Regulations - Securities Exchange Act of 1934
If there are insufficient shares tendered, the maker of the offer might increase the price
"sweetening" the offer; each price revision must extend the offer for another 10 business days.
Under SEC rules, member firms must comply with
(1) Net Capital Rule - min standards (2) Segregation of fully paid customer securities (no commingling) (3) Buy-In Of Customer Fails To Deliver In 10 Business Days
Rule 104 exempts stabilization from being viewed as manipulation - as long as the following conditions are met:
(1) Notice Of Stabilization (2) Only 1 Stabilizing Bid (3) At Or Below The POP - Never Above / Never Higher Than POP
If a firm wishes to sell "designated securities" to someone who is not an "established customer" it must first
(1) Obtain detailed information from the customer about his or her financial situation; investment experience; and investment objectives (2) Determine, based on the above information, that the proposed transactions are suitable for the customer and that the customer has sufficient knowledge and experience in financial matters to evaluate the risks and merits of the recommended investment; (3) Deliver a written statement to the customer, setting forth the basis upon which suitability was determined and stating in boldface that it is unlawful for the broker-dealer to effect the trade until the customer signs the statement
Some of the specific manipulations banned under the Act are:
(1) Wash Trades (2) Trading Pools (3) Trading by Underwriters Handling a Primary Offering before the Effective Date
Under Rule 15a-6, foreign broker-dealers that are not SEC registered are permitted to:
(1) effect trades for U.S. persons that contact them on an unsolicited basis; (2) solicit business from and provide research reports to Major Institutional Investors (an investor with at least $100 million of investments) and Institutional Investors (3) conduct business with foreign nationals temporarily present in the U.S.
A 13D Filing must be made within
10 business days of the date that the 5% threshold is reached, with copies sent to the SEC, exchange where the security trades, and the issuer
Copies of proxy materials must be filed with the SEC
10 days before the date they are mailed to shareholders
Informants can be paid
10%-30% of the amounts recovered above $1,000,000 under civil penalties
Anyone who accumulates a 5% position in a company with the intention of exercising control is required to report the holding to the SEC, which makes that information public
13D Filing; if that person intends to remain a passive investor, a "13G" filing is made, 45 calendar days after year end
Requires that broker-dealers provide customers that wish to purchase penny stocks with a standard "Risk Disclosure Document"
15g-2
Insiders are required to report their trades within
2 days of the event to the SEC, which makes the information public
Any suit must be brought within
2 years of discovery, but no later than 5 years after the violation occurred
Each Sweetening Of The Offer for Bond Repurchase Extends It By
5 Business Days
The firm, on request of the customer, must disclose the identity of the market to which the customer's orders were routed for execution in the preceding
6 months along with the time of execution
Brokerage firms must send semi-annual financial statements of the firm itself to customers. The statement must include:
Balance Sheet Net Capital Computation
Member firms that deal in non-exempt securities also must register with
FINRA and the SEC, as must their sales related employees
Regulation FD
Fair Disclosure; designed to address 2 principal issues: (1) The selective disclosure by issuers of material non-public information (2) When insider trading liability arises in connection with a trader's "use" or "knowing possession" of material non-public information
Tender Offer For Bonds Made By Issuer Must Be Held Open
For 5 Business Days
Filing must be made by the issuer with the SEC if the issuer declares bankruptcy, changes the composition of the Board of Directors, proposes a merger or divestiture, or if other major corporate events occur. The report must be filed within 4 business days of the event.
Form 8K
The Securities Exchange Act of 1934 regulates trading of which of the following? I Corporate Stock II Corporate Bonds III Options IV Commodities Futures
I, II, and III; does not regulate the trading of commodities, since these are not securities, and thus, are not regulated under the Securities Acts. Rather, futures (commodities) are regulated by the CFTC
Which of the following are covered under the Securities Exchange Act of 1934? I Registration of new issues II Stabilization of new issues III Registration of exchanges IV Registration of broker/dealers
II, III, and IV;
Municipal market participants are subject to which of the following? I Indenture requirements of the Trust Indenture Act of 1939 II Issuer reporting requirements under the Securities Exchange Act of 1934 III Prospectus delivery rules under the Securities Act of 1933 IV Anti-fraud Rule 10-B-5 under the Securities Exchange Act of 1934
IV only; Municipal bonds are "exempt" securities and thus are not subject to the provisions of the Securities Acts with the exception of the "anti-fraud" provisions. Municipal bonds do not have to provide a trust indenture; municipalities do not report to the SEC; no prospectus is required when selling a new municipal issue.
General provisions of the 1934 Act are:
MISS PERMS (1) Manipulation - Becomes fraud under the Act. (2) Insiders - Are defined under the Act and prohibited from profiting from inside information. (3) SEC created - The Securities and Exchange Commission was created to regulate the markets. (4) Short Sale Rules - The SEC wrote Regulation SHO to set rules for selling securities short (selling borrowed shares) (5) Proxy Rules - Outside proxies of shareholders became regulated to make takeover attempts fair to shareholders. (6) Exchanges - Must now register with the SEC and regulate themselves under SEC guidance, as must their members. (7) Reports - Corporate issuers must file annual and quarterly financial reports which are public information. (8) Margin - Control over credit on securities was given to the Federal Reserve. (9) Stabilization - Though manipulation is fraud, stabilization of a new issue in the trading market is permitted under SEC rules.
One provision of the Act of 1934 applies to both exempt and non-exempt securities
Manipulation, whether it involves an exempt security or a non-exempt security, is fraudulent under the Act
Under the Securities Act of 1934, an "insider" is a(n):
Officer; Director; 10% shareholder of the issuer's equity securities
A set of rules under the Securities Exchange Act of 1934 designed to deal with potential market manipulations that occurred during the "20-day cooling" off period for "add-on" securities offerings.
Regulation M
Requires that every order ticket to sell be marked long or short, with a short sale defined as a sale of borrowed shares that are delivered on settlement
Regulation SHO; the broker must "locate" the shares and deliver them on settlement
Controls credit on securities extended from broker to customer
Regulation T (maintenance margins)
Sets limits on syndicate members that are not market makers during the "20-day cooling off" period for an add-on offering
Rule 101; the trading restrictions do not apply to unsolicited customer orders to buy
During the "20-day cooling off period," any syndicate member who is a market maker in that security can either
Rule 103: (1) Resign as a market maker during the 20-day cooling off period; or (2) Act as a "passive market maker" in that security (it will not bid the stock higher in the market (only other market makers that are not syndicate members may do this); and it agrees to limit its daily buying volume in that company's shares)
The SEC recognizes that stabilization in the aftermarket can be necessary to have a successful distribution of securities
Rule 104
Prohibits broker-dealers from purchasing shares of stock from the underwriters at the offering price to cover short positions established within 5 business days of the effective date
Rule 105
An anti-manipulation rule that sets ground rules for issuers or affiliated persons who wish to buy their shares in the open market
Rule 10b-18
It is unlawful for broker-dealers, including municipal broker-dealers, to use or employ any deceptive or manipulative device
Rule 10b-3
If you do something the Act didn't specify, and it is wrong, it can be considered as "fraud" under the Act
Rule 10b-5
Makes it illegal for any person to commit undefined actions that would operate as a fraud
Rule 10b-5
A "safe-harbor" rule that permits statutory insiders (officers, directors and 10% shareholders) to set up a written plan for trading that company's securities
Rule 10b5-1
If an individual "stumbles upon" inside information and trades on it, he or she cannot be held liable. On the other hand, if the individual stole that information and used it to trade; or the individual was told the information in confidence and used it to trade; then he or she has violated the insider trading prohibition.
Rule 10b5-2
Permits foreign broker-dealers to engage in limited activities in the U.S. without registering with the SEC
Rule 15a-6
Permits broker-dealers to "pay for order flow" and to route orders for securities to the market chosen by the broker-dealer (subject to "best execution" requirements) as long as disclosures are made available to customers
Rule 606 of Regulation NMS
Regulates securities only - it does not regulate insurance products, commodities, or futures contracts
SEC
Passed to cover abuses in the trading markets
Securities Exchange Act of 1934
A person offers to buy shares from investors at a stated price
Tender Offer; tenders can only be made of net long positions of shares; short tendering is prohibited (to tender stock, the person must be in a "net long" position in that security)
Penalties if the person is "controlled" (employee of a broker-dealer that was supposed to have procedures designed to prevent misuse)
The liability for such firms is greater (since they have deeper pockets!) and is set at a $25,000,000 fine
Tier 1 Security
There is no trading restriction. This applies to a stock that has an average daily trading volume of at least $1,000,000 and a minimum market capitalization of at least $150,000,000
Investors grouping together trading the same security among themselves at successively higher prices without true change of ownership
Trading Pools
Tier 3 Security
Trading by syndicate members who are not market makers is restricted for the 5-day period prior to the effective date. This applies to a stock that has an average daily trading volume of less than $100,000 and a market capitalization of less than $25,000,000.
Tier 2 Security
Trading by syndicate members who are not market makers is restricted only for the 1-day period prior to the effective date. This applies to a stock that has an average daily trading volume of at least $100,000 and a minimum market capitalization of at least $25,000,000
Penalties for insider trading
Up to 3 times the profit realized or loss avoided (treble damages). Criminal penalties for individuals include a fine of up to $5,000,000 for each "inside" trade and up to 20 years in jail for each violation.
If an equity security falls by 10% or more during the trading day, it can only be sold short on an "up bid" for the remainder of that day and the entire next trading day
Up-bid rule
Buying and selling the same security to create the "appearance" of trading activity
Wash trades
To ensure that such inside information is not communicated to the firm's trading or retail operations
all firms set up "Chinese Walls"
An insider is defined as
an officer, director or 10% shareholder of a company; court cases have extended the definition of an insider to include anyone who has material non-public information about a company and who trades on that information for profit
Corporate issuers are required to file
annual reports with the SEC called 10Ks (audited) as well as quarterly reports called 10Qs (unaudited)
Through court cases, the current definition of an "insider" is
any person who has received material non-public information that can be expected to influence the price of a company's stock
SEC Rule 10b-18 allows an issuer to buy its shares in the open market: A. at any price that is reasonably related to the current market B. at the highest independent bid or the last reported sale price, whichever is higher C. at the lowest independent offer or the last reported sale price, whichever is lower D. under no circumstances, since this is considered to be market manipulation
at the highest independent bid or the last reported sale price, whichever is higher; Rule 10b-18 purchases: (1) Must be effected through 1 broker on any given day; (2) Cannot be the opening transaction; (3) Cannot be executed within 10 minutes of market close if the security is "actively traded," otherwise it cannot be executed within 30 minutes of market close; (4) Must be effected at prices no higher than the current market; (5) Cannot exceed 25% of the trading volume in the security that day (except for block purchases handled outside the normal flow of orders).
Rule 103 of Regulation M requires that a market maker in a stock that is also a syndicate member in an "add-on" offering of that issue, during the 20-day cooling off period:
can either resign as a market maker or can act as a passive market maker
Tender Offer For Common Stock Must Be Held Open
for 20 business days
Giving someone "inside information"
is not a violation; violation occurs if the recipient ("the tippee") uses the information to trade for profit; if this occurs, then the "tipper" is also liable under the Act
All of the following statements are true about listed securities EXCEPT: A. listed securities trade in the Second Market B. under Regulation T, all listed securities are marginable C. listed securities are subject to Regulation SHO D. listed companies must be registered with, and report their results to, the SEC
listed securities trade in the Second Market;
When a new issue commences trading in the secondary market, the managing underwriter is allowed to
maintain a stabilizing bid until the offering is complete
A "short swing" profit is defined as
one achieved by an insider (officer, director, or 10% shareholder) trading that company's stock within a six month period. Short swing profits must be returned to the corporation under the Act
Note that if damages must be paid, the check is made payable to
the Department of Treasury
