Series 4 key terms

An SEC-required booklet, "Characteristics and Risks of Standardized Options," explaining how listed options work and the risks they carry. Firms must give it to prospective options customers and obtain evidence that the customer received it.

The SEC rule that requires a broker-dealer to furnish the options disclosure document to a customer at or before the time the customer's options account is approved, and to keep evidence of that delivery.

A signed customer agreement in which the customer acknowledges the risks of options trading, agrees to be bound by exchange and clearinghouse rules, and accepts the firm's margin and liquidation terms.

The record of a customer's identity, age, employment, income, net worth, liquid net worth, investment experience, objectives, and risk tolerance that a firm uses to judge whether options trading is appropriate.

Tiered categories, commonly Level 1 through Level 4, that specify which option strategies a customer may use, from covered calls and protective puts up to uncovered short options and complex spreads.

The documented analysis comparing a customer's financial resources, investment objectives, experience, and risk tolerance with the particular option strategy and trading level being approved or recommended.

A person who has passed the Series 4 examination and is designated by the firm to approve options accounts and transactions, review options activity, and supervise the firm's options business.

The requirement that a registered options principal review and endorse each options order and the resulting position, unless the account has been approved for unsupervised trading.

A status a firm may grant to an experienced options customer after principal review, allowing orders to be entered without prior approval of each transaction; the account still requires ongoing supervision.

An account for which a representative has written authority to choose and execute trades without the customer's prior consent to each order; options discretion requires principal approval and close supervision.

A pattern of trading driven mainly by the desire to generate commissions rather than to meet the customer's goals, often shown by high turnover, high cost-to-equity ratios, and rapid in-and-out transactions.

A written grievance from a customer alleging misconduct, error, or dissatisfaction. Firms must log, investigate, and respond to complaints, and certain complaints must be reported on registration forms or to FINRA.

The U.S. clearinghouse that issues, guarantees, and settles all listed standardized options, standing as the counterparty to every trade so buyers and sellers need not deal with each other directly.

The holder's use of the right to buy or sell the underlying asset at the strike price before or on the expiration date, depending on whether the contract is American or European style.

The obligation placed on an option writer when a holder exercises; the writer must honor the contract. The clearinghouse allocates assignments among member firms, which then allocate them to customers' short positions.

A clearinghouse procedure under which an expiring option that is in the money by at least a set amount is exercised automatically unless the holder submits a contrary instruction before the cutoff time.

A customer's instruction to prevent the automatic exercise of an expiring in-the-money option. It must reach the firm before the established cutoff so the firm can notify the clearinghouse in time.

Caps set by exchanges and FINRA on the number of contracts in one underlying that an account, or accounts acting together, may hold on the same side of the market.

Restrictions on how many contracts of a given class an account or group may exercise within a set period, typically five business days, designed to prevent manipulation of the underlying market.

Margin calculated from the maximum risk of a defined option position, such as a spread, covered call, or straddle, rather than by requiring margin on each leg as if it stood alone.

The FINRA rule governing options accounts and trading, covering account approval, principal endorsement of orders, position and exercise limits, exercise cutoffs, and required disclosures for standardized options.

The FINRA rule on communications with the public, which sets content standards, principal approval requirements, filing obligations, and recordkeeping for retail communications, institutional communications, and correspondence.

Material distributed in writing or electronically to more than 25 retail investors within any 30-calendar-day period; options retail communications generally require principal pre-approval and, for certain content, FINRA filing.

Written or electronic communication sent to 25 or fewer retail investors within 30 calendar days. It does not need pre-approval but must be reviewed by a qualified supervisor and retained.

Written or electronic material distributed only to institutional investors. It is exempt from most pre-approval and filing rules but must still be supervised and kept in the firm's records.

The requirement that options advertising and sales literature give a fair picture of both potential benefits and risks, avoiding exaggerated claims, promissory language, unwarranted projections, or misleading emphasis.

The SEC rule requiring a broker-dealer to act in a retail customer's best interest when recommending a securities transaction, strategy, or account, with obligations for disclosure, care, conflict of interest, and compliance.

A firm's written procedures, required under the Bank Secrecy Act, to verify customer identity, monitor transactions, detect suspicious activity, and train staff; options accounts must be included in the monitoring.

A confidential report filed with FinCEN when a firm knows or suspects that a transaction involves illegal funds or is structured to evade reporting rules; the customer must not be told it was filed.

Someone a customer names, with the customer's permission, whom the firm may contact in limited situations such as suspected financial exploitation or concerns about the customer's health or whereabouts.

The supervision rule requiring a firm to maintain a system, including written procedures and designated supervisors, reasonably designed to achieve compliance with securities laws and FINRA rules.

The firm's written description of the reviews, approvals, and follow-up steps used to supervise its business, naming who performs each step and how compliance is documented and escalated.

A yearly meeting required of every registered representative at which compliance issues, sales practices, new rules, and the firm's procedures are reviewed with a supervisor; attendance must be documented.

Two required programs: the Regulatory Element is FINRA computer-based training due at set intervals after registration, and the Firm Element is the firm's own annual training plan based on its business and risks.

Periodic on-site examination of a firm's offices to test compliance with rules and internal procedures; offices of supervisory jurisdiction are inspected at least annually and other branch offices at least every three years.

Any business activity for compensation outside the representative's work for the firm, which must be disclosed and approved in writing before it begins so conflicts and risks can be assessed.

Uniform registration forms: the U4 discloses a representative's background and history when registering with a firm, and the U5 reports the facts of a termination and other disclosures when registration ends.

A legal bar to registration or association with a member firm arising from certain criminal convictions, regulatory orders, or financial events; relief must be granted before the person may work in a registered capacity.