Public Housing Manager (PHM)

Correct: The Registered Options Principal (ROP) is responsible for the overall supervision of the firm’s options business. When surveillance alerts suggest potential front-running or cross-market manipulation, the ROP must ensure a thorough internal investigation is conducted, evidence is preserved, and supervisory systems are reviewed for gaps. This aligns with FINRA Rule 3110 regarding supervision and the requirement to maintain a robust compliance framework to detect and prevent market abuse.

Incorrect: Directing the freezing of personal accounts and requesting trade nullification from the OCC is an overreach of firm authority, as such actions are typically reserved for regulators or specific exchange committees after due process. Disclosing investigation details to a whistleblower or attempting to bypass Form U4 reporting violates confidentiality and regulatory reporting requirements. Finally, the ROP cannot ignore the underlying equity side of a potential cross-market manipulation scheme, as the options strategy’s legitimacy is inextricably linked to the legality of the related stock transactions.

Takeaway: A Registered Options Principal must ensure rigorous internal investigation and evidence preservation when surveillance alerts indicate potential cross-market manipulation or front-running.

Correct: A Registered Options Principal (ROP) has an affirmative duty to investigate red flags such as ‘marking the close,’ which involves entering orders near the close of trading to artificially affect the price. This investigation must include analyzing the intent and timing of the trades. Simultaneously, data protection and privacy regulations require that sensitive, non-public customer information be shared only with personnel who have a legitimate ‘need to know’ for compliance or legal purposes.

Incorrect: Notifying a Designated Market Maker (DMM) about specific suspicious accounts would violate customer confidentiality and could potentially lead to improper information leakage. Deferring an investigation based on an arbitrary materiality threshold is inappropriate, as manipulative intent is a regulatory violation regardless of the dollar amount. Sharing unredacted surveillance reports with a marketing department is a severe violation of data protection standards and Regulation S-P.

Takeaway: Registered Options Principals must balance the duty to investigate manipulative trading patterns with the obligation to protect sensitive customer data from unauthorized internal or external disclosure.

Correct: The Options Clearing Corporation (OCC) is the sole issuer and guarantor of all exchange-listed options. By acting as the common counterparty to every trade (a process known as novation), the OCC ensures the integrity of the options market by guaranteeing that the obligations of the contracts are fulfilled, regardless of the financial stability of the individual clearing members.

Incorrect: Setting margin requirements is primarily the responsibility of the Federal Reserve Board under Regulation T and the individual Self-Regulatory Organizations (SROs) like FINRA, while strike prices are determined by the exchanges where the options are listed. Regulation of market participants is handled by FINRA and the specific exchanges, not the clearing corporation. The dissemination of last-sale information is the function of the Options Price Reporting Authority (OPRA), not the OCC.

Takeaway: The OCC centralizes and mitigates counterparty risk in the options market by acting as the issuer and guarantor for every listed contract.

Correct: Flex Options are exchange-traded options that allow investors to customize key contract terms, including the strike price, the expiration date (which can be any business day), and the exercise style (American or European). This flexibility allows institutional users to tailor the contracts to specific hedging needs while still benefiting from the centralized clearing and price discovery of an exchange environment.

Incorrect: The suggestion that Flex Options are exempt from OCC clearing is incorrect; a primary benefit of Flex Options over OTC options is that they are cleared and guaranteed by the OCC. The claim that they must follow standardized strike price intervals is false, as the ability to set non-standard strikes is a fundamental feature of these instruments. Lastly, Flex Options are available for both individual equities and various stock indices, not just individual equity securities.

Takeaway: Flex Options combine the customization of the OTC market with the safety and transparency of exchange-traded, OCC-cleared products.

Correct: When a client fails to meet a maintenance margin call, the broker-dealer is obligated under FINRA rules and Regulation T to protect the firm and the market by liquidating securities in the account to cover the deficiency. While firms may have ‘house’ rules that are more stringent than regulatory minimums, the core requirement is that the firm must take action to bring the account back into compliance if the customer fails to provide the necessary collateral within the specified period.

Incorrect: Granting indefinite or automatic extensions is not permitted under standard margin regulations, as extensions are typically reserved for exceptional circumstances and must be requested through a self-regulatory organization (SRO). The OCC does not involve itself in individual client margin calls or provide waivers for retail accounts. While converting positions into spreads would reduce the margin requirement, a firm cannot unilaterally execute new trades (purchasing long options) in a client’s account without specific discretionary authority; the standard remedy for a margin deficiency is liquidation.

Takeaway: Broker-dealers are required to liquidate positions to satisfy unmet margin maintenance calls to ensure the financial integrity of the firm and compliance with regulatory credit requirements.

Correct: For a call option to be considered ‘covered,’ the writer must own the underlying security and it must be available for delivery upon assignment. If a regulatory restriction, such as a sanctions-related freeze or a legal hold, prevents the transfer of the underlying shares, the shares can no longer serve as ‘cover’ for the short call. Under exchange and OCC rules, if the underlying cannot be delivered, the position must be treated as an uncovered (naked) call, which carries significantly higher margin requirements and different risk profiles.

Incorrect: The physical presence of shares in an account is insufficient if those shares are not legally deliverable; the definition of a covered call relies on the ability to fulfill the delivery obligation. The OCC does not have the authority to unilaterally change a physically-settled equity option into a cash-settled one due to individual account restrictions. Forcing the exercise of a long position is not a standard regulatory requirement and would not be possible if the underlying security is the one subject to the transfer freeze.

Takeaway: A covered call position requires the underlying security to be in a deliverable form; any legal or regulatory restriction on the transfer of the shares invalidates the covered status of the option.

Correct: The primary responsibility of a Registered Options Principal (ROP) when reviewing and approving transactions is to ensure suitability. Under FINRA and exchange rules, the ROP must determine if the transactions are appropriate for the customer based on their financial situation, investment objectives (e.g., Income vs. Speculation), and prior experience. In this scenario, the discrepancy between an ‘Income’ objective and high-risk debit spreads is a red flag that requires immediate supervisory attention to ensure the customer understands the risks and that the account is handled properly.

Incorrect: Verifying the exchange venue is a matter of best execution but does not address the fundamental supervisory requirement of suitability. Monitoring firm-wide volume for capital commitment is a financial principal (FINOP) or institutional risk function rather than a transaction-level suitability review. While representative qualifications are important, the ROP’s daily transaction review is specifically designed to catch unsuitable or unauthorized trading activity regardless of the representative’s tenure or education status.

Takeaway: The Registered Options Principal’s most critical function in transaction review is ensuring that all trades align with the customer’s stated investment objectives and financial profile.

Correct: Under FINRA Rule 4530 and related options rules, a ‘complaint’ is defined as any written statement of a customer or any person acting on behalf of a customer complaining about the activities of the member or its associated persons. This definition includes institutional investors, such as hedge funds or pension funds. Firms are required to maintain records of these complaints and report quarterly statistical and summary information to FINRA, regardless of the client’s net worth or institutional status.

Incorrect: Option b is incorrect because institutional sophistication does not waive the firm’s regulatory obligation to report written complaints. Option c is incorrect because the reporting requirement is triggered by the receipt of a written complaint, not by a specific request from the client to involve regulators. Option d is incorrect because while the $50 million threshold is used to define an institutional account for other purposes, it does not provide an exclusion from the quarterly reporting requirements for customer complaints.

Takeaway: FINRA complaint reporting and record-keeping requirements apply equally to written grievances from both retail and institutional investors.

Correct: FINRA Rule 2090 (Know Your Customer) requires firms to use reasonable diligence, in regard to the opening and maintenance of every account, to know and retain the essential facts concerning every customer. A critical component of these essential facts is understanding the authority of each person acting on behalf of the customer. In a scenario involving a third-party investment adviser, the firm must ensure it has verified the adviser’s legal authority to trade and manage the sub-accounts for the underlying clients.

Incorrect: The requirement to obtain a signed options agreement within 15 days is a specific options-related rule (FINRA Rule 2360) and relates to suitability, not the foundational KYC requirements of Rule 2090. Updating financial profiles for risk tolerance is a requirement of the Suitability Rule (Rule 2111), which is distinct from the ‘essential facts’ required by Rule 2090. While identity verification is part of the broader regulatory framework, the Customer Identification Program (CIP) is a separate requirement under the USA PATRIOT Act and Rule 3260, whereas Rule 2090 specifically focuses on the facts needed to service the account and understand the authority of those acting for the client.

Takeaway: Rule 2090 requires firms to maintain ‘essential facts’ for every account, which specifically includes verifying the authority of any person acting on behalf of the customer.