KYC data or the ROP’s duty to verify financial information for uncovered options. Deferring AML/CIP responsibilities to an annual audit is inappropriate because AML monitoring must be ongoing and risk-based. Ignoring discrepancies in KYC documentation while focusing solely on margin levels fails to address the firm’s regulatory obligations regarding suitability and anti-money laundering. Takeaway: A Registered Options Principal must ensure that disclosure delivery, suitability documentation for uncovered strategies, and AML/KYC verification are all satisfied concurrently to maintain regulatory compliance.

Correct: In the context of a structural industry shift, such as the transition from internal combustion engines to electric vehicles, historical market share and financial results are lagging indicators that may not reflect future viability. A professional analytical approach requires a gap analysis to identify the specific technological and manufacturing deficiencies of the target. This must be followed by adjusting the valuation model to include the necessary capital expenditures (CapEx) or acquisition costs required to bridge that gap. This approach aligns with the requirement to analyze industry dynamics and future prospects by quantifying the ‘cost to stay in business’ in a changing market, rather than simply extrapolating historical performance. Incorrect: Focusing solely on historical dividend yields and cash flows from a legacy business fails to account for the terminal value risk associated with technological obsolescence. Comparing a legacy manufacturer’s multiples directly to ‘pure-play’ emerging technology firms is a flawed relative valuation technique, as it ignores the fundamental differences in growth rates, risk profiles, and capital structures. Relying on established OEM relationships as a guarantee of future market position is a qualitative error that ignores the competitive threat from new entrants who possess the intellectual property and specialized capabilities that the target lacks. Takeaway: When an industry undergoes a structural shift, buy-side analysis must prioritize a gap analysis and adjust future capital requirements over the simple extrapolation of historical financial results.

Correct: Under Cboe Rule 9.1 and FINRA Rule 2360(b)(16), firms are required to provide a special written disclosure statement to any customer approved for uncovered short options transactions. The Registered Options Principal (ROP) must ensure this disclosure is delivered and that the client’s profile supports the suitability of such high-risk strategies, especially when operating at minimum margin levels. This ensures the client is aware of the potential for unlimited loss and the firm has met its due diligence obligations. Incorrect: Increasing margin requirements is a risk management tool but does not resolve the regulatory failure of missing mandatory disclosures. Reporting the client for AML structuring based solely on a margin request is an inappropriate use of the SAR process without additional red flags. Reclassifying a retail client as an institutional investor to bypass disclosure or suitability requirements is a direct violation of FINRA Rule 2111 and Cboe Rule 9.1. Takeaway: The Registered Options Principal must ensure that all required risk disclosures are delivered and that suitability is documented before a client begins trading uncovered options at minimum margin levels.

Correct: FINRA Rule 2010 and Cboe Rule 9.1 require members to observe high standards of commercial honor and just and equitable principles of trade. For uncovered options, firms must provide specific disclosures, such as the Special Statement for Uncovered Options, at or before the time the account is approved for such trading. Suspending the activity until the gap is closed and implementing a systemic block ensures future compliance and protects the integrity of the trade principles by prioritizing regulatory requirements over transaction volume. Incorrect: Allowing positions to remain without immediate remediation of the disclosure gap fails the high standard of honor required by the rules. Retroactive disclosure without systemic change is insufficient for remediation and does not address the underlying procedural failure. Global waivers do not satisfy the specific delivery and approval requirements for uncovered options disclosures under Cboe Rule 9.1(f) and are generally not considered a high standard of commercial honor. Takeaway: Adherence to the Standards of Commercial Honor requires proactive remediation of disclosure failures and the implementation of systemic controls to prevent recurrence.

Correct: According to Cboe Rule 9.15 and FINRA Rule 2360(b)(16), a firm must furnish a current Options Disclosure Document (ODD) to each customer at or prior to the time the customer’s account is approved for options trading. This ensures that the customer has access to the necessary risk disclosures before they are authorized to engage in options transactions. Incorrect: The 15-day timeframe is often confused with the requirement for the customer to return the signed options agreement after account approval, not the delivery of the ODD. Waiting until the trade confirmation is sent or within five business days of the initial transaction is non-compliant, as the disclosure must be provided before or at the moment of approval to ensure the client is informed of the risks prior to any trading activity. Takeaway: The Options Disclosure Document (ODD) must be delivered to a customer no later than the moment their account is approved for options trading.

Correct: According to Cboe and FINRA rules, when the OCC assigns an exercise notice to a clearing member, the member must allocate the notice to a customer account using a method that is fair and equitable. The two most common and accepted methods are random selection and first-in, first-out (FIFO). Additionally, firms are required to inform their customers about the method they use and how it functions, as this impacts the customer’s risk of assignment. Incorrect: Prioritizing proprietary or market maker accounts over customers is not a standard requirement and does not fulfill the ‘fair and equitable’ mandate for customer account allocation. Pro-rata allocation based on position size is generally not used for options assignment and is not one of the standard methods like random or FIFO. There is no 24-hour grace period to close a position once an assignment notice has been issued by the OCC; the assignment is a binding obligation that must be fulfilled according to the terms of the contract. Takeaway: Firms must use a fair and equitable method, typically random selection or FIFO, to allocate OCC exercise assignments to customer accounts and must disclose this method to their clients.

Correct: Under the reasonable investigation standard established by Section 11 of the Securities Act of 1933 and reinforced by FINRA due diligence guidelines, investment bankers must independently verify the material claims within a business plan. Coordinating with management to use scripted inquiries or employing third-party consultants for blinded interviews represents a balanced professional approach. This method allows the banker to validate critical revenue drivers and supply chain dependencies—essential for establishing a reasonable basis for valuation and disclosure—while protecting the issuer from the commercial harm that could result from the premature disclosure of a sensitive transaction. Incorrect: Relying exclusively on management-provided summaries and public data is insufficient for due diligence because it lacks the independent verification necessary to identify potential misrepresentations or omissions in the business plan. Conversely, insisting on unscripted, direct access to all stakeholders without regard for confidentiality ignores the banker’s obligation to manage the transaction process in the client’s best interest and could lead to significant business disruption. Limiting interviews to former employees is an inadequate substitute for current due diligence, as these individuals lack up-to-date knowledge of the company’s current contracts, operational health, and future strategic direction required to validate a forward-looking business plan. Takeaway: Due diligence must involve independent verification of business plan assumptions through structured stakeholder communication that balances the need for thoroughness with the necessity of transaction confidentiality.

Correct: According to FINRA Rule 2360(b)(16) and Cboe Rule 9.1(e), the Options Disclosure Document (ODD) must be delivered to the customer at or before the time the account is approved for options trading. Furthermore, Cboe Rule 9.15(a) stipulates that whenever the ODD is amended or a supplement is issued, it must be distributed to every customer who has an active options position or to whom an options recommendation is made. Incorrect: The requirement to provide the ODD within 15 days of a transaction is incorrect because the rule mandates delivery at or before account approval. Restricting supplement delivery only to those who request them in writing fails to meet the proactive distribution requirement for active options traders. Delivering the ODD at the time of trade confirmation is too late in the process. Linking supplement delivery solely to risk profile changes or the CIP process misses the specific regulatory triggers related to document revisions and active options positions. Takeaway: The Options Disclosure Document must be delivered at or before account approval, with subsequent supplements provided to all active options participants or those receiving recommendations.

Correct: Rule 17a-8 requires broker-dealers to comply with the reporting and recordkeeping requirements of the Bank Secrecy Act (BSA). This includes the obligation to file a Suspicious Activity Report (SAR) for any suspicious transaction, or pattern of transactions, that involves at least $5,000. Firms must look beyond individual transaction amounts to identify potential structuring or activity that serves no apparent business or lawful purpose, especially when involving high-risk jurisdictions. Incorrect: The suggestion that wire transfers are exempt is incorrect because Rule 17a-8 and the BSA cover various forms of value transfer, not just physical currency. The claim that monitoring is only required for transactions over $10,000 is a common misconception; while $10,000 is the threshold for Currency Transaction Reports (CTRs), the SAR threshold is lower and applies to suspicious patterns. Waiting for a regulatory request is incorrect because AML programs must be proactive in identifying and reporting suspicious activity independently. Takeaway: Under Rule 17a-8, firms must proactively monitor for and report suspicious patterns of activity, such as structuring, even if individual transactions fall below standard reporting thresholds.

Correct: According to FINRA Rule 2210 and Cboe rules, institutional communications do not require Principal pre-approval or filing with regulatory bodies, provided the firm has established internal written procedures for the post-use review of such materials. A critical best practice is ensuring the material is clearly labeled ‘For Institutional Use Only’ to prevent it from being shared with retail investors, which would subject the communication to much stricter retail communication standards. Incorrect: Filing institutional communications with the Exchange or FINRA ten days prior to use is a requirement typically reserved for retail communications from new member firms or specific high-risk products, not standard institutional material. The size of the institution’s workforce (e.g., 100 employees) is not the defining factor for institutional status; rather, it is the nature of the entity or the value of its assets. While the ODD must be delivered at or before the time an account is approved for options, it does not need to be physically appended to every individual piece of institutional correspondence. Takeaway: Institutional communications are exempt from Principal pre-approval and regulatory filing requirements if the firm maintains adequate post-use review procedures and prevents the material from reaching retail audiences.

Correct: According to Cboe and FINRA rules, when an exchange imposes restrictions on a class of options, it typically prohibits opening transactions (those that create or increase a position) while allowing closing transactions (those that reduce or eliminate a position). The Registered Options Principal (ROP) must ensure the firm’s systems are configured to enforce these specific boundaries to comply with the exchange’s mandate while allowing customers to manage their existing risk.

Correct: Cboe Rule 9.1(f)(5) requires that Trading Permit Holders (TPHs) who conduct uncovered short options business with customers must develop and maintain specific written procedures. These procedures must include the criteria used to evaluate the suitability of the customer for such transactions, the minimum equity requirements for the account, and a mandate to provide the customer with a special written description of the risks inherent in uncovered short option writing. Incorrect: While collateral and margin are important, there is no specific Cboe rule requiring 110% collateralization for all uncovered positions. Automatic conversion of positions is a risk management tool but not a mandated component of the written procedures under Rule 9.1(f)(5). While a Registered Options Principal (ROP) must approve the account for uncovered writing, they are not required to personally execute every trade, as this would be operationally impractical and is not a regulatory requirement. Takeaway: Firms must maintain specific written procedures for uncovered options accounts that include suitability criteria, minimum equity levels, and the delivery of a specialized risk disclosure document to the client.

Correct: Under FINRA Rule 3160, when a member firm enters into a networking arrangement with a financial institution, it must ensure that its brokerage services are clearly distinguished from the financial institution’s activities. This includes conducting business in a physically separate area whenever possible and providing the mandatory ‘Not-Not-May’ disclosures: that the products are NOT insured by the FDIC, are NOT deposits or obligations of the financial institution, and MAY lose value. Incorrect: Integrating banking and brokerage systems for suitability verification, while efficient, does not address the primary regulatory requirement of maintaining clear separation to prevent customer confusion. Paying referral fees to bank tellers based on trade execution is generally prohibited and creates significant conflict of interest issues, even if they are registered. Co-branding that de-emphasizes the broker-dealer’s identity is a violation of the rule, which requires the broker-dealer to be clearly identified as the provider of the securities services. Takeaway: Networking arrangements require strict physical separation and specific disclosures to ensure customers understand that brokerage products are distinct from bank deposits and are not FDIC insured.

Correct: Under FINRA Rule 2360(b)(5) and Cboe Rule 8.4, members are required to file a Large Options Position Report (LOPR) for any account or group of accounts acting in concert that has an aggregate position of 200 or more contracts on the same side of the market (e.g., long calls and short puts) in an underlying security. This reporting is essential for market surveillance and identifying potential manipulation or concentration risks. Incorrect: The threshold of 200 contracts applies universally to both retail and institutional accounts, making the distinction in the second option incorrect. The reporting requirement is based on a fixed number of contracts (200) rather than a percentage of the total position limit, which invalidates the third option. While AML programs and enhanced due diligence are critical, LOPR reporting is a specific market conduct requirement triggered by position size, not by the risk rating of the account or a weekly schedule, making the fourth option incorrect. Takeaway: Firms must report aggregate options positions of 200 or more contracts on the same side of the market to regulators via the Large Options Position Report (LOPR).

Correct: Under Cboe Rule 9.1 and FINRA Rule 2360, which align with the oversight principles of the Securities Exchange Act of 1934, firms are strictly required to deliver the Options Disclosure Document (ODD) to a customer at or prior to the time the customer’s account is approved for options trading. This ensures that the investor has access to standardized risk information before any contractual obligations or trades occur. Incorrect: Providing the ODD within 15 days of the first trade or with the first monthly statement is a violation of the ‘at or prior to approval’ requirement, as the customer would have already been exposed to market risk without the required disclosures. While firms must maintain written procedures for uncovered options, there is no regulatory requirement for a separate signed waiver for every individual transaction; the primary obligation is the initial delivery of the ODD and the subsequent return of the signed options agreement within 15 days of account approval. Takeaway: The Options Disclosure Document must be furnished to a customer at or prior to the approval of the account for options trading to satisfy regulatory transparency and risk disclosure requirements.