Study guide
The exam's fourth job function covers order entry, settlement, corporate actions, and compliance rules including AML and prohibited practices, tested throughout the exam.
Order Types and the Order Book
Buy limits and sell stops rest below market; sell limits and buy stops rest above. Stop orders become market orders when triggered; stop-limits become limit orders, risking no fill in gapping markets.
Settlement, Regulation T Payment and Confirmations
Regular-way settlement is T+1. Reg T payment due settlement plus 2 business days (T+3 from trade). Freeriding triggers 90-day freeze. Rule 10b-10 confirmations disclose capacity and commission at or before completion.
Corporate Actions and Adjustment of Open Orders
Ex-date now coincides with record date under T+1. Buy limits/sell stops reduced by dividend unless DNR. Splits/stock dividends adjust all orders regardless of DNR. Reverse splits cancel open orders.
Short Sales and Regulation SHO
Locate requirement (Rule 203(b)(1)) requires reasonable belief shares can be borrowed, documented, before short sale. Market makers exempt. Persistent fails land on threshold list, forcing pre-borrow discipline.
Anti-Money Laundering: CTR and SAR
CTR required for currency over $10,000/day, amount-only trigger, filed within 15 days. SAR requires suspicion at $5,000+, filed within 30 days, confidentially, never disclosed to customer.
Prohibited Practices and Customer Disputes
Front running, guarantees against loss, and breakpoint sales are always prohibited regardless of consent. Account sharing requires written approval from customer and firm, proportionate to contribution (family exempt from proportionality).
Key terms
- Stop order
- — Becomes a market order when triggered at the stop price.
- Stop-limit order
- — Becomes a limit order when triggered; may not execute in a gap.
- Regular-way settlement
- — T+1 for equities, corporate/municipal bonds, and government securities.
- Freeriding
- — Selling before paying, using proceeds to cover purchase; triggers 90-day freeze.
- Do not reduce (DNR)
- — Prevents cash dividend reduction; doesn't stop split/stock dividend adjustments.
- Locate requirement
- — Reg SHO duty to reasonably believe shares can be borrowed, documented, before short sale.
- Threshold security
- — Persistent fails-to-deliver stock subject to mandatory close-out.
- Currency Transaction Report (CTR)
- — FinCEN filing for currency over $10,000/day, amount-only trigger.
- Suspicious Activity Report (SAR)
- — Confidential FinCEN filing for suspicious transactions of $5,000+.
- Front running
- — Trading ahead of a customer's imminent block order.
Exam tips
- Buy limits/sell stops rest below market and get reduced on ex-date unless DNR; sell limits/buy stops rest above and never reduce.
- Splits/stock dividends adjust orders regardless of DNR; reverse splits cancel orders outright.
- Reg T payment is due 2 business days after settlement (T+3 from trade under current T+1 cycle).
- CTR is amount-only ($10,000+); SAR requires suspicion ($5,000+) — don't swap the triggers.
- Locate requirement needs reasonable belief + documentation, not actual possession of borrowed shares.
- Guarantees against loss and breakpoint sales are prohibited regardless of customer consent or disclosure.