This chapter covers about 15 of the 50 scored items (30% of the exam, a CertFuel planning estimate). Trading around IPOs and secondary offerings under Regulation M, non-listed and penny stocks, options trading under Cboe rules, and short sales under Regulation SHO.
What You'll Learn
| Unit | Topic | Lessons |
|---|---|---|
| 1 | IPOs, Secondary Offerings and Safe Harbor | New Issues, Initial Public Offerings and Distributions; The Regulation M Restricted Period; Short Sales Around a Public Offering; Trading a New Listing; New Issue Allocations and Spinning; Penalty Bids; Stabilizing Bids; Passive Market Making; Required Notification Related to IPOs and Secondary Offerings; The Issuer Repurchase Safe Harbor; Trading Plans and the Insider Trading Defense; Regulation D Offerings |
| 2 | Non-listed and Penny Stocks | Characteristics of Penny Stocks; Disclosure Requirements; Escrowed Securities of a Blank Check Company; Over-the-Counter Quoting and Trading; Quoting Mechanics in OTC Equity Securities; Display of Customer Limit Orders; The Other Trading Practices Rule and Its Scope; The Quotation Information Rule; Initiating or Resuming Market Making (Form 211) |
| 3 | Options Trading | Option Order Types, Order Instructions and Times-in-Force; Spreads, Straddles and Combinations; Index Options, Including the Cboe Volatility Index; Exercise and Assignment; Tender of Exercise Notices; Position Limits; Exercise Limits, Reports and Liquidation |
| 4 | Handling and Executing Short Sales | Short Sale Regulations; Locates and Borrows; The Price Test; Close-Out Requirements for Threshold Securities; Close-Out Requirements for Fails to Deliver; Order Marking Requirements; Trade Reporting of Short Sales; Short Sale Exemptions |
Why This Chapter Matters
Function 1 continues with the products a trader handles under special rules. Regulation M governs what a distribution participant may do while an offering is in the market. Penny stocks carry their own disclosure regime and their own quotation gate. Listed options have exercise machinery and position and exercise limits. Short sales run on Regulation SHO's marking, locate, price test and close-out rules.
Exam Strategy
FINRA publishes weights by function only, so the per-unit figures in each introduction are planning estimates. Focus on:
- Regulation M is about the restricted period. Know when it starts, who it binds, and which activities are excepted, then layer on stabilizing bids, penalty bids, passive market making and the notices FINRA requires.
- A penny stock is defined by what it is not. Learn the exclusions first, then the disclosure documents and the compensation disclosures a firm owes before a transaction.
- The quotation information rule is the gate to quoting an unlisted security. Know the information sets, the piggyback exception and what a qualified inter-dealer quotation system may do.
- Options questions test exercise and limits. Exercise by exception, the allocation of exercise notices, and the position and exercise limits for equity, index and flexible exchange (FLEX) options are the heavily tested mechanics.
- Regulation SHO has four moving parts. Marking, the locate and borrow requirement, the alternative uptick rule after a 10% decline, and the close-out clocks for fails to deliver.