General Securities Sales Supervisor (Series10) Practice Exam

What determines the validity of a short sell executed prior to the effective date of a public offering?

1. Retail investor approval

2. The firm’s compliance guidelines

3. Regulation M rules

4. The number of shares sold

The correct answer is: Regulation M rules

The validity of a short sell executed prior to the effective date of a public offering is determined by Regulation M rules. Regulation M is designed to prevent manipulative practices in the trading of securities during the distribution of new stock offerings. Specifically, these rules restrict certain activities that could unfairly affect the market price of the securities being offered. When a public offering is imminent, Regulation M places limitations on short selling to prevent traders from driving down the price of the stock as a way to profit from the offering. This ensures an orderly market and fair participation for investors in the new offering. Consequently, any short sell executed before the effective date of the public offering is subject to these regulations, which helps maintain the integrity of the market during this crucial time. Though other factors, such as a firm's compliance guidelines or the nature of retail investor approval, could play a role in a firm's trading policies, they do not override the specific provisions set by Regulation M regarding short selling activities surrounding public offerings.