Unit 7 - Practice Exam 3 (Issuing Securities)

An affiliate holding restricted stock wishes to sell shares under Rule 144. He has held the shares, fully paid, for 6 months, and the issuer has 2.4 million outstanding shares. Form 144 is filed on Monday, April 10, and the average weekly trading volume for the last four weeks is 24,500 shares per week. The maximum number of shares the customer can sell with this filing is: A) 23,000. B) 24,250. C) 24,500. D) 24,000.

Your answer, 24,500., was correct!. Under Rule 144, after holding the fully paid restricted shares for 6 months, the affiliate can begin selling. For affiliates, volume restrictions always apply. They can sell the greater of 1% of the total shares outstanding or the weekly average of the prior 4 weeks' trading volume (the 4 weeks preceding the Form 144 filing). In this case, 1% of the total shares outstanding is 24,000 (1% × 2.4 million). The weekly average of the prior 4 weeks' trading volume is 24,500. Therefore, the most the affiliate can sell during the 90 days following the Form 144 filing is 24,500 shares. Reference: 7.6.2.4 in the License Exam Manual.

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

Your answer, Agreement among underwriters., was correct!. 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. Reference: 7.5.1 in the License Exam Manual.

A due diligence meeting occurs between: A) All of these. B) the issuing corporation and the underwriters to review and reexamine the full details of the pending underwriting and negotiate final terms to be included in the formal underwriting contract. C) the FINRA member firm and FINRA's Corporate Finance Department to discuss the fairness of the underwriting spread on a pending public offering. D) the underwriter and the SEC before the issuance of a final prospectus to insert the public offering price and make any last minute changes at the SEC's request.

Your answer, All of these., was incorrect. The correct answer was: the issuing corporation and the underwriters to review and reexamine the full details of the pending underwriting and negotiate final terms to be included in the formal underwriting contract. A *due diligence meeting is held between the issuer and the underwriter before the effective date and is one of the final meetings held before the sale of the security so that each party may review all aspects of the issue.* Reference: 7.2.2.3. in the License Exam Manual.

Which of the following will NOT be found in a final prospectus? A) Statement that the SEC neither approves nor disapproves of the issue. B) Agreement among underwriters. C) Date and offering price. D) Business plan.

Your answer, Business plan., was incorrect. The correct answer was: Agreement among underwriters. *The agreement among underwriters is a separate document and is not included in a prospectus.* Reference: 7.2.2.4 in the License Exam Manual.

*Which of the following terms is used in connection with a municipal securities underwriting?* A) Effective date. B) In-registration. C) Cooling-off period. D) Agreement among underwriters.

Your answer, Effective date., was incorrect. The correct answer was: Agreement among underwriters. The agreement among underwriters (or syndicate letter) details the participation and obligations of each syndicate member. "Cooling-off period", "registration period", and "effective date" are terms that apply to nonexempt issues that must be registered with the SEC in accordance with the Securities Act of 1933. *Municipal issues are exempt from these registration requirements.* Reference: 7.6.1 in the License Exam Manual.

If an officer of a bank wants to purchase new issues, which of the following statements is TRUE? A) He may not purchase a new issue unless the amount he wishes to purchase is considered small in relation to the total offering. B) He may purchase a new issue because anyone is allowed to purchase new issues. C) He may purchase a new issue because no banking rules prohibit it. D) He may not purchase a new issue because he is considered a restricted person.

Your answer, He may not purchase a new issue because he is considered a restricted person., was correct!. Under the rules regarding the purchase of new issues bank officers would be characterized as restricted persons. They may not, therefore, purchase new issues. Reference: 7.6.3.1 in the License Exam Manual.

In which of the following types of offerings does a brokerage firm have no financial obligation for unsold securities? All-or-none. Best efforts. Standby. A) I, II and III. B) II and III. C) I and II. D) I and III.

Your answer, I and II., was correct!. In a best efforts underwriting, the underwriter serves as an agent with no financial obligation for unsold securities. In an all-or-none (AON) offering, the underwriter agrees to devote its best efforts to sell the issue, but the entire offering is canceled if all shares cannot be sold. In a standby underwriting, the underwriter agrees to purchase any unsold shares remaining after the expiration of a rights offering (firm commitment). Reference: 7.5.3 in the License Exam Manual.

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) II and IV. C) II and III. D) I and IV.

Your answer, I and II., was incorrect. The correct answer was: II and III. The syndicate letter is signed by the managing underwriter and syndicate members and identifies these parties' rights and responsibilities. Reference: 7.4.1.2 in the License Exam Manual.

*Which of the following are defined as securities?* Fixed annuities. Variable annuity units. Investment company shares. Negotiable CDs insured by the FDIC. A) I and IV. B) II and III. C) I and III. D) II and IV.

Your answer, II and III., was correct!. A security is any investment for profit with management performed by a third party, in which an element of risk is present. Reference: 7.1.1.1 in the License Exam Manual.

Which of the following are TRUE of an over-allotment option or provision for a new issue? One is found in every underwriting agreement. It allows the underwriters to sell up to 15% more than the original number of shares offered. It allows the underwriters to sell up to 2 times the original number of shares offered. It is a way for underwriters to address demand exceeding the number of shares originally offered. A) I and IV B) I and III C) III and IV D) II and IV

Your answer, II and IV, was correct!. The over-allotment option found in the underwriting agreement is a process allowed by the SEC to handle demand for new issues exceeding the number of shares originally intended to be offered by the issuer. Not all underwriting agreements contain an over-allotment option, but for those that do, the option or provision allows the underwriters to sell up to 15% more than the original number of shares offered. Reference: 7.5.5 in the License Exam Manual.

Stabilizing bids may be entered at: A) a price not exceeding 5% above the public offering price. B) a price no higher than the public offering price. C) any reasonable price necessary to support the public offering price. D) whatever stabilizing price is stated in the prospectus.

Your answer, a price no higher than the public offering price., was correct!. Stabilizing bids cannot be used to raise the market price of an issue. Stabilization may only be used to support a new issue security at or below the public offering price. Reference: 7.3.5.3 in the License Exam Manual.

When an investment banker is successful on a competitive bid corporate underwriting in which they agree to purchase the shares from the issuer, the underwriters will be handling the offering as: A) a best efforts. B) an all or none. C) a standby underwriter. D) a firm commitment.

Your answer, a standby underwriter., was incorrect. The correct answer was: a firm commitment. An underwriting is known as a firm commitment when the investment banking firm (underwriters) winning the competitive bid have agreed to purchase the entire issue from the issuing corporation with the obligation to resell to the public. Reference: 7.4.1.5 in the License Exam Manual.

All of the following are restricted persons EXCEPT: A) portfolio managers. B) employees of members. C) any persons owning 5% or more of a member firm. D) finders and fiduciaries acting on behalf of the managing underwriter.

Your answer, any persons owning 5% or more of a member firm., was correct!. Rules prohibit member firms from selling initial equity public offering stock to any account in which restricted persons are beneficial owners. Restricted persons include FINRA members, employees of member firms, finders and fiduciaries acting on behalf of the managing underwriter, portfolio managers, and any person owning 10% or more of a member firm. Also included are a restricted person's immediate family members. Reference: 7.6.3.1 in the License Exam Manual.

Rules regarding restricted persons state that each of the following is considered immediate family EXCEPT: A) brothers and sisters. B) parents-in-law. C) parents. D) aunts and uncles.

Your answer, aunts and uncles., was correct!. Rules regarding restricted persons define "immediate family" as spouses, parents, brothers, sisters, in-laws, and children. Aunts and uncles are among those excluded. Reference: 7.6.3.1 in the License Exam Manual.

An intrastate offering is exempt from: A) state registration. B) federal registration. C) all registrations. D) blue-sky registration.

Your answer, federal registration., was correct!. An intrastate offering (Rule 147 exemption) is limited to companies that do business in one state and limit stock or bond sales to that state's residents. Even though this offering may be exempt from SEC registration, it is not exempt from registering with that one state. Blue-sky registration (Uniform Securities Act registration) means the same thing as state registration. Reference: 7.6.2.3 in the License Exam Manual.

All of the following are unlawful EXCEPT: A) giving written notification to a customer that the broker/dealer is acting as a principal for the trade. B) omitting a statement of a material fact. C) selling new issues on margin. D) representing that the SEC has approved of a broker/dealer or a security being sold.

Your answer, giving written notification to a customer that the broker/dealer is acting as a principal for the trade., was correct!. New issues may not be sold on margin. The Securities and Exchange Commission does not approve or disapprove of securities, broker/dealers, or registered representatives. It is always unlawful to make a fraudulent communication in connection with the sale or purchase of securities; making a fraudulent communication includes failing to state a material fact. Reference: 7.2.2.5 in the License Exam Manual.

All of the following are required to be registered with the SEC EXCEPT: A) securities analysts. B) securities associations, such as FINRA. C) national stock exchanges. D) insurance companies offering fixed annuities to investors.

Your answer, insurance companies offering fixed annuities to investors., was correct!. Insurance companies are generally not required to be registered with the SEC. Reference: 7.6.1 in the License Exam Manual

The Securities Exchange Act of 1934 covers all of the following EXCEPT: A) trading on exchanges. B) issuance of corporate securities. C) issuance of financial reports by corporations. D) trading of corporate securities

Your answer, issuance of corporate securities., was correct!. The Securities Exchange Act of 1934 regulates secondary trading or trading markets, including reporting requirements. The Securities Act of 1933 regulates the issuance of new, nonexempt securities. Reference: 7.1.1.2 in the License Exam Manual.

If an officer of a public company buys 400 shares of the company's registered stock in the open market, he: A) may sell immediately subject to Rule 144 volume limitations. B) may sell immediately without restriction. C) may not sell until he leaves the company. D) may sell under Rule 144 only after a 6-month holding period.

Your answer, may sell under Rule 144 only after a 6-month holding period., was incorrect. The correct answer was: may sell immediately subject to Rule 144 volume limitations. *If purchased in the open market, the transaction is not a private placement and there is no required holding period. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations under Rule 144.* Reference: 7.6.2.2 in the License Exam Manual.

The provisions of the Securities Act of 1933 include all of the following EXCEPT: A) regulation of offerings of new securities. B) requirement that an issuer provide full and fair disclosure about an offering. C) regulation of the secondary market. D) prohibition of fraud in the sale of new securities.

Your answer, regulation of the secondary market., was correct!. The Securities Act of 1933 regulates new issues of corporate securities sold to the public and is designed to prevent fraud in the sale of newly issued securities. Trading and the secondary markets are regulated under the Securities Exchange Act of 1934. Reference: 7.1.1.1 in the License Exam Manual.