General Securities Sales Supervisor (Series10) Practice Exam

Which rule prohibits shorting stock being underwritten within a specific timeframe before the effective date?

1. Rule 10b-18

2. Rule 102

3. Rule 105

4. Rule 100

The correct answer is: Rule 105

The correct answer is C, as Rule 105 of Regulation M specifically addresses the prohibition of short selling in connection with a security being underwritten during a certain period prior to the effective date of a public offering. This rule is aimed at preventing manipulation of the stock price by individuals who might short sell the security before it is officially issued. By restricting such actions, Rule 105 helps maintain the integrity of the market and ensures that the price of the newly issued security reflects genuine demand rather than artificially depressed values caused by pre-offering short sales. This rule thus creates a fair environment for both issuers and investors participating in the offering by preventing the potential suppression of the stock’s price. Understanding Rule 105 is crucial for those involved in underwriting and sales practices, as violating it can lead to significant regulatory repercussions and affect the success of a public offering.