Series 24 Trading Supervision Practice Questions

Correct answer: A. No later than the beginning of regular trading hours on the settlement day following the 13th consecutive settlement day the fail has persisted

Rule 203(b)(3) requires a participant to close out a fail-to-deliver position in a threshold security no later than the beginning of regular trading hours on the settlement day following the thirteenth consecutive settlement day the fail has persisted. Failure to do so triggers a pre-borrow requirement for further short sales in that security until the position is closed out. The other choices either invent deadlines or wrongly describe the rule as merely a disclosure obligation.

• A. Correct. Under Reg SHO Rule 203(b)(3), once a fail-to-deliver in a threshold security has persisted for 13 consecutive settlement days, the participant must close out the position no later than the beginning of regular trading hours on the following settlement day.
• B. There's no fixed 3-day, then-open-ended deadline — Reg SHO ties the mandatory close-out to the number of consecutive settlement days (13) the fail has persisted, with ongoing monitoring, not a one-time window.
• C. The close-out deadline is tied to the 13-consecutive-settlement-day fail threshold, not to a calendar-month cutoff.
• D. Reg SHO Rule 203(b)(3) imposes a mandatory close-out obligation, not merely a disclosure requirement, once the persistent fail threshold is reached.

• Source: SEC Reg SHO Rule 203 (borrow and delivery)

Correct answer: B. Information barriers (Chinese wall) between research and trading

Trading ahead of an imminent, market-moving research report using knowledge gained from within the firm is precisely what information barriers are designed to prevent, since research analysis of this kind is treated as material nonpublic information until published. A supervisory failure allowing the trading desk to access and act on it before release is an information-barrier breakdown, not a Reg M, Reg SHO, or trade-reporting issue.

• A. Regulation M governs trading restrictions during securities distributions and is unrelated to the misuse of internal research information by a trading desk.
• B. Using undisclosed knowledge of an impending research report to trade ahead of it is exactly the scenario information barriers are designed to prevent, so a breakdown here points directly to a Chinese wall failure between research and trading.
• C. Regulation SHO locate procedures concern the ability to borrow and deliver shares for short sales, not the misuse of material non-public research content.
• D. Trade reporting timeliness concerns how quickly executed trades are reported to the tape, which has nothing to do with trading ahead of an internal research report.

Correct answer: B. This is a prohibited trade-through unless a specific Rule 611 exception applies (e.g., the order was flagged as an intermarket sweep order, or another enumerated exception is met)

Rule 611 generally prohibits trading through a protected quotation, but the rule contains several defined exceptions -- including intermarket sweep orders, benchmark trades, and others -- under which an inferior execution is permitted. Whether a given trade-through is a violation therefore depends on whether an exception applies, not an automatic yes/no. Rule 611 applies to NMS stocks generally, not just options (which have separate linkage rules), and speed of the executing venue is not itself an exception.

• A. Rule 611 isn't a strict-liability, no-exceptions rule — it explicitly carves out enumerated exceptions (like intermarket sweep orders) under which an execution at an inferior price is permitted.
• B. Correct. Executing through a protected quotation is a prohibited trade-through under Rule 611 unless one of the rule's enumerated exceptions applies, such as the order being flagged as an intermarket sweep order.
• C. Rule 611's order protection framework applies to NMS stocks (equities), not options — this describes the wrong asset class.
• D. Being faster than the other venue isn't an exception under Rule 611 — the rule turns on whether an enumerated exception applies, not on relative execution speed.

Correct answer: A. Marking the close

Marking the close is the manipulative practice of executing trades near the close specifically to affect the reported closing price, often to benefit a related position (e.g., options, futures, or a mark-to-market valuation). It is prohibited manipulative conduct under the Exchange Act's antifraud/antimanipulation provisions and FINRA Rule 2020. Painting the tape instead refers to a broader series of transactions meant to create a false impression of active trading, without the specific closing-price focus.

• A. Executing trades late in the session specifically to push the closing price to benefit a related position is the classic definition of marking the close.
• B. Painting the tape refers more broadly to creating a false appearance of active trading through a series of transactions; this scenario's specific focus on manipulating the closing price is more precisely marking the close.
• C. Wash trading involves offsetting trades with no genuine change in beneficial ownership, which is not what's described here.
• D. Front running involves trading ahead of a known, pending customer order, which is unrelated to manipulating a closing price.