79 - Ch.3
An IPO is priced by the managing underwriter at $20 a share. A customer purchases shares at the IPO price and sells them on the same day at $26.00 a share in the secondary market. Which of the following statements is TRUE? AThis type of transaction is a violation BThis type of transaction is permitted, and the customer is entitled to keep the profit CThis type of transaction is permitted, but the broker-dealer that sold the new issue to this customer would forfeit its compensation DThis type of transaction is permitted, but the customer is not permitted to purchase new issues for the next 30 days
A customer is permitted to purchase an IPO, sell it at a profit in the secondary market and keep the profit. This is an example of flipping, which is defined as the initial sale of a new issue within 30 days following the offering date of the IPO. What is not permitted is a broker-dealer or a person associated with the firm attempting to recoup any portion of a commission or credit paid or awarded to an associated person for selling shares of a new issue that are subsequently flipped by a customer. A penalty bid assessed by the managing underwriter to the entire syndicate is permitted.
Your firm will be a distribution participant in an offering of an OTC equity security and is currently quoting the security. If the security is subject to a Regulation M restricted period, the firm is: APermitted to maintain its quote provided the firm is not the managing underwriter BRequired to withdraw its quote and file a request for an excused withdrawal status CRequired to withdraw its quote, but is not required to file a request for an excused withdrawal status DPermitted to maintain its quote
A distribution participant is required to withdraw its quote for both exchange-listed and OTC equity securities if the security is subject to a Regulation M restricted period. Quoting firms in OTC equity securities are permitted to withdraw their quotes without a reregistration penalty and, therefore, a request for an excused withdrawal status is not required.
A syndicate is underwriting a new issue of common stock for a large pharmaceutical company, on a firm-commitment basis. The underwriting agreement contains a provision that allows the syndicate to withdraw from the arrangement without financial harm if a pending ruling from the Federal Drug Administration, or any other event, has a materially adverse effect on the company. This provision is: AA market-out clause BA Green Shoe provision CAn indemnification clause DA penalty bid
A market-out clause is a provision that may be included in firm-commitment underwriting agreements. Essentially, the clause allows the underwriters to be released from their commitment to purchase the offering if materially adverse developments impact the market for the issuer's securities
New issue shares may be allocated to which of the following? AThe CEO of a non-public company that intends to hire the member firm for investment banking services BThe CFO of a publicly traded company that paid the member firm for investment banking services rendered six months ago CThe director of a publicly traded company that intends to hire the member firm within the next month to perform investment banking services A hedge fund that uses the member firm to execute its trades in the secondary market
A member firm is prohibited from allocating shares of a new issue to certain decision makers, such as executive officers and directors of former, current, or prospective customers and any person who is materially supported by the executives or directors. This activity is referred to as spinning. The prohibition does not apply to a customer (e.g., a hedge fund) that uses the member firm to execute its trades in the secondary market, provided no excessive compensation has been paid to the member firm. These restrictions apply to both public and non-public companies that may be considering an investment banking relationship with the member firm. The rule specifically prohibits the allocation of shares of a new issue to those customers if: The company is currently an investment banking services client of the member firm or the member firm has received compensation from the company for investment banking services in the past 12 months; The person responsible for making the allocation decision knows or has reason to know that the member firm intends to provide, or expects to be retained by the purchaser for, investment banking services within the next three months; or On behalf of the company they represent, the executive officers or directors make an expressed or implied condition that their company will use the member firm to provide future investment banking services.
An issuer whose stock trades on Nasdaq is conducting a follow-on offering. The offering price is established at $24.00 per share, but the highest independent bid falls by 10%. What is the highest price at which a stabilizing bid may be entered? AThere is no limit BStabilization is not permitted with a follow-on offering C$21.60 D$24.00
A stabilizing bid is permitted for an IPO or a follow-on offering. A stabilizing bid may be entered at the lower of the offering price or the highest independent bid. Since the highest independent bid fell to $21.60, this is the highest price at which a stabilizing bid may be entered by the lead or managing underwriter.
Which of the following factors is the MOST important in the IPO market? APending changes in the regulation of the financial services industry BRecent changes in the capital gains tax rate CRecent performance of the S&P 500 DRecent performance of the housing market
Although all of these factors may be important to the IPO market, the recent performance of the equity markets is considered to be of greatest importance. A profitable, well-established company may still have difficulty raising capital if the equity markets have been falling for an extended period.
The syndicate manager must notify FINRA if the firm anticipates an offering will not close on the settlement date: AImmediately, but no later than the closing date BAt least five business days prior to the closing date CWithin one business day of the closing date DAt least one business day prior to the closing date
FINRA rules require the syndicate manager of a firm-commitment public offering to immediately, but in any event no later than the scheduled closing date, notify the Uniform Practice Department of any anticipated delay in the closing of an offering beyond the closing date in the offering document.
An IPO is being priced by a syndicate that consists of three large broker-dealers. If the offering is oversubscribed, the managing underwriter's BEST course of action is to allocate the shares: AOn a pro rata basis BBased on which customers have generated the most commissions over the last six months CTo its most active hedge fund clients DBased on which mutual funds agree to not flip the shares
If an offering is oversubscribed, the best course of action is to allocate the shares on a pro rata basis using a fair allocation system. Although there is no regulatory requirement regarding how to allocate an oversubscribed issue, a fair system is the best method for a manager to follow.
Relevant financial information to answer the following question is found in Exhibit 56. (Clicking the link will open the exhibit in a new window). Additional Information Manager's Fee—$.26 per share Allocation to Selling Group Members—650,000 shares What is the total compensation earned by syndicate members for shares sold by the selling group? A$487,500 B$169,000 C$819,000 D$162,500
In Exhibit 56, the total underwriting discount is $1.26, and the concession paid to dealers (members of the selling group) is $.75. If the manager's fee is $.26, syndicate members would receive $.25 per share as compensation for each share sold by members of the selling group ($1.26 − [.26 +.75]). The compensation received by the syndicate members for those shares would total $162,500 (650,000 shares x $.25 = $162,500).
A corporation is selling 9,000,000 shares of common stock through a group of underwriters, at $14 per share. The total underwriting spread is $1.19, the manager's fee is 24 cents, and the selling concession is 65 cents. Selling group members have been allocated 400,000 shares. The corporation will receive: A$104,490,000 B$113,130,000 $115,290,000 D$107,190,000
In a new stock offering, the underwriting syndicate assumes risk and is therefore entitled to make a profit on the shares sold. Since the total underwriting spread is $1.19, the issuer will receive $12.81 per share ($14.00 offering price minus the $1.19 underwriting spread) for a total of $115,290,000 ($12.81 x 9,000,000 shares). The manager's fee ($0.24), and the selling concession ($0.65) are a part of the total underwriting spread.
All of the following entities can be listed on an exchange, EXCEPT: AA limited liability company BA limited partnership CA master limited partnership DA general partnership
Limited partnerships, master limited partnerships, limited liability companies, and C corporations do not limit the number of owners or shareholders and can be traded on an exchange (e.g., Nasdaq and the NYSE). On the other hand, a general partnership is not structured to be traded on an exchange and is usually a privately held business.
A company is planning to conduct an IPO and has decided to list its stock on Nasdaq. If the company currently has nine directors on its board, but only four of them are independent, the company must appoint a minimum of: ATwo new independent directors BThree new independent directors CSeven new independent directors DEight new independent directors
One of the listing requirements of both the NYSE and Nasdaq is that a majority of the board of directors must be independent. If the company appoints two new independent directors, it will have a total of 11 directors on its board. Of the 11 directors, six (a majority) are independent.
The Wohl Ice Cream Corporation, a Nasdaq listed company, is selling additional shares of stock that will be priced on Wednesday, July 15. A person purchasing the additional shares would NOT be in violation of Rule 105 of Regulation M if she sold short the stock of Wohl on which of the following dates? AJuly 7 BJuly 10 CJuly 8 DJuly 9
One of the listing requirements of both the NYSE and Nasdaq is that a majority of the board of directors must be independent. If the company appoints two new independent directors, it will have a total of 11 directors on its board. Of the 11 directors, six (a majority) are independent.
Your firm is participating as an underwriter in a follow-on offering. The issuer is offering shares of common stock through a split offering. 50% of the proceeds of the sale will go to the issuer, with the balance being paid to selling shareholders who are part of senior management. Your firm has received a call from one of the selling shareholders who wants to buy 200,000 shares of the issuer's common stock in the secondary market. Which of the following actions is MOST consistent with the requirements of Regulation M? AYour firm should inform the selling shareholder that the order must be placed with a different broker-dealer BYour firm's trading desk can accept the order but may only execute the order on an agency basis CYour firm is permitted to accept the order and would mark the order ticket unsolicited DYour firm's trading desk is not permitted to accept the order
Regulation M of the Securities Exchange Act of 1934 restricts transactions by underwriters, issuers, and selling shareholders in the period leading up to, and during, the distribution of a new issue of equity securities. Issuers and selling stockholders may not buy shares of their company's common stock in the open market while they are in the process of selling shares. The order may not be accepted.
A member firm allocates shares of an IPO to the CEO of a different company that is considering the possibility of using the member firm for its IPO. This action is: AFlipping, a prohibited activity BSpinning, a permitted activity CFlipping, a permitted activity DSpinning, a prohibited activit
Spinning is a prohibited activity in which a member firm allocates shares of a new issue to certain decision makers such as executive officers and directors of former, current, or prospective customers and any person who is materially supported by the executives or directors. These restrictions apply to both public and non-public companies that may be considering an investment banking relationship with the member firm. Flipping is a permitted activity that is defined as the initial sale of a new issue within 30 days following the date it was offered as an IPO.
The IPO of Symphony Music Inc. was registered on July 1, 20XX. If the comanager of the issue wants to publish a research report on Symphony Music, what would the earliest date be that it could publish the report? AJuly 11, 20XX BJuly 12, 20XX CJuly 1, 20XX DJuly 2, 20XX
The earliest date on which the comanager of Symphony Music could publish a research report after the IPO (on July 1, 20XX) is July 12, 20XX. The time when a research analyst may not write a research report or make a public appearance after an offering of equity securities is referred to as the quiet period. For any underwriter or dealer participating in any initial public offering (IPO), the quiet period is 10 calendar days. This includes the managing underwriter, any syndicate member, or selling group member. For a secondary offering (a follow-on offering), the quiet period is three calendar days and only applies to the manager or comanager.
A broker-dealer is managing a contingent underwriting to be conducted on an all-or-none basis. If the issuing company wants 5,000,000 of its shares sold, regulations require the broker-dealer to: ADeposit the funds in an escrow account that is held by the SEC BDeposit the funds in a special account for its exclusive benefit CHold the funds in its proprietary account DDeposit the funds in an escrow account that is held by a bank
The escrowing of funds is covered by SEC Rule 15c2-4 of the Securities Exchange Act of 1934. If a broker-dealer is participating in a distribution other than a firm commitment underwriting, it must establish an account with an escrow agent (a bank) that provides a written agreement to hold the funds. In contingency underwritings, the payment of sales commissions and underwriting expenses occur after the deal closes. Any release of funds to the underwriters earlier than the closing date of the offering is a violation of SEC rules.
Which of the following transactions would violate industry regulations regarding the sale of an equity IPO to a restricted person? A registered person involved in the distribution sells shares to her brother who she supports BThe sister of a registered person purchases shares from a broker-dealer CThe mother of a registered person purchases shares from a broker-dealer that does not employ her child DA registered person sells shares to a cousin whom she does not support
The prohibition of IPO purchases by a restricted person includes the following persons. Member firms and any associated person (i.e., an employee) of the member firm An immediate family member of an employee of a member firm. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other persons who are materially supported by an employee of a member firm. The aforementioned immediate family members would only be considered restricted persons if any one of the following three conditions apply. The employee gives/receives material support to/from the immediate family member. Material support is defined as providing more than 25% of the person's income, or living in the same household as the person associated with the member firm. (Since the registered person in choice (a) supports the brother, he is a restricted person.) The family member is employed by the member firm that is selling the new issue. The family member has the ability to control the allocation of the new issue. Since the mother is not supported by her child and is purchasing the shares from a broker-dealer, which does not employ her child, she is not restricted on this purchase.
An investment banking associate is attending a road show for an IPO. The road show is in Las Vegas where a research analyst from the same firm is meeting with a client. The investment banking associate contacts the research analyst and requests that she meet with a prospective customer who is attending the road show to discuss the IPO. The research analyst: AMay meet with the prospective customer to discuss the IPO BMust refuse the request CMay only send the prospective customer an e-mail about the IPO DMay meet with the prospective customer, but may not speak favorably about the IPO
The research analyst must refuse the request from the investment banking associate to meet with the prospective customer to discuss the IPO. Under SRO rules that restrict a research analyst's participation in investment banking related activities, investment banking personnel may not direct a research analyst to participate in attempts to sell or market an investment banking service transaction. Investment banking personnel are also prohibited from directing a research analyst to engage in communications with a customer or prospective customer concerning an investment banking service transaction.
The initial offering price for OEVO Pharmaceuticals is $9.00. The underwriting discounts and commission total $0.63. If the manager's fee is $.13 and the syndicate expenses are $.02, which of the following statements is TRUE? AThe syndicate expenses are not permitted to be paid from the underwriting spread BThe syndicate expenses are deducted from the selling concession CThe syndicate expenses are deducted from the managers' fees DThe syndicate expenses are deducted from the underwriting fees
The syndicate expenses are deducted from the underwriting fees. Therefore, each syndicate member pays its proportional share of these expenses.
Final settlement of a syndicate account must be made no later than how many days following the syndicate settlement date? A135 days B30 days C10 days D90 days
The syndicate settlement date occurs when the issuer delivers (new issue) securities to the account of the underwriting syndicate. According to FINRA rules, the final settlement of the syndicate accounts by the syndicate manager is required no later than 90 days following the syndicate settlement date. Any delay beyond the 90-day settlement date requires the syndicate manager to provide notification to FINRA.
Market maker (MM) #1 has placed a bid on Nasdaq as a passive market maker. MM #1's bid was placed at the same price as two other market makers and was at the inside bid. The two independent market makers have just dropped their bids by $0.05, leaving MM #1 alone at the inside. Which of the following statements is TRUE? AMM #1 must immediately withdraw its Nasdaq quote after notifying Market Operations MM #1 does not need to change its bid until it buys two times the minimum quotation size for that security, or its remaining daily purchase limit CMM #1 must immediately lower its bid so that it is no higher than the highest independent bid DOnce a passive bid has been placed, it does not need to be lowered
When making a passive market, a firm involved in a distribution may not enter a bid or effect a purchase at a price that exceeds the highest independent bid on Nasdaq. In a falling market, when the last independent bid drops below that of a passive market maker, the passive market maker may maintain its bid until its purchases have reached or exceeded the lesser of two times the minimum quote size for that security (as set by FINRA), or the passive market maker's remaining daily limit. If twice the minimum order size is executed, the passive market maker must drop its bid to or below the highest independent bid. If its daily purchase limit is reached first, it must withdraw from the market for the rest of the day. In a rising market, a passive market maker may raise its bid when the best independent bid rises, but is not required to do so.
All of the following choices would require the filing of a Regulation M notice, EXCEPT: AInvestment-grade nonconvertible debt BA private placement CAn initial public offering DAn actively traded security
he managing underwriter is required to file a Regulation M notice with FINRA unless an exemption applies. This notice applies to offerings of both exchange-listed and OTC equity securities and applies whether or not a Regulation M restricted period applies. Therefore, even though actively traded securities are not subject to a restricted period, a notice is still required to be filed. The notice would be filed for an initial public offering, private placements, PIPE offerings, follow-on offerings, and shelf registrations. Offerings not subject to the filing requirements include investment-grade, nonconvertible debt, 144A transactions, and exempt securities such as government and municipal securities.
