Chapter 1

Smith and Company, a FINRA member firm, is preparing to underwrite securities to be issued by KLC Corporation for a new business venture. For which of the following will Smith and Company be responsible? Filing the registration statement with the SEC and state regulatory bodies Providing advice on the type of security to be issued Distributing the security to the public Providing advice on how KLC can best use the funds raised

II and III The issuer is ultimately responsible for filing registration statements with federal and state regulatory bodies and has already determined how the money will be used. The underwriter confines his activities and advice to the type and sale of the securities.

An investor and his father own 8% and 5%, respectively, of a corporation's outstanding shares, and the father wants to sell his holding. According to Rule 144, which of the following statements are true? He must file Form 144 to sell the shares. He does not have to file Form 144 to sell the shares. He is considered an affiliated person. He is not considered an affiliated person.

II and IV Under Rule 144, an affiliate is a person in a control relationship with an issuer. Because neither of the investors own at least 10% of the stock, they are not control persons under Rule 144 and do not have to comply with the rule. Certain family members, such as a spouse or other immediate family member residing in the same home, are required to combine holdings. If the question indicated that the father and son share the same residence, then the filing requirements of the rule would apply because the 13% total would make them control persons.

There are four basic elements qualifying a bond issue for coverage under the Trust Indenture Act of 1939:

It is a corporate issue. The issue size is more than $50 million within 12 months. The maturity is 9 months or more. It is offered interstate.

Which of the following statements regarding the sale of restricted stock under Regulation D by a nonreporting company with the seller relying on Rule 144 is true? Nonaffiliates are not subject to volume restrictions on stock held for more than 6 months. Affiliates are not subject to volume restrictions on stock held for more than six months. Affiliates are never subject to holding periods or volume restrictions. Form 144 must be filed with the SEC within 10 days of the date of sale.

Nonaffiliates are not subject to volume restrictions on stock held for more than 6 months. Sellers of restricted stock who are not defined as affiliated persons may sell freely after meeting a 12-month holding period. Affiliates may also sell after meeting the 6-month holding period but are subject to volume restrictions as mandated in Rule 144. Form 144 must be filed no later than concurrent with the sale. If the company that issued the securities is a reporting company subject to the Securities Exchange Act of 1934, then the holding period is at least six months. Form 144 is filed on or before the day of the trade and is good for 90 days. Filing Form 144 is not necessary if during a 90-day period the amount to be sold under Rule 144 does not exceed 5,000 shares or have an aggregate sales price in excess of $50,000.

What is the profit to a syndicate member if a syndicate is offering an 8½% bond at 100, the syndicate manager is giving a 0.75 concession and a one-point total takedown, and the syndicate member sells 1,000 bonds?

When a member of the syndicate sells a bond, they are entitled to the total takedown—in this case, one point ($10) per bond (1,000 bonds sold × $10 per bond = $10,000 profit). Remember that the concession would only go to those who are not members of the syndicate but are part of the selling group instead.

You are asked to read the preliminary prospectus for a new issue of common stock for a client. You would expect the preliminary prospectus to include the effective date of the offering and the final offering price. the effective date of the offering and the risks associated with the offering. an overview and history of the issuer's business and the final offering price. an overview and history of the issuer's business and any risks associated with the offering.

an overview and history of the issuer's business and any risks associated with the offering. The preliminary prospectus will include an overview and history of the business, as well as any risks associated with it. The preliminary prospectus cannot include the effective date or the public offering price because they have yet to be determined. It will generally include the expected price range, but not the final offering price.

The true interest cost (TIC) method of evaluating municipal bids is required by the MSRB if a financial advisory relationship exists. considers the time value of cash flows. can only be used for term bonds. is required by the MSRB if a control relationship exists.

considers the time value of cash flows. The calculation of TIC (as opposed to net interest cost) takes the time value of money into account. The Municipal Securities Rulemaking Board has no requirement as to which method is used.

What is s associated with a process whereby a municipal issuer first appoints and then works with the underwriters who will be establishing the interest rate and offering price for a new municipal bond issue?

negotiated underwriting

SEC Rule 498 permits delivery of an abbreviated prospectus, usually referred to as a summary prospectus, in the sale of

open-end investment companies.

A new offering has a green shoe option. This means the syndicate is obligated to purchase up to 15% of the offering. the syndicate can oversell by up to 15% of the offering. the issuer has purchased put options to protect itself against a decline in the price of the stock. the syndicate members have purchased put options to protect against a decline in the price of the stock.

the syndicate can oversell by up to 15% of the offering. If the syndicate manager, based on anticipated demand, wants to sell more shares than initially registered with the SEC, the manager can invoke the green shoe clause on short selling. A green shoe clause, negotiated with and agreed to by the issuer, allows the syndicate to sell up to 15% more shares than initially registered within 30 days of the IPO beginning to trade. The additional shares are made available to the syndicate by the issuer. To be effective, a green shoe clause must be disclosed in both the registration statement filed with the SEC and the prospectus.