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Which of the following are characteristics of the Securities Act of 1933?
Requires registration of exchanges.
Called the Truth in Securities Act.
Requires full and fair disclosure of material facts.
Enabled the Federal Reserve Board to determine margin requirements.
The Securities Act of 1933 regulates new issues of corporate securities sold to the public. The act is also referred to as the Full Disclosure Act, the Paper Act, the Truth in Securities Act, and the Prospectus Act. The purpose of the act is to require full, written disclosure about a new issue. The Securities Exchange Act of 1934 requires registration of exchanges with the SEC and enabled the FED to set margin requirements.
Which of the following securities issues must be registered with the SEC under the Securities Act of 1933?
The Securities Act of 1933 requires the registration of all new nonexempt issues of securities sold to the public. In general, exempt issues include municipal securities, U.S. government securities, bank issues, and nonprofit organization securities. The securities in this question are all nonexempt.
The Trust Indenture Act of 1939 applies to which of the following?
The Trust Indenture Act of 1939 applies to corporate bond issues sold interstate in which the dollar amount to be sold is $5 million or more. The act requires issuers, prior to issuance, to appoint a trustee whose job is to protect the bondholders.
The term offering at the market refers to a distribution in which the price to the public on the offering date is set:
A) based on the DJIA or other index price during the day.
B) more than once during the day.
C) once during the day.
D) no more than three times during the day.
An offering at the market occurs when the offering price is not fixed, meaning that it can change many times daily. This public offering pricing technique applies only to additional issue offerings, in which case the open market price for existing stock (which will fluctuate during the day) is used to price the new stock on the offering date.
The letter of intent in a corporate underwriting is typically signed by which of the following parties?
Selling group members.
The letter of intent initiates the underwriting process and is signed by the issuer and managing underwriter.
Under SEC rules, customer checks deposited into an escrow account in connection with a contingent offering may be invested in all of the following EXCEPT:
A) a deposit obligation of a bank.
B) a money market fund.
C) securities guaranteed by the U.S. government.
D) a negotiable CD.
Deposited proceeds may be held in cash, invested in a money market fund, or invested in any security with guaranteed principal and interest by the U.S. government.
SEC Rule 15c2-4 deals with:
A) notification of customer free credit balances.
B) hypothecation of customer securities.
C) custody of customer securities.
D) escrow of customer checks in contingent offerings.
This SEC rule requires that customer checks subscribing to contingent offerings be placed in an escrow account pending completion or cancellation of the underwriting.
Which of the following stipulations must be contained in agreements among underwriters and in selling group agreements between members?
To whom and under what circumstances selling concessions will be allowed.
Price at which the securities will be sold to the public or the formula by which the price will be determined.
Financial liability each selling group member incurs.
Maximum duration that the agreement will be in effect.
The only requirements for both syndicate and selling group agreements are the concession amounts and the selling price. Selling group members take no financial responsibility and hence have no liability. These agreements are extendable.
A Green Shoe clause in an underwriting agreement allows the syndicate to sell up to:
A) 20% more shares than registered.
B) 15% more shares than originally planned.
C) 5% more shares than registered.
D) 10% more shares than registered.
A Green Shoe over allotment option in an underwriting agreement allows the underwriters to sell up to 15% more shares than registered. The additional shares are provided by the issuer. Over-allotment provisions must be disclosed in both the registration statement and the final prospectus.
If an event affects the investment merit of a security during the registration process, the syndicate may invoke the:
A) severance clause.
B) market-out clause.
C) penalty-bid clause.
D) hold-harmless clause.
A market-out clause, contained in the letter of intent executed by both the syndicate manager and the issuer, allows the syndicate manager to back away from a firm commitment if an event occurs affecting the investment merit of the securities.
A corporation plans to issue stock to the public at $10 per share. If the manager's fee is $0.10 per share, the underwriting fee is $0.25 per share, the concession is $0.45 per share, and the re-allowance is $0.20 per share, the spread is:
In a corporate offering, the spread has three components: the manager's fee, the underwriting fee, and the concession. The re-allowance is not a separate item; rather, it is part of the concession and represents a give-up if a member of the selling group sells to a nonmember.
Under SEC rules, a selling group is formed:
A) after the filing of the registration statement.
B) at the same time the syndicate is formed.
C) after syndicate formation, but before the filing of the registration statement.
D) at the same time the registration statement is filed.
Under SEC rules, a selling group cannot be formed until after the registration statement is filed with the SEC.
Each member of a syndicate formed to underwrite a municipal offering in an Eastern joint account has:
divided selling responsibility.
undivided selling responsibility.
An eastern, or undivided, account is one in which each syndicate member is liable for any unsold portion of the issue according to each member's percentage participation in the syndicate.
Ajax Corp. is engaged in a best efforts underwriting. Employees of Ajax may help sell the issue if they meet which of the following conditions?
They are not associated with any broker-dealer
They are not subject to a statutory disqualification
They are not compensated based on sales
Under SEC Rule 3a4-1, an issuer may use its employees to help sell the issue as long as the employees are not subject to a statutory disqualification, are not compensated based on sales and are not associated with any broker-dealer.
If XYZ Corporation intends to offer stock in a public offering, it must do all of the following EXCEPT:
A) publish a tombstone advertisement and free writing prospectus.
B) issue a prospectus.
C) file a registration statement with the SEC.
D) register the securities with the SEC and applicable states.
Tombstones are advertisements often appearing in business newspapers to publicize new issues and are generally placed by a syndicate manager. A free writing prospectus (FWP) is a supplement to the SEC cleared prospectus. Neither a tombstone ad nor FWP are required.
All of the following will occur during the cooling-off period for an IPO EXCEPT:
A) blue-skying the issue.
B) stabilization of the issue.
C) a due diligence meeting.
D) issuance of a preliminary prospectus.
The underwriters of an IPO cannot stabilize the offering during the cooling-off period because the issue is not yet in the hands of investors, and therefore cannot be traded in the open market.
Which of the following statements regarding a firm that is said to be taking securities in trade are TRUE?
Securities taken in trade must not be assigned an inflated value in an effort to even them up with the value of the public offering securities being sold by the broker/dealer.
In determining the fair market price for securities taken in trade from a customer, there is a presumption of compliance if the firm pays the customer no more than the highest independent bid.
There is a presumption of noncompliance if the firm pays more than the lowest independent offer.
The objective of the securities taken in trade rule is to ensure securities are not assigned an inflated value in an effort to match the value of the public offering securities being offered by the broker/dealer. When taking securities in trade, it is considered safe to presume compliance if the firm has not paid the customer any higher than the highest independent bid. Paying more than the lowest independent offer is exceeding the outer limit and is a clear violation of the securities taken in trade rule.
A member is participating in an offering of nonconvertible debt for an issuer for whose common stock the member acts as a market maker. Regarding the common stock, the member may:
A) distribute recommendations.
B) publish research reports and market analyses.
C) accept sales solicited or unsolicited.
D) all of these.
Under SEC Rule 138, the member may distribute recommendations, publish reports, and accept sales provided the offering is for a nonequivalent security.
Under SEC Rule 415, a shelf registration, once effective, allows the issuer to sell securities for up to:
A) 6 months from the effective date.
B) 12 months from the effective date.
C) 18 months from the effective date.
D) 2 years from the effective date.
Once effective with the SEC, a shelf registration is good for two years. This allows issuers who are looking for a window of opportunity to have an effective registration in place if and when the window opens. For well-known and seasoned issuers (WKSI), a shelf registration statement is good for three years. WKSI may take advantage of a safe harbor and make use of free writing communication during the shelf life.
For an additional issue offering where the subject security is quoted on the OTCBB, the prospectus delivery requirement period is:
A) 40 days.
B) 25 days.
C) 60 days.
D) 90 days.
The prospectus delivery requirement periods in the aftermarket are as follows: For IPOs, 90 days if the security is non-Nasdaq and 25 days if the security is to be listed or quoted over Nasdaq. For additional issues, there is no requirement to deliver a prospectus in the secondary market if the security is listed or on Nasdaq. Once the distribution is complete, there is no further obligation to deliver a prospectus. If the security is non-Nasdaq, the prospectus delivery requirement period is 40 days.
Under the Uniform Securities Act, all of the following are methods of registering securities with a state EXCEPT:
There are two basic methods by which an issuer can register securities with a state: coordination and qualification. Notification is available for covered securities, such as investment company securities. There is no such thing as registration by application.
Syndicate members may publish a research report on an additional issue offering during the registration period under all of the following conditions EXCEPT:
A) the recommendation is no more favorable than in the past.
B) the issuer is listed on the NYSE.
C) the recommendation is contained within a publication distributed with reasonable regularity.
D) the publication includes recommendations on other companies in the issuer's industry.
Rule 139 of the SEC (which applies to additional issue offerings) allows syndicate members, otherwise prohibited from publishing research on the subject company for the ten-day period following the effective date, to publish research during the registration period if the recommendation is contained in a publication distributed with reasonable regularity and includes recommendations on other companies in the issuer's industry, or contains a comprehensive list of all securities being recommended by the firm. In addition, the recommendation must not be given greater prominence in the publication than that given to other recommendations, nor more favorably than in the past. There is no requirement that the subject security be listed on the NYSE. Nasdaq issuers (both Global Market and Capital Market) are also eligible for a Rule 139 exception.
If a member firm is underwriting an initial public offering of common stock for ABCD Corp., a new issue that qualifies for Nasdaq listing, a prospectus must be provided to all purchasers for how many days following the effective date?
For new issues that qualify for listing on an exchange or Nasdaq, the prospectus delivery requirement period in the aftermarket is 25 days. If the new issue will trade on the OTCBB or OTC Pink Market, the period is 90 days.
Under SEC Rule 134, a tombstone advertisement includes all of the following EXCEPT:
A) the public offering price.
B) names of the syndicate members.
C) net proceeds to the issuer.
D) number of shares to be sold.
Under SEC Rule 134, a tombstone advertisement may be placed by the syndicate manager on or before the offering's effective date and is limited to the name of the issuer, type of security being offered, number of shares to be sold, public offering price, and names of the syndicate members.
An amendment to Form SB-1 filed with the SEC is effective:
A) within 20 days of filing.
C) within 48 hours of filing.
D) within ten days of filing.
Form SB-1 is a registration statement that may be used by issuers who wish to sell $10 million or less in securities. The form may also be used for amendments. If so, the amendments filed are effective immediately.
An issuer listed on Nasdaq is in registration for an additional issue offering. Before the effective date, the issuer reaches an agreement in principle to acquire a manufacturing company. The issuer must take all of the following actions EXCEPT:
A) amend its prospectus.
B) directly notify all of its shareholders.
C) amend its registration statement.
D) notify Nasdaq.
The issuer's registration statement must be amended as well as the prospectus. Also, the issuer must notify Nasdaq, which will likely decide to halt trading to allow the investing public sufficient time to absorb the news. Furthermore, the company will issue a press release that will serve to notify its shareholders.
Under SEC rules, a well-known, seasoned issuer is one which has a common equity market capitalization of at least:
A) $800 million.
B) $1 billion.
C) $700 million.
D) $500 million.
A well-known, seasoned issuer must have a market capitalization of at least $700 million held by nonaffiliates. Alternatively, an issuer may qualify if, during the preceding three years, it issued, in the aggregate, $1 billion or more of nonconvertible securities other than common equity.
Under SEC rules, the phrase access equals delivery refers to the:
A) electronic delivery of research reports.
B) electronic delivery of private placement memoranda.
C) electronic delivery of OFAC lists.
D) electronic delivery of final prospectuses.
Given the impact of email and the Internet, final prospectuses no longer have to be printed and physically delivered to customers. Filing a final prospectus with the SEC will satisfy delivery requirements. Investors must be notified that they purchased securities in a registered offering.
The electronic delivery of a final prospectus applies to all of the following offerings EXCEPT:
A) equity securities.
B) debt securities.
C) convertible debt securities.
D) mutual fund shares.
Investment companies are not permitted to use the access-equals-delivery model.
A deficiency letter issued by the SEC indicates that:
A) the issuer has not paid the required filing fees.
B) a preliminary prospectus needs to be modified.
C) a final prospectus needs to be modified.
D) the price range specified in its registration statement is unrealistic.
If a registration statement, which is the base document for preparing a preliminary prospectus, is found by the SEC to be deficient, the SEC will issue a deficiency letter to the issuer. Until the deficiencies are corrected, the 20-day cooling-off period is halted.
Which of the following statements regarding delivery of a final prospectus is NOT true?
A) It must be delivered under separate cover.
B) It may be delivered with other materials of the firm.
C) It must be delivered at or before confirmation of sale.
D) Delivery may be satisfied electronically.
A final prospectus must be delivered under separate cover.
Your firm is the lead underwriter for a new issue of WXYZ stock. When and in what manner do your representatives have to disclose this fact to prospective buyers?
It makes sense to make this disclosure when first contacting clients.
Which of the following regarding forward looking statements are TRUE?
They may be used in preliminary prospectuses.
They may not be used in preliminary prospectuses.
They may be used in final prospectuses.
They may not be used in final prospectuses.
Under Section 21E of the Act of 1934, The SEC allows issuers to use forward looking statements in annual reports to shareholders as well as in prospectuses and proxy material.
A well-known seasoned issuer files a shelf registration statement with the SEC. The WKSI wishes to sell up to $250 million of convertible preferred over the next 3 years as market conditions permit. SEC registration fees:
A) may be paid on a "pay as you go" basis.
B) must be paid upon filing
C) must be paid within 20 days of filing.
D) may be paid at the expiration of the shelf registration.
WKSIs may pay filing fees at the time of filing or on a "pay as you go" basis.
Under SEC rules, a seasoned issuer must have a public float value of at least:
A) $50 million.
B) $100 million.
C) $250 million.
D) $75 million.
The minimum threshold is $75 million.
Standby purchasers are NOT subject to FINRA Rule 5130 provided which of the following is done?
The standby arrangement is disclosed in the final prospectus.
The standby arrangement is in writing.
The syndicate manager represents, in writing, that it was unable to find any other purchasers for the securities.
The securities are locked up for three months.
If the issue is not moving well, the syndicate manager may allow standby purchasers (individuals or firms who would otherwise be restricted under FINRA Rule 5130) to buy at the offering price. Securities purchased in a standby arrangement are not subject to FINRA Rule 5130 provided the arrangement is disclosed in the final prospectus and the syndicate manager represents in writing that it was unable to find any other purchasers for the new issue. Securities purchased pursuant to a standby arrangement are subject to a three-month lockup.
Under which of the following circumstances may a member firm sell a new equity issue to one of its nonregistered employees?
A) Under no circumstances.
B) Amount purchased is small and not disproportionate to the size of the issue.
C) Transaction is consistent with the employee's normal investment practice.
D) Permission of a principal is obtained.
Member firms and employees of members (registered and nonregistered) are prohibited from buying a new equity issue at the public offering price.
Under FINRA rules, if a member firm receives an order to buy a new equity issue on behalf of an undisclosed principal from a bank, the member must:
A) obtain a representation from the bank that the purchaser is not restricted.
B) accept the order.
C) reject the order.
D) determine the identity of the purchaser.
If a member receives an order from a conduit such as a bank, the member must make an inquiry as to whether the ultimate purchaser is restricted. It is not necessary to determine the identity and business affiliations of the purchaser.
Under the de minimis exemption, an initial public offering of common stock may be sold to an account where restricted persons have a beneficial interest as long as their interest in the account does NOT exceed:
If the beneficial interests of restricted persons do not exceed 10% of an account, the account may purchase a new equity issue.
All representations relating to whether an account is eligible to purchase new equity issues at the public offering price must be retained for how many years?
A) Five years.
B) Six years.
C) Three years.
D) One year.
Representations obtained to determine the eligibility of an account to purchase a new equity issue must be retained for three years.
You are an officer of a member firm that deals exclusively in direct participation programs. You would like to purchase a new equity issue at the POP being underwritten by a major firm. Under FINRA Rule 5130, which statement is TRUE?
A) You are permitted to buy the new issue without restriction.
B) You are permitted to buy the new issue if new issues are part of your normal investment practice.
C) You are permitted to buy the new issue if the amount to be purchased is insubstantial.
D) You are prohibited from buying the new issue.
If you are associated with a limited business broker/dealer, you may purchase a new equity issue at the POP. This exemption applies to employees, not to the firm. A limited business broker/dealer is one whose business is limited exclusively to DPPs or redeemable investment company securities.
Which of the following statements are TRUE regarding representation letters required by FINRA Rule 5130?
Initial verification must be in the form of a positive affirmation letter.
Initial verification may be in the form of a negative consent letter.
Annual verification must be in the form of a positive affirmation letter.
Annual verification may be in the form of a negative consent letter.
The initial verification that a customer is not a restricted person must be in the form of a positive affirmation letter. Subsequent verification, which must be done annually, may be in the form of a negative consent letter.
Your firm is the managing underwriter for a 300,000 share offering on a best efforts all-or-none basis. On the basis of lower than anticipated indications of interest, your firm has disclosed a standby purchase arrangement in the final prospectus. At the end of the offering period, 20,000 shares remain unsold. Under FINRA rules, your firm could finalize the offering by:
A) purchasing the 20,000 shares remaining for its investment account.
B) remitting to the issuer the net proceeds from the 280,000 shares sold.
C) purchasing the 20,000 shares remaining for its trading account.
D) renegotiating the terms of the offering with the issuer.
With a standby purchase agreement in effect, the manager could sell shares to a person or entity that would otherwise be a restricted purchaser as long as it represents that it was unable to find any other buyers for the shares. Stock purchased in a standby arrangement is subject to a three-month lockup period, which is why it must be purchased in the firm's investment account, not its trading account.
Under FINRA rules, employees of member firms are prohibited from purchasing which of the following new issues?
A) IPOs of equity securities
B) All IPOs
C) IPOs of equity and non-convertible debt securities
D) IPOs and follow-on offerings of equity securities
FINRA Rule 5130 only applies to the initial public offering of equity securities. It does not apply to additional issue offerings, debt securities, exempt securities, convertible securities, preferred stock or investment company securities.
Underwriters that reserve the right to stabilize the price of securities distributed to the public under an SEC registration statement may do so:
A) only if notice is given in the prospectus.
B) only if the securities being distributed will be immediately listed for trading on the NYSE or other exchange.
C) without restriction.
D) under no circumstances.
Stabilizing transactions are permitted if the SEC is notified in the registration statement and the investing public is notified in the prospectus.
If a public offering of ABC common stock is to be immediately listed and traded on one or more securities exchanges, the maximum number of stabilizing bids that may be maintained by the underwriters per exchange is:
Only one stabilizing bid is allowed per market.
According to Regulation M, a syndicate manager may reserve the right to reclaim a selling concession from a syndicate member when securities originally sold by the syndicate member are purchased in a stabilizing bid transaction. This is known as:
A) primary market making.
B) a penalty-free bid.
C) a penalty bid.
D) passive market making.
A penalty bid is used to minimize sellbacks of public offering stock at the stabilizing bid. The penalty is a return of the concession earned.
According to Rule 103 of Regulation M, passive market-making activity:
A) is only allowed for firm commitment offerings.
B) is allowed for firm commitment and best efforts offerings.
C) can only begin if notification was given to Nasdaq at least three business days prior to the beginning of the restricted period.
D) is only allowed for at-the-market offerings.
Passive market-making activity is permitted for fixed price, firm commitment offerings only. There can be no passive market-making activity in at-the-market offerings or best efforts underwritings. Notice of passive market-making activity must be given one business day prior to the beginning of the restricted period.
Under SEC Rule 103, once a passive market maker reaches or exceeds its daily net purchase limit, the market maker must:
A) adjust its quote size to 1 × 1.
B) seek an excused withdrawal for the remainder of that trading day.
C) notify Nasdaq and execute subsequent trades as an agent.
D) move its quotes away from the inside market.
Once a passive market maker reaches or exceeds its net daily purchase limit (30% of its ADTV), the firm must seek an excused withdrawal for the remainder of the trading day.
Before placing a stabilizing bid, SEC Rule 104 requires that the syndicate manager:
A) advise Nasdaq as to whether the syndicate will engage in any short covering.
B) All of these.
C) notify Nasdaq as to whether the bid will be a penalty bid or a penalty-free bid.
D) provide Nasdaq with a copy of the cover page of the prospectus.
Before placing a one-sided stabilizing bid, the manager notifies Nasdaq of its intention to place the bid and provides the following information: whether the bid will be a penalty bid or a penalty-free bid; a copy of the cover page of the prospectus; and whether the syndicate will engage in any short covering (buying back in the secondary market to cover short sales made at the public offering price).
During the offering period, a syndicate member would be permitted to sell the securities below the public offering price:
A) provided the discount does not exceed the spread.
B) for block size orders only.
C) under no circumstances.
D) if released to do so by the manager.
All members of the underwriting group are bound to sell the new issue at the public offering price. If the issue is not moving, the manager, in writing, may authorize syndicate and selling group members to sell the issue at a lower price.
All of the following statements are true regarding stabilizing bids EXCEPT:
A) the manager must keep written records of each bid entered including date, time, and price.
B) stabilizing bids must be identified as such on Nasdaq.
C) records relating to stabilization must be retained for three years.
D) stabilization is permitted for at-the-market offerings.
Stabilization is only permitted for fixed-price offerings underwritten on a firm-commitment basis. Records of stabilization must be retained by the manager for three years. In addition, stabilizing bids must be identified as such over Nasdaq.
A passive bid that is higher than the highest current independent bid is:
A) permitted if the bid is placed within 30 minutes of the close.
C) permitted if the bid reflects a customer limit order.
D) permitted if the bid represents an order of 1,000 shares or more.
The only time a passive bid can be higher than the highest independent bid is if it reflects a customer limit order.
The SEC rule that addresses market maker activities during syndication of a new issue is:
A) Regulation M.
B) Regulation A.
C) Regulation S.
D) Regulation D.
Regulation M, which deals with both IPOs and additional issue offerings, governs the activities of syndicate makers and market makers who have an interest in the outcome of an offering of securities.
Which of the following firms could act as a passive market maker?
A) A syndicate member in an additional offering of WXYZ common stock that is not a market maker in the issue.
B) All of these.
C) A market maker in WXYZ that is also a syndicate member in an additional offering of WXYZ common stock .
D) A market maker in WXYZ that is not a syndicate member in an additional offering of WXYZ common stock.
One of the concerns of the SEC is that market makers who are also syndicate members in an additional issue offering may be able to affect the offering price prior to the effective date. SEC Rule 103 requires these market makers to either seek an excused withdrawal for the restricted period (generally one business day prior to the effective date) or function as a passive market maker.
Under Regulation M, passive market making is prohibited in all of the following situations EXCEPT:
A) during the time a stabilizing bid is in effect.
B) additional offerings of Capital Market stocks.
C) at-the-market offerings.
D) best effort offerings.
Under Rule 103, passive market making is only permitted for fixed-price offerings underwritten on a firm commitment basis. At-the-market offerings and best effort offerings do not meet this requirement. Under Rule 104, if a stabilizing bid is in effect, there can be no passive market making. Passive market making is permitted for listed stocks and Nasdaq stocks.
To be considered an actively traded security under Regulation M, an issue must have which of the following?
An average daily trading volume of $1 million or more.
An average daily trading volume of $5 million or more.
A public float value of $100 million or more.
A public float value of $150 million or more.
To be considered an actively traded security, an issue must have an average daily trading volume of $1 million or more and a public float of $150 million or more. If a security is actively traded, there are no restrictions placed on market makers trading the issue before an offering of its securities.
If the customers of a selling group member sell into a penalty stabilizing bid, the selling group member must pay back to the underwriter the:
The concession is the portion of the spread that a selling group member receives for selling securities in an offering. Stabilization is a practice designed to support the public offering price of a new issue, and it is conducted by a member of the underwriting syndicate. In stabilization, the syndicate member maintains a public bid to support the price of the security. If the customers of a selling group member sell into the stabilization bid, the selling group member must refund to the syndicate the concession it had received on those securities.
On the Nasdaq, a stabilizing bid with a penalty stipulation is identified by:
D) Pen D.
Syndicate stabilizing bids are identified as SYND bids. If the stabilizing bid is also a penalty bid, it is identified PBID.
What is the highest price at which a stabilizing bid can be placed?
A) No higher than the lowest independent bid in any marketplace.
B) No higher than the highest independent bid in the security's principal market.
C) No higher than the highest independent bid in any marketplace.
D) No higher than the lowest independent bid in the security's principal market.
A stabilizing bid can be no higher than the highest current independent bid in the security's principal market.
Under Rule 101 of Regulation M, securities which are not actively traded but have an ADTV of at least $100,000 and a public float of $25 million or more are subject to a restricted period of:
A) two days.
B) three days.
C) five days.
D) one day.
Securities with an ADTV of at least $100,000 and a public float value of at least $25 million are subject to a restricted period of one day, the business day before the effective date.
Under the Securities Act of 1933, an accredited investor is defined as a person having:
an annual income of at least $1 million.
an annual income of at least $200,000 for the last two years and anticipating an income of $200,000 this year.
a net worth of $1 million exclusive of personal residence.
a net worth of $1 million.
To qualify as an accredited investor under Regulation D of the Securities Act of 1933, the investor must be either an institutional investor or an individual with a net worth of at least $1 million (excluding the value of the personal residence), or have an income of at least $200,000 for each of the past two years with the same expected this year.
Notification of a sale under Regulation A in the form of an offering circular must be filed with the SEC how many calendar days before the initial offering?
Regulation A requires notification to the SEC 20 calendar days before the sale.
Under Regulation A, when must a broker/dealer furnish an offering circular to purchasers?
A) 72 hours before the confirmation.
B) Concurrently with the mailing of the customer confirmation.
C) 48 hours before the confirmation.
D) 24 hours before the confirmation.
Regulation A requires that an offering circular be provided to purchasers at least 48 hours before the confirmation of sale.
With regard to private placement transactions under Regulation D, which of the following statements regarding a purchaser representative are TRUE?
The representative must not be an affiliate, director, officer, or employee of the issuer or a 10% shareholder in the company. However, this prohibition is lifted if the representative is related to the purchaser by blood, marriage, or adoption.
The representative must be knowledgeable and experienced in financial matters and business affairs.
The representative must be acknowledged by the purchaser in writing as being that person's representative.
The representative must inform the purchaser of any affiliation with the issuer or any ownership relationship that may exist.
Regarding private placements, a purchaser representative may not be an affiliate, director, or employee of the issuer unless the person is related to the purchaser. A purchaser representative cannot own 10% or more of the issuer's stock and must be knowledgeable and acknowledged in writing by the purchaser.
An issuer or broker/dealer selling private placement securities under Rule 506 is permitted to advertise:
A) under none of the these circumstances.
B) in a general news medium.
C) through a seminar or meeting that is open to the public.
D) through a letter, circular, or any other written communication sent to the general public
Rule 506 prohibits general advertisements. However, advertisements directed to potential, qualified investors are allowed. These advertisements usually take the form of seminars open only to qualified investors.
Which of the following must an issuer selling stock under Rule 506 make available to prospective purchasers?
Detailed financial information regarding the issuer.
Disclosure of material relationships or affiliations that may exist between the issuer and any purchaser representatives whose services may be used.
Information regarding the fact that the securities involved are restricted and have limited liquidity.
Opportunity to ask questions of the issuer regarding the terms and conditions of the offering.
Rule 506 offerings do not preclude an issuer from providing full information to an investor. An issuer must provide detailed information, make public any relationship between the issuer and purchaser representatives, inform investors that the securities are restricted, and give the purchaser the opportunity to ask questions. Rule 506 is generally not available to "bad actors", i.e. those issuers whose principal officers were convicted of certain felonies or subject to court injunctions and restraining orders.
Corporate securities distributed in a private placement under Regulation D may be issued in compliance with Rule 506 if which of the following conditions are observed?
Sales are limited to 35 nonaccredited purchasers.
Purchasers receive substantially the same information they would receive if the securities were sold via a public offering.
There is no general promotion or advertising permitted.
Purchasers are experienced investors able to evaluate the risks and merits involved who sign an investment letter stating that the securities will be held for investment and not for sale to others.
Rule 506 private placements are limited to 35 purchasers, excluding accredited investors. Full disclosure is required, no general advertising is allowed, and an investment letter must be signed by each purchaser.
In order to qualify for exemption under Rule 147, what percentage of an issuer's gross assets must be physically located or held within its home state?
At least 80% of an issuer's gross assets must be physically located within its home state.
A resident of a state who acquires stock pursuant to Rule 147 (intrastate offerings) is prohibited from selling the stock to a nonresident of that state for how many months?
Rule 147 stock cannot be sold to a nonresident of the state for a period of nine months from the last date of sale by the issuer.
An issuer of securities under Rule 147 must do all of the following EXCEPT:
A) obtain a written representation from each purchaser as to that person's residence.
B) place a legend on the securities stating that they have not been registered under the Securities Act of 1933 and that resale is limited .
C) issue stop transfer instructions to the transfer agent barring certificate cancellation and reissuance in the name of any nonresident of the state, with such in effect for nine months.
D) obtain the purchaser's signature on an investment letter in which the buyer agrees to hold the securities for a minimum of nine months, after which they may only be sold in accordance with volume limitations imposed under Rule 144.
Under the Rule 147 safe harbor, a written statement as to state of residence must be obtained and the securities will be restricted for a nine-month period. The transfer agent must be notified, and the fact that the securities are unregistered must be noted on the certificates. Rule 147 securities must be held for nine months before being sold out of state, but they can be sold immediately to another resident. Rule 144 does not apply.
Under Rule 147, an issuer must be deemed a resident of a particular state by meeting all of the following EXCEPT:
A) 80% of the issuer's net revenues are within that state.
B) 80% of the issue's proceeds are utilized within that state.
C) 80% of the issuer's gross assets are within that state.
D) 80% of the purchasers are residents of that state .
Under Rule 147, an issuer must be deemed a resident of a particular state. The issuer's home office must be in that state, and the 80% test applies to revenues, assets, and proceeds of the offering. The 100% test applies to purchasers.
The maximum public offering permissible under Regulation A is:
A) $1.5 million per issuer and $500,000 per affiliate.
B) $5 million per issuer and $1.5 million per affiliate.
C) $500,000 per issuer and $500,000 per affiliate.
D) $1.5 million per issuer and $100,000 per affiliate.
The maximum size of an offering under Regulation A is $5 million per issuer and $1.5 million per affiliate. Sales are measured over a 12-month period.
All of the following statements regarding Regulation A offerings are true EXCEPT:
A) sales by affiliates are limited to $1.5 million.
B) the cooling-off period is 20 calendar days.
C) any sales literature to be used must be filed with the SEC.
D) information on the offering is not filed with the corporate financing department.
Form IA is filed with the SEC 20 calendar days prior to the effective date. Sales by affiliates (e.g., officers) are limited to $1.5 million. Any sales literature to be used must be filed with the SEC. Information on the offering must be filed with the CFD.
Under Regulation D, Rule 504 offerings deal with a sale of securities:
A) not exceeding $100,000.
B) not exceeding $5 million.
C) not exceeding $1 million.
D) without regard to dollar amount.
Regulation D offerings are exempt transactions under the Act of 1933. Rule 504 deals with private placements in which the dollar amount to be sold is $1 million or less. Rule 505 offerings are those in which the offering amount is between $1 million and $5 million. Rule 506 deals with private placements in which there is no ceiling on the dollar amount sold.
In a Regulation A offering, the SEC will integrate the current offering with any securities offering of the issuer occurring within the prior:
A) 18 months.
B) 24 months.
C) 12 months.
D) 6 months.
A Regulation A offering exemption allows issuers to sell up to $5 million of securities without going through a full-blown registration. A Regulation A offering is sometimes called the small offering exemption. The $5 million ceiling is measured over a 12-month period.
All of the following statements are true regarding Regulation A offerings EXCEPT:
A) sales literature may not be used in connection with the offering.
B) Form 1A must be filed with the SEC at least 20 days prior to the effective date.
C) information on the offering must be filed with the Corporate Financing Department.
D) all purchasers must receive the offering circular at least 48 hours prior to confirmation of sale.
Sales literature may be used in connection with Regulation A offerings and copies must be filed with the SEC prior to use.
An issuer sells unregistered securities under the exemption provisions of Regulation D. If the entire issue is sold immediately, reports of sales on Form D must be made to the SEC within how many days of the first sale?
SEC Rule 503 requires that issuers of unregistered securities file Form D (Notice of Sales Made) with the SEC within 15 days of the first sale.
SEC Rule 145 exempts which of the following from registration?
Stock resulting from a stock split.
Stock resulting from a stock dividend.
Stock issued in connection with an acquisition.
IPO in which the entire amount is being sold by officers.
Rule 145 exempts (from registration) additional shares resulting from stock splits or stock dividends. Stock issued in connection with an acquisition must be registered, as must stock in an IPO.
Offshore distributions of securities by U.S. issuers are exempt from the registration provisions of the Act of 1933 under:
A) Regulation A.
B) Regulation B.
C) Regulation M.
D) Regulation S.
Regulation S allows offers and sales by U.S. issuers that are made outside the U.S. to be exempt from the registration provisions of the Act of 1933. To avoid registration, the offer and sale must be made in an offshore transaction and there can be no directed selling efforts in the U.S. in connection with the offering.
Which of the following statements are TRUE regarding a Rule 147 offering?
All shares being offered must be primary shares.
Sales by affiliates are permitted.
Form 147 must be filed with the SEC at least ten business days prior to the effective date.
Form 147 must be filed with the SEC at least 20 calendar days prior to the effective date.
All shares must be primary shares. In addition, Form 147 must be filed with the SEC at least ten business days prior to the effective date.
Which of the following statements are TRUE regarding Rule 504 offerings?
There are limitations on the number of purchasers, accredited or nonaccredited.
There are no limitations on the number of purchasers, accredited or nonaccredited.
All purchasers must meet sophistication standards.
There is no requirement that all purchasers meet sophistication standards.
Rule 504 involves the sale of securities in which the dollar amount does not exceed $1,000,000. It is distinct from Rules 505 and 506 because there are no limitations on the number of accredited or nonaccredited investors, no requirement that purchasers meet suitability standards, and no restrictions on solicitation or advertising.
The use of sales literature in a Regulation A offering:
A) is prohibited.
B) must be accompanied by an offering circular.
C) is permitted without restriction.
D) must be accompanied by a prospectus.
Sales literature may be used in a Regulation A offering only if it is preceded or accompanied by the offering circular.
Regulation S permits the sale of unregistered securities by:
A) U.S.-based issuers to U.S. residents.
B) non-U.S.-based issuers to U.S. residents.
C) non-U.S.-based issuers to non-U.S. residents.
D) U.S.-based issuers to non-U.S. residents.
Regulation S provides a safe harbor for U.S.-based issuers that sell securities outside the United States. As long as the provisions of Regulation S are met, the securities are exempt from registration with the SEC. To get the exemption, the issue must be sold in an offshore transaction to non-U.S. residents.
Shares sold to a U.K. resident in a Regulation S offering may not be resold to a U.S. resident for:
A) six months from the offering date.
B) nine months from the offering date.
C) 12 months from the offering date.
D) three months from the offering date.
Shares sold in a Regulation S offering are generally restricted for resale to a U.S. resident for a 12 month "seasoning" period from the offering date.
A security purchased under the provisions of Regulation S may be resold:
A) immediately in any SEC-designated offshore securities market.
B) in the U.S. after being held for two years.
C) only after regulatory approval from the SFA.
D) in any non-U.S. jurisdiction after being held for 180 days.
There is a holding period of 12 months before a security sold pursuant to Regulation S may be resold in the U.S. However, the security may be resold immediately in any SEC-designated offshore securities market.
In determining the number of purchasers under Regulation D, which of the following are excluded?
A purchaser's relative whose home address is the same as the purchaser's.
A trust or estate in which a purchaser owns 100% of the beneficial interest.
A limited partnership formed for the express purpose of acquiring the securities.
A person whose net worth exceeds $1 million.
Rule 506 offerings are limited to 35 nonaccredited investors. Excluded from this count are the relatives of an investor who share the same household with the investor and trusts or estates owned 50% or more by the investor. Also excluded is anyone classified as an accredited investor. In addition, a business entity or partnership where the investor owns 50% or more of the equity is excluded from the count unless it was formed solely for the purpose of purchasing the offering's securities.
Reports of sales made pursuant to Regulation A must be filed with the SEC:
A) every nine months following the date of the original offering.
C) every six months following the date of the original offering.
D) every three months following the date of the original offering.
During the offering period of a Regulation A offering, sales reports must be filed with the Securities and Exchange Commission every six months. A sales report must also be filed with the SEC when the offering period ends.
Which of the following best describes a PIPE transaction?
A) Restricted securities, once sold, are immediately registered for public resale.
B) An offering sold principally to non-U.S. residents.
C) A self underwriting where issuer employees sell the issue.
D) An offering which complies with Rule 504 of Regulation D.
In a PIPE ( Private Investment in Public Equity ), investors purchase securities directly from a publicly traded issuer in a private placement. The securities are restricted and can not be immediately resold. After the closing of this transaction, the issuer immediately prepares and files a registration statement with the SEC for the securities issued in the PIPE. Once effective, public resale of the PIPE securities may begin.
In order to preserve its exemptive status, securities sold under the provisions of Regulation S may NOT be purchased by:
U.S. citizens residing abroad.
a foreign branch of a U.S. bank.
a U.S. bank.
To be an offshore transaction, sales cannot be made to any person or entity in the U.S. However, U.S. citizens residing outside the U.S. could purchase these securities.
Which of the following statements regarding the sale of securities under the provisions of Rule 144 are TRUE?
Adequate current information must be available regarding the issuer.
If restricted stock acquired under an investment letter agreement is involved, the stock must have been held for at least three years.
The stock must be fully paid.
There are no volume restrictions for control persons.
To sell unregistered stock under Rule 144, the shares must be held fully paid for six months and there must be current information available regarding the issuer (e.g., the issuer is filing reports with the SEC). Control stock is always subject to volume restrictions.
Under the provisions of Rule 144, what is the minimum holding period for the sale of control stock acquired through an open-market purchase?
A) six months.
B) one year.
C) two years.
D) No holding period required.
Rule 144 governs sales by two different categories of people-affiliates (control persons) and nonaffiliates. The rule also applies to two categories of stock-registered and unregistered. Therefore, to answer questions concerning restrictions on stock sales under Rule 144, two issues are involved. In this question, the seller is an affiliate and the stock is registered. Therefore, the sale is subject to the volume restrictions imposed by Rule 144, but no holding period is required.
The maximum amount of securities that may be sold by an insider within a three-month period under Rule 144 is:
A) 5% of the shares outstanding.
B) l% of the shares outstanding or the average weekly volume of trading in the previous six weeks, whichever is less.
C) l% of the shares outstanding or the average weekly volume of trading in the previous four weeks, whichever is greater.
D) the average weekly volume of the previous six weeks.
Rule 144 allows the selling of 1% of the outstanding shares every three months or the weekly average of the last four weeks' trading volume, whichever is greater.
A broker/dealer selling a block of restricted securities for an insider pursuant to Rule 144 may engage in which of the following activities?
A) Showing the stock to any customers who have indicated buying interest in the securities within the preceding ten business days.
B) Soliciting buyers for the stock without restriction, but filling all orders as an agent.
C) Showing the stock to any customers who have indicated buying interest in the securities within the preceding 90 days.
D) none of these.
An exception to the general ban on soliciting for Rule 144 sales for insiders occurs when customers have called indicating interest within the last ten business days or when other broker/dealers have called indicating interest within the last 60 calendar days.
All of the following restricted securities are subject to the minimum holding period under SEC Rule 144 EXCEPT:
A) securities acquired by a trust from a beneficiary.
B) securities acquired by a pledge from a donor.
C) securities held by the estate of a deceased person.
D) securities acquired as a gift.
The only exception to the holding period rule is for sales made by a deceased person's estate.
Form 144 must be filed with the SEC:
A) concurrently with the sale or earlier.
B) five business days before the sale.
C) within ten calendar days of the sale.
D) within ten business days of the sale.
Form 144, which alerts the SEC to the impending sale of unregistered or control stock, must be filed concurrently with or before the sale.
Rule 144 applies to the sale of securities by all of the following EXCEPT:
A) affiliated persons.
D) control persons.
Rule 144 deals with the sale of securities by nonissuers. The rule cannot be used by issuers to issue securities. Specifically, the rule deals with the sale of unregistered securities by nonaffiliated persons (e.g., investors who bought unregistered shares in a private placement) and the sale of registered stock by control persons and their affiliates (e.g., spouses).
A Form 144 filing is effective for:
A) 60 days.
B) 180 days.
C) 90 days.
D) 30 days.
Once filed with the SEC, Form 144 is good for 90 days.
A member firm is a market maker in WXYZ common stock. The firm receives a customer order to sell WXYZ common under Rule 144. Which of the following statements is TRUE?
A) The firm must act as an agent in executing the order.
B) The firm must execute the transaction through a third party.
C) The firm is prohibited from executing Rule 144 transactions in securities in which it makes a market.
D) The firm is permitted to buy the stock for its inventory.
In selling Rule 144 stock, members must act as agents unless they are market makers in the subject security. In this case, they could buy as principal for inventory.
The rules governing transactions in unregistered securities between qualified institutional buyers are described in:
A) Rule 144A.
B) Rule 137.
C) Rule 144.
D) Rule 147
Rule 144A allows trades in unregistered securities between qualified institutional buyers (QIBs) without concern for holding periods or the volume restriction provisions of Rule 144.
The OTC Reporting Facility (ORF) is used to report trades in what type of securities?
B) Foreign securities traded OTC and reported on the regulator of that country.
C) Exchange traded securities.
D) Restricted equity securities effected under Rule 144A.
ORF rules require reporting for all restricted equity securities that are traded pursuant to SEC Rule 144A. All ORF-reportable trades must go up no later than 8 p.m. Eastern Time. Transactions in restricted Rule 144A stock executed between 8 p.m. and midnight must be reported the following business day (T+1) by 8 p.m.
Form 144 does not have to be filed by an affiliate if the amount to be sold in any 90-day period is:
2,000 shares or less.
5,000 shares or less.
worth $25,000 or less.
worth $50,000 or less.
An affiliate, in any 90-day period, may sell up to 5,000 shares or less or may sell stock with a value of $50,000 or less without having to file Form 144 with the SEC.
A member firm becomes aware of an impending sale of ABCD stock in a Rule 144 transaction. In order to purchase the stock as principal, the firm registers as a market maker in ABCD. Under SEC rules, this action is:
A) permitted as long as the firm meets the net capital requirement applicable to market makers.
B) permitted as long as the shares to be purchased are locked up for three months.
C) permitted as long as the shares to be purchased do not meet the definition of a block sale.
To register as a market maker for the sole purpose of acquiring stock in a 144 transaction as principal is prohibited.
Under Rule 144A, which of the following is NOT considered a qualified institutional buyer (QIB)?
A) An investment company with a securities portfolio of $550 million
B) A bank with a securities portfolio of $200 million
C) An accredited individual investor with a securities portfolio of $175 million
D) A broker-dealer with a securities portfolio of $15 million
An individual is not considered an institution despite the size of his/her portfolio. A QIB is generally defined as a pension fund, bank, insurance company, investment company, etc, with a securities portfolio of $100 million or more. Broker-dealers are considered QIBs if they have a securities portfolio valued at $10 million or more.
In accordance with Section 10 of the Securities Exchange Act of 1934, which of the following would be deemed a short sale?
An investor has an option to buy the securities to be sold but has not exercised this right.
An investor owns bonds convertible into the securities to be sold but has not tendered them.
An investor has purchased stock but has not yet paid for the purchase.
A customer is considered long a security only if she owns the stock or has entered into an unconditional contract to buy the stock and will deliver the shares; owns convertible securities, has converted them, and will deliver; or owns an option, has exercised it, and will deliver. Otherwise, the sale is a short sale.
XYZ, Inc. can purchase which of the following in the open market if they are making a tender offer for ABC?
A) ABC straight debt.
B) ABC common stock.
C) ABC convertible bond.
D) ABC convertible preferred stock.
By law, when a company has an outstanding tender offer to acquire another firm's stock, neither the acquiring company nor any of its officers or directors may purchase an equity interest in the target or anything convertible or exercisable into stock. Straight debt is not convertible into equity; therefore, this purchase is in compliance.
An investor is long 1,000 shares of ABC stock. These securities are subject to a tender offer at a price of 60. If the investor has written five ABC calls with a strike price of 55, which of the following statements is TRUE?
A) The investor may tender 1,500 shares.
B) The calls have no effect on the number of shares that can be tendered.
C) The investor may tender 500 shares.
D) The investor may tender 1,000 shares.
An investor may only tender his net long position. When calls have been written with a strike price lower than the tender offer, the investor will likely have the calls exercised against him, which will lead to the sale of the shares. Because five calls control 500 shares of stock, this investor's net long position is reduced to 500 shares.
All of the following statements about tender offers are true EXCEPT:
A) if the entity that makes an offer increases the price of the stock subject to the tender, the new offer must remain open for a minimum of 20 business days from the date of the change.
B) an entity that makes a cash tender offer for a given stock is prohibited from purchasing bonds convertible into that stock while the tender offer is open.
C) tender offers must remain open for a minimum of 20 business days.
D) only the net long position of an investor can be tendered.
When any change in the terms of a tender occurs, the new offer must remain open for a minimum of ten business days from the change. The entity making the tender may not purchase securities convertible into the stock in the open market once the offer is announced.
Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its shareholders with a statement indicating acceptance or rejection of the offer within how many business days of the announcement?
Once a tender offer is announced, the target company, within ten business days of the announcement, must provide its shareholders with a statement indicating acceptance or rejection of the offer and the reasons for the position taken.
Under SEC Rule 10b-18, all of the following statements regarding an issuer purchasing its own securities are true EXCEPT:
A) trades on any day can only be executed through one market maker.
B) trades on any day cannot exceed 25% of average daily trading volume.
C) block trades are prohibited.
D) trades cannot affect the opening or closing of the security.
Under SEC Rule 10b-18, an issuer buying back its own shares cannot affect the opening or closing of the security. This means that the issuer cannot be involved in the first trade of the day nor in any trade in the last 30 minutes of trading. On any day, transactions can only be executed through one market maker (or DMM). In addition, daily purchases cannot exceed 25% of average daily trading volume. Block trades are permitted.
Under SEC Rule 10-b-18, an issuer purchasing its own securities in the open market can pay no more than which of the following?
The highest independent bid.
The lowest independent offer.
The last sale.
An issuer purchasing its own securities may pay no more than the highest independent bid or last sale, whichever is higher.
At 3:55 pm ET, a registered representative receives a market order from an officer of XYZ to buy 75,000 shares of XYZ for the company's account. The registered representative must:
A) advise the officer that a safe harbor under SEC rule 10b-18 no longer exists before placing the order.
B) place the order without taking any further action.
C) advise the officer that a safe harbor under SEC Rule 10b-18 no longer exists before refusing the order.
D) refuse the order.
Under SEC 10b-18, an issuer purchasing its own securities cannot affect the opening or closing of the security. A safe harbor is available if the issuer is not involved in the first transaction of the day or in any transaction in the last 30 minutes of trading (ten minutes if the security is actively traded). If the issuer were to purchase its own securities during the last 30 minutes of trading, it may be forced to justify that its purchase did not affect the closing price. If a registered representative receives an order from an issuer at 3:55 pm ET, he must advise the issuer that a safe harbor is not available. The representative may then place the order.
Under FINRA Rule 5121, to be qualified to set the offering price, an independent underwriter must:
A) not be located in the same general marketing territory as a firm issuing the securities.
B) not have a conflict of interest and is not an affiliate of any member that has a conflict of interest.
C) have been approved by the SEC to act as such.
D) have been approved by FINRA to act as such.
Among other criteria, a qualified independent underwriter must not have a conflict of interest and is not an affiliate of any member that has a conflict of interest.
A member firm may sell a new equity issue of its own securities to all of the following EXCEPT:
A) employees of other full-service member firms.
B) public customers.
C) owners, officers, and employees of the firm.
D) family members of owners, officers, and employees of the firm.
When member firms sell their own securities, FINRA Rule 5130 does not apply to the issuer's employees-but does apply to the employees of other full-service member firms.
All of the following statements are TRUE regarding the sale of a member's securities to the public EXCEPT:
A) information on the offering must be filed with the Corporate Financing Department.
B) in an IPO, an independent underwriter must be engaged.
C) written customer permission is required prior to purchasing the securities in a discretionary account.
D) in an additional issue, an independent underwriter must be engaged.
Information on the offering must be filed with the Corporate Financing Department. In an IPO, an independent underwriter must be engaged. In an additional issue, the member is permitted to price its own issue. Prior to purchasing these securities in a discretionary account, the member must first receive a customer's written permission.
Underwriting agreements and related documentation covering which of the following types of public offerings need NOT be filed for review by FINRA's Corporate Financing Department?
A) Regulation A offerings.
B) Offerings of closed-end investment companies.
C) Offerings of open-end investment companies.
D) Intrastate offerings.
The only issues that do not have to be filed with the Corporate Financing Department are mutual funds (open-end investment companies), variable annuities, straight debt issues rated BBB or better, municipal securities, and U.S. government securities. Regulation D offerings are also exempt.
According to FINRA's Corporate Financing Department, stock acquired as compensation will not be considered unreasonable if the amount does not exceed what percentage of the total offering?
C) There is no limitation.
The Corporate Financing Department considers shares acquired by an underwriter in excess of 10% of the total offering to be unreasonable compensation.
The Corporate Financing Department will NOT attempt to evaluate which of the following?
The fairness and reasonableness of the terms and conditions of members' participation in an underwriting.
The fairness and reasonableness of the public offering price.
The fairness and reasonableness of a compensation arrangement between underwriters and an issuer.
The investment merits of securities being underwritten.
The Corporate Financing Department specifically does not pass on the fairness of the POP or the merits of an underwriting.
All of the following items of compensation would be considered unreasonable by the Corporate Financing Department of FINRA EXCEPT:
A) any options exercisable below the public offering price.
B) any right of first refusal for future offerings with a life of more than three years.
C) an overallotment option of 15%.
D) any freely transferable stock.
The CFD considers the following to be unreasonable compensation: options or warrants exercisable below the POP; options or warrants with a life of more than five years; any freely transferable stock (any stock received by the underwriters must be restricted for resale for 180 days); any right of first refusal for future underwritings that have a duration of more than three years from the effective date; and any overallotment option (Green Shoe) that allows the underwriters to purchase more than the customary15% of the shares being offered.
All of the following offerings must be filed with the Corporate Financing Department EXCEPT:
A) rights offerings.
B) offerings where a member firm is going public.
C) unit trusts.
D) direct participation programs.
Nonconvertible debt and nonconvertible preferred stock offerings are exempt if they are rated as investment grade. Also exempt are Regulation D offerings, U.S. government and agency securities, municipal securities, mutual funds, and unit trusts.
In reviewing the fairness of any compensation received by the underwriter, the Corporate Financing Department will presume any item of compensation received was in connection with the offering if received within how many days preceding the filing?
The CFD will review any compensation received by the underwriters during the 180 days preceding the filing.
Reimbursement by the issuer of which of the following expenses borne by the underwriter would be considered compensation by the Corporate Financing Department?
A) Solicitation costs.
B) Blue-sky fees.
C) Legal fees.
D) Printing costs.
Reimbursement from issuer to underwriter is commonplace and is not considered compensation if the expense is normally borne by the issuer. Blue-sky fees, legal fees, and printing costs are expenses normally paid by the issuer. Therefore, if paid by the underwriters and subsequently reimbursed, this is not considered compensation. However, the underwriters generally pay solicitation costs. If the underwriters are reimbursed for these expenses, the Corporate Financing Department will consider the reimbursement to be compensation.
Which of the following offerings are exempt from filing with the Corporate Financing Department?
Investment-grade nonconvertible debt securities.
Redeemable Investment Company securities.
Offerings exempt by order of the Board of Governors of FINRA.
The offerings subject to review by the CFD are equity and convertible debt issues. Nonconvertible debt and nonconvertible preferred stock offerings are exempt provided they are rated as investment grade. Private placements under Regulation D, U.S. governments and agency securities, municipal securities, open-end and management companies, and unit trusts are also exempt from having to file. Note that the Board of Governors of FINRA can exempt any offering from having to file if it deems an exemption to be in the public interest.
If the syndicate manager is advised by the Corporate Financing Department that the underwriter's compensation in a proposed offering is unfair or unreasonable, the manager must immediately:
A) notify the issuer.
B) notify Nasdaq.
C) cancel the offering.
D) notify the other members of the underwriting group.
If notified by the Corporate Financing Department that the compensation is unreasonable, the syndicate manager must immediately notify the other members of the underwriting group.
Under FINRA rules, finders in corporate financing deals may be compensated with all of the following EXCEPT:
A) cash based on the size of the deal.
B) freely transferable stock.
Any stock received by the underwriters or finders in connection with an underwriting must be restricted for resale for a period of 180 days from the effective date.
When is a Form 13-D filing made?
When an unaffiliated entity acquires a 5% or more interest in an issuer.
When an insider acquires a 5% or more interest in the employing issuer's securities.
When an investment company acquires a 5% or more interest in an issuer.
SEC Form 13-D is filed when an unaffiliated entity acquires a 5% or more interest in an issuer. Investment companies would file Form 13-G. Insiders would file SEC Form 4.
Changes in stock ownership by insiders must be reported to the SEC:
A) within ten calendar days of the change.
B) by the tenth day of the following month.
C) by the fifteenth day of the following month.
D) within two business days of the change.
Insiders are required to report changes in their holdings to the SEC on Form 4 within two business days of the change.
Under SEC rules, a Form 13-D filing is made to all of the following EXCEPT:
A) the SEC.
B) the issuer.
C) the market where the security principally trades.
D) shareholders of the issuer.
Once an unaffiliated investor accumulates a 5% or more interest in an issuer, a Form 13-D filing is required. The filing is made to the issuer, the SEC, and the market where the security primarily trades. It is not made to shareholders of the issuer.
All of the following statements regarding SEC filings are true EXCEPT:
A) 10-Q reports must be audited.
B) 13F reports are filed quarterly.
C) 10-K reports are filed annually.
D) 10-K reports must be audited.
Quarterly reports (10-Q) to the SEC are not audited but annual reports (10-K) must be audited. Most publicly traded companies are subject to these reporting requirements under the SEC Act of 1934.
If an individual accumulates a holding of more than 5% in the voting stock of a publicly traded company, notification must be made to all of the following EXCEPT:
A) the issuer's board of directors.
B) the Administrator of the state in which the customer resides.
C) the SEC.
D) the exchange where the security is traded.
When an individual accumulates a holding of more than 5% in the voting stock of a publicly traded company, notification must be made on Form 13-D within ten business days to the SEC, the exchange where the issue is listed, and the issuer's board of directors. Notification to the state securities Administrator is not required.
A mutual fund has accumulated a 5% or more interest in an issuer of securities. Under SEC rules, the fund must file Form 13G with the issuer, the market where the security principally trades, and the SEC within:
A) 30 calendar days of reaching the 5% ownership level.
B) 45 calendar days after the end of each calendar year during which the position is held.
C) two business days of reaching the 5% ownership level.
D) ten calendar days of reaching the 5% ownership level.
Because the Investment Company Act of 1940 prohibits investment companies from attempting to control any issuer of securities, there is no need for immediate reporting. The position must be reported on Form 13G within 45 calendar days after the end of the year.
Under SEC rules, Form 8-K must be filed:
A) within ten business days of the event.
B) within 15 business days of the event.
C) within four business days of the event.
Form 8-K is used to report newsworthy events to the SEC. The reporting time limit is four business days.
Form 8-K must be filed by:
A) registered investment advisers.
B) registered broker/dealers.
C) registered domestic issuers.
D) registered investment companies.
Form 8-K filings are required for domestic issuers, registered under the Act of 1933, to report newsworthy events to the SEC. Issuers of ADRs, as well as investment companies and investment advisers, are exempt from having to file.
Regulation SK was enacted to:
A) regulate the information supplied to shareholders in corporate acquisitions.
B) standardize the reporting of financial and nonfinancial information to the SEC.
C) require broker/dealers to create privacy policies.
D) prevent issuers from disclosing material nonpublic information to select groups.
Regulation SK was enacted to standardize the reporting of financial and nonfinancial information to the SEC.
If an unaffiliated entity acquires a 5% or more interest in an issuer, Form 13D must be filed within:
A) 2 days.
B) 5 days.
C) 20 days.
D) 10 days.
Within 10 days of reaching the 5% threshold, Form 13D must be filed with the issuer, the SEC and the market where the security principally trades.
Inside information is considered public when it is:
A) available for public evaluation.
B) declared so by the SEC.
C) available to the national financial publications.
D) reviewed by industry SROs.
The law states that inside information is considered public information when the public has had a chance to evaluate it.
According to the Insider Trading and Securities Fraud Enforcement Act, contemporaneous traders are all of the following EXCEPT:
A) persons who make trades at approximately the same time as inside traders.
B) corporate employees.
D) persons granted the right to sue inside traders for damages under the act.
According to the Insider Trading and Securities Fraud Enforcement Act of 1988, contemporaneous traders are corporate outsiders who make trades at about the same time as insiders. They are granted the right to sue inside traders for damages sustained.
At a social gathering, an officer of a publicly traded company confides to his neighbor, a registered representative, that his company will announce a major acquisition in the coming week. Which of the following statements regarding the SEC's insider trading rules is TRUE?
A) Both the officer and the registered representative are in violation.
B) Neither the officer nor the registered representative is in violation.
C) The officer is in violation.
D) The registered representative is in violation.
Simply giving someone material, nonpublic information (while imprudent) is not a violation. However, if the information is used to trade for profit or to avoid a loss, both the tipper and the tippee would have violated the law.
If a registered representative is found to have engaged in insider trading, the member firm can be fined up to:
B) $1 million.
C) $5 million.
D) $25 million.
A member firm, which must have procedures in place to prevent insider trading, can be penalized up to $25 million. Natural persons can be fined up to $5 million and 20 years in prison.
Officers and directors of a publicly traded issuer are prohibited from doing which of the following?
Shorting the issuer's stock.
Shorting the issuer's stock against the box.
Taking short swing profits on the issuer's stock.
Writing covered calls on the issuer's stock.
Insiders cannot short the issuer's stock nor can they take short swing profits. A short swing profit is a profit earned by buying and selling the issuer's stock in a six-month period or less, and any short swing profit must be returned to the issuer. Insiders are permitted to short the issuer's stock against the box provided the position is closed out within 20 days. Writing calls against a long stock position is an acceptable income strategy.
A research analyst attends a meeting where the chief financial officer of ABC inadvertently discloses nonpublic, material information about ABC. Once disclosed to the public, the information would likely have a significant impact on the company's stock price. The analyst would be permitted to do all of the following EXCEPT:
A) update, but not release, her report on the company.
B) update, but not release, her rating on the company.
C) discuss the information with her firm's institutional clients.
D) discuss the information with her immediate supervisor.
Regulation FD was designed to curb the selective disclosure of nonpublic, material information by issuers to analysts and institutional investors. Regulation FD requires that when an issuer discloses material information, it do so publicly to provide a level playing field. In this question, there is no indication that the issuer made the required public disclosure. Therefore, the analyst would be prohibited from discussing or disclosing this information to anyone other then her immediate supervisor and/or compliance and legal personnel. To do otherwise would be a violation of insider trading rules.
Which of the following mandates the creation of a Chinese Wall?
A) SEC Rule 10b-5.
B) USA PATRIOT Act.
C) AML Rules.
D) Insider Trading Act.
The Insider Trading and Securities Fraud Enforcement Act of 1988 requires firms to create information barriers between departments so that sensitive information does not flow between departments. These information barriers are often referred to as Chinese Walls.
ABC Corp. is planning an invitation only meeting for a select group of security analysts to discuss the company's earnings prospects for the coming year. ABC has stated that transcripts of the meeting will be posted on its Website within 24 hours after the meeting ends. This action would:
A) be a violation of Regulation FD because earnings forecasts are not permitted.
B) be a violation of Regulation FD because the disclosure is not being simultaneously made to the public.
C) not be a violation of Regulation FD because the company is making prompt disclosure to the public.
D) not be a violation of Regulation FD because the analysts would be required to make prompt disclosure to the public.
Regulation FD was enacted to curb selective disclosure of material, nonpublic information. Whenever an issuer discloses such material information to anyone outside the issuer, the issuer must simultaneously make this information available to the public. If the disclosure is unintentional, the issuer must promptly make public disclosure. In this case, the disclosure was intentional.
In an insider trading case investigated by the SEC, a member firm is found to have violated federal securities law and is fined $5 million. The fine must be paid to the:
A) U.S. Department of Justice.
C) U.S. Treasury.
D) Comptroller of the Currency.
All fines are payable to the U.S. Treasury.
A research analyst attends an analyst-only meeting sponsored by ABC Corp. After listening to presentations made by various ABC officers, the analyst changes his opinion of the company. Under Regulation FD, which statement is TRUE?
A) The analyst cannot revise his opinion without the consent of his employer.
B) The analyst can share his revised opinion with his supervisor when he returns to his firm.
C) The analyst can share his revised opinion with other analysts in attendance at the meeting.
D) The analyst cannot revise his opinion until the information obtained at the meeting has been publicly disseminated.
The analyst can revise his opinion at any time but cannot share it with anyone outside of his firm until the information on which it is based is available for public evaluation. Other analysts are considered part of the general public.
Under FINRA Rule 5150, which of the following statements regarding fairness opinions are TRUE?
A member issuing a fairness opinion may receive compensation contingent upon the successful completion of the transaction.
A member issuing a fairness opinion may not receive compensation contingent upon the successful completion of the transaction.
A member issuing a fairness opinion must disclose any material relationships that existed during the past two years with any party to the transaction.
A member issuing a fairness opinion must disclose any material relationships that existed during the past three years with any party to the transaction.
Compensation may be contingent on the successful completion of the transaction as long as this is disclosed in the fairness opinion. Further, all material relationships that existed during the prior two years with any party involved in the transaction must also be disclosed in the opinion.
Under the Sarbanes-Oxley Act of 2002, the officers signing the financial statements of a reporting company must certify that they have evaluated their internal controls within the previous:
A) 30 days.
B) 60 days.
C) 120 days.
D) 90 days.
Section 302 of SOX requires that signing officers must certify that they have reviewed all periodic financial reports, that they do not contain any material untrue statements or omissions of material facts and that they have evaluated their internal controls within the previous 90 days and have reported on their findings.
Under FINRA Rule 5150, a fairness opinion must include all of the following disclosures EXCEPT:
A) if any information that formed a basis for the opinion was supplied by the party requesting the opinion.
B) whether any material relationships existed during the past two years with any party involved in the transaction.
C) the qualifications of the persons involved in forming the opinion.
D) if the member will receive compensation contingent on the successful completion of the transaction.
In a fairness opinion, a member is required to disclose the following: 1) whether the firm has acted as a financial adviser with respect to the transaction; 2) whether the firm will receive compensation contingent on the successful completion of the transaction; 3) whether the firm has had during the past two years, or will have, any material relationship with any party involved in the transaction and whether any compensation was or will be received as a result; 4) if any information that formed a basis for the opinion was supplied to the firm by the party requesting the opinion, and whether this information was verified; and 5) whether the opinion was approved or issued by a fairness committee.
Which of the following acts requires parties to a pending business combination to provide premerger notification information to the FTC?
C) USA PATRIOT Act.
The Hart-Scott-Rodino Act is an amendment to the antitrust laws and requires both parties to an intended merger or acquisition to file information on the proposed transaction with the FTC. Upon filing, a 30-day waiting period begins during which the FTC will make a determination as to whether the proposed transaction violates antitrust laws.
Under Regulation M-A, which of the following statements are true regarding the summary term sheet prepared in connection with tender offers?
It must be on the first or second page of the disclosure document
It must be prepared as an attachment to the disclosure document
It must show the material facts in bullet format
It may not show the material facts in bullet format
Regulation M-A, which provides guidelines to companies involved in tender offers as well as mergers and acquisitions, requires that a disclosure document be prepared for shareholders of the companies involved. A summary term sheet must be prepared as part of the disclosure document. The sheet must be on the first or second page of the document and must contain the material facts in bullet format.
The Sarbanes-Oxley Act of 2002 requires publicly traded companies to do all of the following EXCEPT
A) review the collateral underlying all loans made by the company to officers
B) disclose all material off-balance sheet liabilities
C) publish information concerning the adequacy of their internal accounting controls
D) require that newly appointed officers file Form 3 with the SEC
Section 402 of SOX prohibits personal loans made to officers by the company. All of the other statements are true.
Under the Hart-Scott-Rodino Act, a report must be filed with the FTC if the value of the proposed acquisition or merger exceeds:
A) $66 million.
B) $ 92.6 million.
C) $126.2 million.
D) $185.2 million.
f the value of the proposed transaction exceeds $66 million, a report must be filed with the FTC and the Dept. of Justice.
Form 3, attesting to the ownership of the common stock of an issuer, must be filed with the SEC within how many days of becoming an officer or director of that issuer?
Sarbanes-Oxley requires that within 10 days of becoming an officer or director of a publicly traded issuer, such person must file with the SEC a statement as to his/her ownership of the common stock of the issuer. The initial statement of ownership is done on Form 3. Subsequent changes are made on Form 4 within 2 business days.
Under Sarbanes-Oxley, which of the following officers of a publicly traded issuer must certify that the firm's periodic financial reports do not contain any material untrue statements or omissions of material facts?
The chairman of the board.
The chief executive officer.
The chief financial officer.
The signing officers, under Section 302 of Sarbanes-Oxley, are the CEO and the CFO.
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