Options Disclosure Document

A client of Larkmont Securities asks to place his first options order. Regarding what the firm must do before and around accepting that order, which statement is correct?

1. A.The representative may approve the account for options trading personally, provided the customer signs the options agreement before the first order is entered.Incorrect. Approval must come from a designated registered options principal, not from the representative handling the account.
2. B.No special approval is required, because listed options are exchange traded and therefore carry the same account requirements as ordinary equity securities.Incorrect. Options accounts require specific background information, principal approval and delivery of the Options Disclosure Document.
3. C.A designated registered options principal must approve the account based on the customer information, the Options Disclosure Document must be delivered at or before approval, and the signed options agreement is due within fifteen days after approval.Correct. That is the required sequence: information, principal approval with contemporaneous disclosure delivery, then the signed agreement within fifteen days.
4. D.The Options Disclosure Document need only be delivered with the confirmation of the first executed options trade.Incorrect. Delivery must occur at or before account approval, so the customer receives the risk disclosure before trading is permitted.

Why: Options carry risks and mechanics that differ fundamentally from ordinary securities, so the rules require the account to be vetted before any order is accepted. The firm must obtain background and financial information about the customer, including investment objectives, experience and knowledge, financial situation and needs, and a designated registered options principal must approve the account for options trading, deciding the level of activity that is appropriate. At or before the time the account is approved, the firm must deliver the current Options Disclosure Document, the standardised booklet titled Characteristics and Risks of Standardized Options, which explains how listed options work and the risks of each basic strategy. The customer must then return a signed options agreement confirming that he has received the document and will abide by the rules of the options exchanges and the Options Clearing Corporation, and that agreement is due within fifteen days after approval. Ongoing suitability obligations continue to apply to every recommendation, so approval at a given level does not make any strategy within that level automatically suitable.

A member firm prepares a retail communication about options strategies that will NOT be preceded or accompanied by the Options Disclosure Document. Under FINRA Rule 2220, the communication must be:

1. A.Filed with FINRA at least 10 calendar days before first use and approved by a Registered Options PrincipalCorrect. The pre-filing track governs non-ODD options communications.
2. B.Limited to institutional investors onlyWrong. Retail use is permitted under the pre-filing regime.
3. C.Filed with the SEC within 10 business days after useWrong-but-tempting. Neither the SEC nor post-use timing is the requirement.
4. D.Used freely, because the ODD is optional marketing materialWrong. The ODD is the foundational risk document, and skipping it triggers stricter handling.

Why: Communications about standardized options not accompanied by the ODD must be submitted to FINRA at least ten calendar days before first use and are limited to general descriptions, along with Registered Options Principal approval. Citation: FINRA Rule 2220(c). Takeaway: no ODD = 10-day FINRA pre-filing and restricted content.

A customer's account at Ashgrove Partners has been approved for options trading. When must the options disclosure document reach the customer?

1. A.With the confirmation of the customer's first options transaction.Wrong. That timing belongs to disclosure tied to a purchase and would leave a customer cleared to take on options risk while still uninformed about it.
2. B.Within fifteen days after approval, alongside the signed options account agreement.Wrong. That window is the one for getting the signed agreement back, a different document travelling in the opposite direction.
3. C.At or before the time the account is approved for options trading.Correct. Approval is the trigger, so the document has to be in the customer's hands by then rather than merely on its way.
4. D.Before the customer's first order is entered, whether or not the account has been approved.Wrong. It anchors delivery to trading instead of to approval, and an unapproved account cannot receive an options order in any case.

Why: FINRA's options rule requires a member to deliver the current options disclosure document prepared by The Options Clearing Corporation to a customer at or prior to the time the customer's account is approved for trading options. The trigger is approval rather than the first trade, because approval is the moment the firm decides this customer may take on options risk and the disclosure is what informs that decision. Amendments are handled by a separate limb: a revised disclosure document must reach the customer no later than the confirmation of a transaction in the category of options the amendment concerns. Operations therefore carries two delivery duties on the same document, driven by two different events.

A retail communication discussing options strategies must be:

1. A.Approved by a Registered Options Principal, with the ODD preceding or accompanying itCorrect. Rule 2220 imposes both requirements on retail options communications.
2. B.Signed personally by the firm's CEOWrong. No CEO signature requirement exists.
3. C.Limited to institutional investors onlyWrong. Retail options communications are permitted with proper approval and disclosure.
4. D.Filed with the SEC 30 days before first useWrong. SEC pre-filing is not the options-communication mechanism; FINRA and ROP approval govern.

Why: Retail communications concerning options must be approved in advance by a Registered Options Principal, and the current Options Disclosure Document generally must precede or accompany the communication. Citation: FINRA Rule 2220. Takeaway: ROP approval plus ODD delivery for options material.