Series 79 Unit 6 - Organizing the underwriter

Which of the following statements are true regarding a Green Shoe clause? - It must be disclosed in the registration statement only. - It must be disclosed in both the registration statement and the prospectus. - It allows the syndicate to sell up to 10% more shares than initially registered. - It allows the syndicate to sell up to 15% more shares than initially registered. A) II and IV B) I and III C) I and IV D) II and III

A A Green Shoe clause in the underwriting agreement, which must be agreed to by the issuer, allows the underwriters to sell up to 15% more shares than are registered with the SEC. To be effective, a Green Shoe clause must be disclosed in both the registration statement and the prospectus.

In an undivided syndicate, liability for unsold securities rests with A) the syndicate members on a pro rata basis. B) the syndicate manager. C) the syndicate members that failed to sell their allotment. D) the issuer.

A In an undivided (Eastern) account, liability for unsold securities rests with each syndicate member based on its participation percentage. For example, if a syndicate member has a 10% participation, that member would be responsible for 10% of any unsold securities (even if that member sold all of its participation). Sales do not affect undivided accounts.

To which of the following firms could a member grant concessions or other allowances? - Another member firm - A suspended member firm A foreign nonmember broker-dealers ineligible for FINRA membership A U.S. nonmember broker-dealers A) II and IV B) I and III C) III and IV D) I and II

B A member can grant discounts and other concessions only to other member firms. A suspended member must be treated like a member of the general public (no discounts or concessions). The only exception is that a member firm can grant concessions to a foreign nonmember firm that is ineligible for FINRA membership.

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 A) $0.90. B) $0.80. C) $0.70. D) $1.00.

B 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.

Within a firm commitment underwriting, which document details the responsibilities and liabilities of each firm? A) Underwriting agreement B) Agreement among underwriters C) Registration statement D) Letter of intent

B The agreement among underwriters, also called the syndicate letter, is signed by representatives of all syndicate members and establishes a joint account to sell newly issued securities.

Ajax Corporation 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 an independent director for non-interested investment bank. - They are not compensated based on sales. - They have been convicted of misdemeanor fraud. A) II and IV B) I and III C) II and III D) I and IV

B 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.

Under the terms of a selected dealer agreement, participant firms - act as principal. - act as agent. - may distribute registered securities only. - may distribute either registered or unregistered securities. A) I and IV B) II and III C) II and IV D) I and III

C A selected dealer agreement specifies the terms between the managing underwriter and the selling group members. Selling group members act as agents because they have no financial responsibility for unsold securities. Distributions subject to a selected dealer agreement include both registered and exempt securities (e.g., municipal bonds).

A corporate securities underwriting spread is A) the amount a syndicate receives. B) the amount a selling group receives. C) the difference between an offering price and the proceeds to an issuer. D) the amount a managing underwriter receives.

C A spread is the difference between the public offering price and the price an underwriter pays an issuer.

When an offering refers to a "joint account," this makes reference to A) an institutional account. B) a retail account with more than one owner. C) the syndicate. D) the selling group.

C Any reference to a joint account during an underwriting is referring to the syndicate.

The group of investment bankers that actually purchases the stocks to be resold to the investing public is called A) the standby group. B) the selling group. C) the syndicate. D) the underwriting manager.

C It is the syndicate members who purchase the securities issue being offered and are responsible for reselling to the public. The underwriting manager is the manager of that syndicate. Selling group members work on behalf of syndicate members as agents trying their best to sell for the benefit of the syndicate.

Which of the following is the single-largest individual component of the spread? A) Management fee B) Reallowance C) Selling concession D) Syndicate fee

C Selling concession is the single-largest individual component of the spread.

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 A) I and III B) III and IV C) I and II D) II and IV

C 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.

In a corporate underwriting, the syndicate letter is signed by which of the following? - Issuer - Managing underwriter - Syndicate members - Selling group members A) I and II B) I and IV C) II and III D) II and IV

C The syndicate letter is signed by the managing underwriter and syndicate members and identifies these parties' rights and responsibilities.

An underwriting group is currently assisting an issuer with the preparation and filing of the registration statement for a new issue. Who is responsible for the accuracy of the information within the registration statement? A) Both the underwriters and the issuing corporation B) Lead underwriter C) Issuing corporation D) Underwriting group

C While underwriters can assist with preparation and filing, the accuracy and adequacy of these documents is the responsibility of the issuer.

If an event affects the investment merit of a security during the registration process, the syndicate may invoke A) the severance clause. B) the penalty-bid clause. C) the hold-harmless clause. D) the market-out clause.

D 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.