Unit 7-9

Which of the following calls for the underwriters to buy securities from the issuer acting as an agent, not as principal? A) Initial public offering B) Follow-on offering C) Firm commitment underwriting D) Best efforts underwriting

D) Best efforts underwriting In a best efforts underwriting the underwriters (syndicate) buy securities from the issuer acting simply as an agent, not as principal. This means that the underwriter is not committed to purchasing the shares and is therefore not at risk. The underwriter acts as an agent contingent on its ability to sell shares in either a public offering or a private placement.

A broker-dealer that accepts the risk of holding a particular security in its account to facilitate trading and provide liquidity in that security is best described as A) a direct participation program. B) a clearing corporation. C) a market maker. D) a holding company.

C) a market maker. Market makers can be individuals or broker-dealers with a line of business to stand ready to buy or sell securities (make markets) with the view of being profitable by buying low and selling high or selling high and buying low (short selling). Market making is risky. Firms that do this must demonstrate to Financial Industry Regulatory Authority (FINRA) that they can manage the operational and financial risk.

Which of the following will not be found in a final prospectus? A) Effective date and offering price B) Statement that the Securities and Exchange Commission (SEC) neither approves nor disapproves of the issue C) Business plan and use of the proceeds D) Agreement among underwriters

D) Agreement among underwriters The agreement among underwriters is not a part of a prospectus.

Which of the following would be allowed during the cooling off period? A) Distributing a prospectus B) Allocating shares to investors C) Taking orders D) Distributing a red herring

D) Distributing a red herring No selling or soliciting is allowed during the cooling off period. Distributing a red herring (a preliminary prospectus) is allowed.

All of the following are self-regulatory organizations (SROs) except A) Municipal Securities Rule Board (MSRB). B) New York Stock Exchange (NYSE). C) Financial Industry Regulatory Authority (FINRA). D) Securities and Exchange Commission (SEC).

D) Securities and Exchange Commission (SEC). All U.S. exchanges such as the NYSE and Chicago Board Options Exchange (CBOE) are SROs. In addition, FINRA and the MSRB are SROs. The SEC is not.

A broker-dealer's business model allows for only the purchase and sale of securities for retail customer accounts. It does not execute, settle, or clear its customer's transactions, nor does it tend to any back-office functions such as sending trade confirmations or forwarding proxies. This broker-dealer would best be described as what type of firm? A) Full service B) Introducing/fully disclosed C) Market making D) Clearing agent/carrying agent

B) Introducing/fully disclosed A fully disclosed introducing broker-dealer is what the word implies—it introduces its customer's business to a clearing firm. Clearing firms (often called carrying firms or agents) hold funds and securities and settle transactions (clear and process) for their correspondent introducing firms. Essentially, the clearing firm acts as the introducing firm's back office

A corporation needs to build a new manufacturing facility costing several hundred million dollars. In which of the following markets could this new capital be raised? A) Capital market B) Government bond market C) Secondary market D) Municipal bond market

A) Capital market Capital markets are a source of financing for corporations, municipalities, and governments. Capital can be raised by issuing equities or debt and offering the securities to investors in an initial public offering (IPO) or an additional public offering (APO). Note that bonds might be issued by a municipality or the federal government to raise money, but corporations (as noted in this question) do not issue government bonds, either federal or municipal.

Which of the following would be applicable to nonexempt securities (those that must be registered) being offered to the public by a corporate issuer? I. Securities Act of 1933 II. Prospectus III. Securities Act of 1934 IV. Secondary market A) I and II B) II and III C) III and IV D) II and IV

A) I and II Offering nonexempt securities [those that must be registered with the Securities and Exchange Commission (SEC)] such as common stock to the public requires the registration of the securities under the Securities Act of 1933. The offering must be made by prospectus.

Secondary market transactions would include all of the following except A) sale of $10 million of corporate bond by a broker-dealer acting as an underwriter. B) sale of $10 million of U.S. Treasury bonds by a broker-dealer acting as a market maker. C) sale of $10 million of corporate stock by a broker-dealer acting as a market maker. D) sale of $10 million of municipal bonds by a broker-dealer acting as a market maker.

A) sale of $10 million of corporate bond by a broker-dealer acting as an underwriter. Market makers are broker-dealer who sell out of their own account in the secondary market. Underwriters are broker-dealers who help issuers bring their securities to market in the primary market.

A fully disclosed broker-dealer A) is also known as a full-service clearing agent able to process and clear transactions. B) is one that introduces its business to a carrying firm to clear transactions. C) is like a clearing agent in that it can take custody of funds and securities. D) clears all of its retail customer transactions and those of other broker-dealers.

B) is one that introduces its business to a carrying firm to clear transactions. A fully disclosed broker-dealer is also known as an introducing broker-dealer because it introduces its business to a carrying firm that can clear and process transactions for it. Unable to clear transactions themselves, they are not a clearing agent or carrying firm and therefore cannot take custody of funds and securities.

The prospectus delivery requirement, access equals delivery, is satisfied when A) a red herring is initially sent by mail to investors during the cooling-off period. B) the final prospectus has been filed with the Securities and Exchange Commission (SEC) and is available on the SEC's website for investors to see. C) the final prospectus has been filed with Financial Industry Regulatory Authority (FINRA) and is available on FINRA's website for investors to see. D) the preliminary prospectus has been filed with FINRA and is therefore available on FINRA's website for investors to see.

B) the final prospectus has been filed with the Securities and Exchange Commission (SEC) and is available on the SEC's website for investors to see. Beyond physical delivery of a paper prospectus, access equals delivery is the industry standard for meeting the final prospectus delivery requirements. It is deemed to be satisfied when the final prospectus has been filed with the SEC and is therefore available on the SEC's website for investors to log in and see. This standard does not apply to delivery of a preliminary prospectus before the effective date.

Which of the following statements would describe the Fourth Market? A) The after-hours market B) These transactions take place through electronic communications networks (ECNs) which are open during normal trading hours and act solely as principals C) A market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers D) These transactions take place through electronic communications networks (ECNs). ECNs are open 24 hours a day and act solely as principals

C) A market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers The Fourth Market is a market for institutional investors in which blocks of stock trade through ECNs that are open 24 hours a day acting as agents.

The primary regulatory body for the securities industry would be which of the following? A) Financial Industry Regulatory Authority (FINRA) B) Federal Reserve Board (FRB) C) Securities and Exchange Commission (SEC) D) Municipal Securities Rule Board (MSRB)

C) Securities and Exchange Commission (SEC) Created under the Securities Exchange Act of 1934, the overriding or primary securities industry regulatory body is the SEC.

When an issuing company sells securities to primarily institutional investors and a small number of wealthy individuals, as opposed to the general investing public in an exempt offering, this is known as A) a secondary placement. B) a primary placement. C) a secondary offering. D) a private placement.

D) a private placement. A private placement occurs when the issuing company sells securities that are exempt from registration to private investors, as opposed to the general investing public. These investors tend to be institutional investors and small groups of wealthy individuals who meet certain net worth and income criteria.

When the Securities and Exchange Commission (SEC) clears securities for sale to the investing public, this is A) the time upon which the SEC approves the securities. B) the exudate. C) the due date. D) the effective date.

D) the effective date. The effective date is when the SEC clears an issue to be sold to the public; the registration becomes effective. At no time does the SEC approve, disapprove, or make any representation that the information in the registration documents is accurate.