FINRA Series 7 flashcards

Retail communications recommending specific options transactions must be accompanied or preceded by delivery of the ODD, explaining the risks and characteristics of standardized options.

• ODD must be given before or with the recommendation material.
• Applies specifically to options communications under FINRA Rule 2220.
• Failure to provide ODD is a violation of options communication rules.

Memory trick: No options pitch without the risk script — ODD comes first or alongside.

The annual accreted discount on a zero-coupon bond is taxed as ordinary income each year even though no interest is actually received in cash.

• Applies to corporate and Treasury zeros (municipal zeros are tax-exempt)
• Cost basis increases each year by the accreted amount
• No cash flow to pay the tax — investor must fund it from other sources

Memory trick: 'Phantom' pays no cash, but the IRS still wants its share every year.

American Depositary Receipts expose U.S. investors to exchange rate risk because dividends and share values are converted from the foreign currency into U.S. dollars.

• ADRs represent shares of foreign companies traded on U.S. exchanges
• Dividends are declared in local currency, then converted to USD
• A weaker foreign currency reduces the dollar value of dividends and share price

Memory trick: Weak foreign currency, weak dollar dividend.

An order that becomes a limit order once the stop price is reached or passed, executable only at the limit price or better.

• Sell stop triggers when market trades at or below stop price
• Buy stop triggers when market trades at or above stop price
• Once triggered, it becomes a limit order, not guaranteed to fill

Memory trick: Stop wakes it up, limit tells it where to stop.

A direct participation program that acquires interests in existing, producing wells to generate current income with lower risk than drilling programs.

• Income programs = existing producing wells, lowest risk
• Exploratory/wildcatting = highest risk, unproven land
• Developmental = drilling near proven reserves, moderate risk

Memory trick: Income = 'already flowing,' Exploratory = 'wildcat gamble.'

When a margin account's equity falls below the 50% Reg T requirement, the account becomes 'restricted,' and 50% of any sale proceeds must be applied to reduce the debit balance (retention requirement).

• Restricted status triggered when equity < 50% of market value
• 50% of sale proceeds must reduce debit
• Remaining 50% becomes available SMA

Memory trick: Restricted = Retain half of every sale to pay down the loan.

An order requiring the entire quantity be executed in a single transaction, but with no time constraint — it can remain outstanding until fully executable.

• No partial fills allowed
• Can remain open (not immediate)
• Contrast with FOK, which must execute immediately or cancel

Memory trick: AON = All or nothing, but I'll wait (patient); FOK = All or nothing, right now (impatient).

SMA is a line of credit generated in a margin account when the market value of securities rises, representing excess equity beyond the Reg T requirement that the customer may withdraw or use to buy more securities.

• SMA = 50% of any market value increase in a Reg T (50%) account
• SMA is a credit line, not cash, and does not reduce automatically if prices later fall
• Can be used to purchase more securities or withdrawn as cash, subject to margin rules

Memory trick: Stock goes up, half the gain becomes 'store credit' (SMA).

Before executing a short sale, a broker-dealer must have reasonable grounds to believe the security can be borrowed and delivered by settlement date.

• Applies before accepting short sale orders
• Especially critical for hard-to-borrow securities
• Failure can result in a 'naked' short sale violation

Memory trick: No locate, no short — find the shares before you sell them.

A settlement method where an institutional customer's custodian bank exchanges payment for securities simultaneously with the broker-dealer, rather than the customer paying/receiving directly.

• Common for institutional accounts
• Reduces credit risk via simultaneous exchange
• Distinct from regular-way settlement timing rules

Memory trick: DVP: Deliver Vs. Pay — bank handles both hands at once.

When an equity option is exercised, the resulting stock transaction settles on a regular-way T+1 basis from the date of exercise, just like any other equity trade.

• Exercise creates a regular stock trade
• Settles T+1 under current cycle
• Applies to both calls and puts upon exercise

Memory trick: Exercise today, stock trade tomorrow — T+1 rules the day.

Federal Reserve Board requirement mandating a minimum 50% deposit of the purchase price for margin stock purchases.

• Applies to initial purchase, not maintenance
• Currently set at 50% for equities
• FINRA maintenance requirement is generally 25% of market value thereafter

Memory trick: Half now, half on credit — that's Reg T.

Requires member firms to report to FINRA within 30 calendar days written customer complaints alleging theft, misappropriation, forgery, or certain other serious violations.

• Applies to specified serious allegations, not all complaints
• 30-calendar-day reporting window from firm's knowledge
• Firms must also report certain statistical/summary complaint information periodically

Memory trick: Forgery found? Thirty days to sound the alarm.

Requires member firms to keep a separate file of written customer complaints at each office where the complaint was received, retained for at least four years.

• Applies to written complaints only
• Retention period of at least 4 years
• Different from Rule 4530, which addresses reporting to FINRA

Memory trick: 4513 = File it if it's written; oral talk walks away.

Includes participation in seminars, forums, media interviews, and interactive electronic forums; excluded from the definition of "communication" and generally exempt from prior principal approval.

• Covers live, unscripted interactive presentations.
• Handouts/scripts used at seminars may still be subject to separate content rules.
• Firms should still train and supervise reps making public appearances.

Memory trick: Live and unscripted? That's a public appearance, no principal gatekeeping needed.

A line of credit in a margin account that accumulates when the market value of securities rises, equal to 50% (Reg T rate) of the increase in equity.

• Generated when securities appreciate in a margin account
• Equals Reg T percentage (50%) of the increase in market value
• Can be withdrawn as cash or used to buy more securities without adding new funds

Memory trick: Stock goes up, SMA banks half the gain.

The obligation for a registered representative to understand a product's features and risks through reasonable diligence before recommending it to any customer.

• One of three prongs of FINRA Rule 2111 (with customer-specific and quantitative)
• Failure occurs when the RR doesn't understand the product, regardless of the customer
• Especially critical for complex products like leveraged/inverse ETFs

Memory trick: Reasonable = understand the product; Customer-specific = fit the person; Quantitative = watch the trading volume.

An order to buy a security at a specified price or lower, placed below the current market price.

• Buy limits sit below market
• Guarantee price, not execution
• Opposite of sell limits, which sit above market

Memory trick: Buy Limits Low, Sell Limits High; Buy Stops High, Sell Stops Low.

Upon sale of depreciated real property, the portion of gain equal to depreciation taken is taxed as ordinary income (recapture), while remaining gain is taxed as capital gain.

• Applies to real estate and equipment leasing DPPs that used depreciation
• Prevents converting ordinary deductions into capital gain benefits
• Recaptured amount taxed at ordinary income rates, capped for real property under Section 1250 rules

Memory trick: What depreciation gave as a deduction, the IRS takes back as ordinary income at sale.

A short sale price test triggered when a covered security's price declines 10% or more from the prior day's closing price, restricting short sales to above the current best bid.

• Trigger: intraday decline of 10%+ from prior close
• Restriction lasts remainder of day plus next full trading day
• Short sales permitted only above the current national best bid

Memory trick: Drop 10%, ring the bell, shorts must clear the bid.

Member firms must maintain records of written customer complaints for a minimum of four years from the date the complaint is received.

• Applies to all written complaints
• Retention period is four years
• Complements FINRA Rule 4530 reporting obligations

Memory trick: Four years to keep the complaint file, just like most FINRA books and records.

Any written (including electronic) communication distributed or made available to more than 25 retail investors within any 30 calendar-day period.

• Requires prior approval by a registered principal before use.
• Retail investor = any person other than an institutional investor.
• Threshold is more than 25 retail investors in 30 days.

Memory trick: 25 or fewer = correspondence; more than 25 = retail, needs the principal's blessing first.

In a covered call strategy, maximum gain occurs if the stock is called away at the strike price, equal to (strike − purchase price) + premium received.

• Max gain = (strike price − stock cost) + premium
• Breakeven = stock cost − premium received
• Max loss = stock cost − premium (if stock goes to zero)
• Covered calls generate income but cap upside potential

Memory trick: Covered call gain = 'stock gain plus the premium paycheck.'

A tax-free exchange allowing an annuity or life insurance contract to be swapped for another similar contract without recognizing taxable gain, with cost basis carried over.

• Applies to annuity-to-annuity, life-to-life, or life-to-annuity exchanges (not annuity-to-life)
• Owner and annuitant must remain the same
• Deferred gain and cost basis transfer to the new contract

Memory trick: '10-35' lets you swap and stay tax-free — no gain recognized.

When a customer fails to pay for a cash account purchase by the payment deadline, Regulation T requires the account be frozen for 90 days, during which purchases require cash in advance.

• 90-day freeze period
• Cash-in-advance required for purchases during freeze
• Applies specifically to cash accounts, not margin accounts

Memory trick: Freeze for 90 — pay up front, or don't buy at all.

An order to buy or sell immediately at the best currently available price.

• Guarantees execution, not price
• Executed at next available price
• Contrast with limit orders, which guarantee price, not execution

Memory trick: Market orders move NOW at whatever price is available.

A custodial account holding gifted assets for a minor's benefit, with one custodian per account and one minor per account.

• Gifts are irrevocable
• Only one custodian and one minor per account
• Income taxed to the minor under kiddie tax rules
• Assets transfer to the minor at the age of majority

Memory trick: Once gifted, it's a one-way gift — one custodian, one minor, no take-backs.

The standard settlement cycle for most securities transactions, currently one business day after the trade date.

• Effective May 28, 2024 for equities, corporate and municipal bonds
• Government securities and options typically settle T+1 as well
• Cash trades settle same day (T+0)

Memory trick: One day later, money's better — T+1.

A long straddle involves buying a call and put at the same strike and expiration; breakeven points are the strike price plus and minus the total premium paid.

• Profits from large price moves in either direction
• Max loss = total premium paid
• Breakeven = strike ± total premium
• Used when volatility is expected but direction is uncertain

Memory trick: Straddle = 'strike plus or minus the stack of premiums.'

A provision within the margin agreement allowing a broker-dealer to pledge a customer's margin securities as collateral for the firm's bank loan.

• Part of the margin account agreement package
• Distinct from the loan consent agreement (lending securities to third parties)
• Enables the firm to re-hypothecate (pledge again) customer collateral, subject to limits

Memory trick: HYPO = firm 'hangs' your stock at the bank as collateral.

An order placed above the current market price that becomes a market order to buy once the stock trades at or through the stop price.

• Used to buy on a breakout or to limit loss on a short position
• Becomes a market order once triggered, no price guarantee
• Opposite of a sell stop, which is placed below market and used to protect long positions

Memory trick: Buy stops chase strength UP, sell stops protect longs DOWN.

Broker-dealers must send account statements monthly to customers with account activity and at least quarterly to customers with securities positions but no activity.

• Active accounts: monthly statements required
• Inactive accounts with holdings: quarterly minimum
• Statements must reflect all positions, balances, and activity

Memory trick: Busy account, busy mailbox — monthly mail.

The sensitivity of a bond's price to changes in interest rates; longer maturities and lower coupon rates increase price volatility (duration).

• Longer maturity = greater interest rate risk
• Lower coupon rate = greater interest rate risk
• Zero-coupon bonds have the highest duration for a given maturity

Memory trick: Long and low (maturity long, coupon low) means price falls the fastest.

When a shorted stock rises in price, equity in the account shrinks; FINRA requires maintenance equity of 30% of current market value (minimum), triggering a call if equity falls short.

• Equity = Credit balance − Current market value
• Credit balance = Sale proceeds + initial margin deposit
• Maintenance requirement is 30% of market value for short positions

Memory trick: Stock climbs, shorts feel the squeeze — pay to keep your seat.

In certain states, assets acquired during marriage are owned equally (50/50) by both spouses, regardless of title or contribution.

• Applies in community property states (e.g., CA, TX, WA)
• Each spouse owns 50% regardless of income source
• Differs from JTWROS, which passes 100% to survivor automatically

Memory trick: Community = split down the middle, 50/50, even after death.

Withdrawals from nonqualified annuities are taxed LIFO — earnings are withdrawn (and taxed) first, before return of principal, and are subject to a 10% penalty if taken before age 59½.

• LIFO taxation applies to nonqualified annuities
• Gains taxed as ordinary income, not capital gains
• 10% penalty applies before age 59½
• Principal withdrawals (after gains exhausted) are tax-free

Memory trick: LIFO: 'Last money in is first money taxed.'

For short positions in securities trading under $5 per share, FINRA maintenance margin is the greater of $5 per share or 100% of the current market value.

• Applies specifically to stocks under $5/share
• For stocks $5 and above, requirement is 30% of market value
• Always use the greater of the two calculated figures

Memory trick: Under $5? Take the bigger of $5/share or 100% — protect against penny stock spikes.

Written or electronic communications distributed to 25 or fewer retail investors within any 30 calendar-day period.

• No prior principal approval required.
• Must still be supervised per Rule 3110 supervisory procedures.
• Firms often use risk-based review rather than 100% pre-review.

Memory trick: 25 or under, correspondence wonder — no pre-approval needed, but watch it later.

The set of KYC data points (objectives, time horizon, liquidity needs, risk tolerance, financial situation) required to support suitable recommendations.

• Required under FINRA Rule 2111 and Reg BI
• Must be updated periodically
• Basis for suitability determinations

Memory trick: Know your customer's Goals, Time, Liquidity, and Tolerance—GTLT.

A person the firm may contact regarding a customer's account to address possible financial exploitation, confirm contact details, or address health concerns.

• Firm must make reasonable efforts to obtain, not mandatory for customer to provide
• Not an account owner and has no trading/transaction authority
• Used to protect against exploitation of vulnerable adults

Memory trick: Trusted contact = 'Tip line' for elder protection, not a co-owner.

In an account with both long and short positions, total equity is the sum of long-side equity (LMV − debit) and short-side equity (credit − SMV).

• Long equity = LMV − debit balance
• Short equity = credit balance − SMV
• Combined equity = sum of both sides

Memory trick: Long side: value minus debt; Short side: credit minus value — add them together.

The amount by which account equity exceeds the Reg T requirement on current market value; this excess (SMA) may be withdrawn in cash or used for further purchases.

• Equity = market value − debit balance
• Reg T requirement = 50% × current market value
• Excess equity = equity − Reg T requirement = withdrawable SMA

Memory trick: Equity minus Reg T requirement equals the cash you can pocket.

In a bull call spread, the maximum loss is limited to the net debit (premium) paid to establish the position.

• Max loss = net debit paid
• Max gain = difference in strikes minus net debit
• Breakeven = lower strike + net debit

Memory trick: Debit spreads: you can never lose more than you paid.

A limited POA allows an agent to trade in an account but not withdraw funds; a full POA allows both trading and withdrawals.

• Limited POA = trading only
• Full POA = trading + withdrawals
• Must be in writing and on file with the firm

Memory trick: Limited lets you trade, Full lets you take.

When a margin account's equity falls below the maintenance requirement (a percentage of current market value), the customer must deposit the shortfall to meet the call.

• Equity = Market value − Debit balance
• Debit balance remains fixed unless additional funds deposited or withdrawn
• Margin call amount = Required equity − Actual equity

Memory trick: Debit stays fixed; falling stock shrinks equity, triggering the call gap.

TEY calculates the yield a taxable bond must offer to match the after-tax return of a tax-exempt municipal bond, using the formula: municipal yield ÷ (1 − tax bracket).

• Formula: Muni yield ÷ (1 − tax rate)
• Higher tax brackets increase TEY, favoring munis
• Used to compare munis with taxable bonds
• Also can invert to find muni-equivalent yield from taxable yield

Memory trick: TEY: 'Muni yield stretched by what the tax man takes.'

Parity price is the theoretical stock price at which the bond's value equals the value of the shares it converts into, calculated as bond price ÷ conversion ratio.

• Conversion ratio = par value ÷ conversion price
• Parity price = current bond price ÷ conversion ratio
• Used to assess if converting is advantageous
• Differs from conversion price, which uses par value

Memory trick: Parity: 'price of bond, split by the ratio.'

Trade confirmations must state whether the broker-dealer acted as agent or principal in the transaction.

• Agent trades disclose commission charged
• Principal trades disclose markup/markdown if required
• Capacity disclosure is mandatory on every confirmation

Memory trick: Agent or dealer — the ticket must tell her.

Cold calls to residential prospects are restricted to between 8:00 a.m. and 9:00 p.m., based on the local time of the person being called.

• Time is measured at the called party's location, not the caller's.
• Violations can result in FINRA and FTC/FCC enforcement.
• Applies to telemarketing calls, not established customers making inquiries.

Memory trick: 8 to 9, don't cross the line — call between dawn's light and evening's nine.

A special settlement instruction requiring a securities trade to settle on the same day as the trade date, rather than the standard T+1 regular-way cycle.

• Settles same day
• Must be specifically requested
• Regular-way settlement is T+1 for equities

Memory trick: Cash trade = cash today, same day pay.

In a Reg T margin account, when a fully margined long position appreciates, 50% of the price increase becomes available as SMA (Special Memorandum Account).

• SMA = excess equity above the current Reg T requirement
• For long positions, SMA generated = 50% of price appreciation
• SMA can be withdrawn as cash or used as buying power

Memory trick: Stock goes up, half the gain becomes spendable SMA.

A written statement allowing a mutual fund investor 13 months to invest enough to reach a sales charge breakpoint, retroactively reducing the sales charge on all purchases within that period.

• 13-month window to complete the intended investment
• Can be backdated up to 90 days
• If unmet, fund holds escrowed shares to cover the higher sales charge

Memory trick: Letter of intent = 13 months to lower your load.

Regulation T requires investors to deposit at least 50% of the purchase price of securities bought on margin in a margin account.

• Reg T initial margin requirement = 50%
• Applies to equity securities purchased on margin
• FINRA maintenance margin is 25% of market value
• Margin calls occur when equity falls below maintenance level

Memory trick: Reg T = 'put up half to trade.'

When a firm executes a trade as agent, the confirmation must state that capacity and disclose the commission charged to the customer.

• Agency = disclose commission
• Principal = disclose markup/markdown or net price
• Capacity must always be shown

Memory trick: Agent = commission shown; Principal = markup shown.

Communications distributed solely to institutional investors do not need prior principal approval but must be covered by written supervisory procedures that may include spot-checking.

• Institutional investor generally has $50 million+ in assets or is a qualifying entity (bank, RIA, etc.).
• No prior approval requirement, unlike retail communications.
• Firms must train staff and periodically review a sample of communications.

Memory trick: Institutions get trust, but firms still spot-check the fine print.

An order in which the customer gives the broker discretion only over the timing and/or price of execution, not over the choice of security, action, or amount.

• Does not require written discretionary authorization
• Differs from full discretionary orders (security/action/amount)
• Common on large block orders to get best execution

Memory trick: 'Not Held' = Not Handcuffed to time/price, but still my stock/side/amount.

Reg T requires a customer to deposit 50% of the short sale proceeds as initial margin, resulting in a total credit balance of 150% of proceeds.

• Short sale proceeds are held by the broker as collateral
• Reg T deposit = 50% of proceeds
• Total credit balance = proceeds + margin deposit = 150% of proceeds

Memory trick: Short sellers post half again — 150% total credit.

Interest paid on municipal bonds is exempt from federal income tax, and may also be exempt from state/local tax if the investor resides in the issuing state.

• Federal interest exemption applies regardless of residency
• Double exemption requires in-state residency
• Capital gains on munis are still taxable
• Munis are not government-guaranteed

Memory trick: Muni interest is 'Uncle Sam-free' but not 'gain-free.'

Losses generated by passive activities like limited partnerships can only be used to offset passive income, not earned (wage) or portfolio income, per IRS rules.

• Passive losses offset only passive income
• Excess losses are carried forward
• DPPs are illiquid and often used for tax-advantaged income
• Suitability requires client to have passive income sources

Memory trick: Passive losses stay in their own lane — no crossing into wages.

An order that must be executed immediately and completely, or it is automatically cancelled.

• Immediate execution required
• All-or-nothing quantity requirement
• If not fully executable right away, order is killed

Memory trick: FOK: Fill it Or Kill it — now, no waiting!