Series 79 Exam Review Questions
Stapled financing
"Stapled financing" is a "pre-packaged," committed financing structure offered to buyers in support of the target being sold. The staple, which is targeted toward sponsors, was a mainstay in auction processes during the LBO boom of the mid-2000s.
Convertible bond characteristics
- the bond indenture explains the terms under which conversion can incur - convertible bonds help issuers achieve LOWER fixed costs for borrowing - a bond CAN be both callable and convertible
When do loans need permission?
- when they loan is for outside personal or business relationship - when the loan is to someone registered at the same firm DO NOT need permission when the customer is a bank or a family member
Joe, an investor in ABC Corp's IPO, learns that the SEC has fined the issuer and officers for misrepresentations and false statements in the registration statement statement for its IPO. If Joe would like to recover the cost of his investment, he would have the option to
If an investor would like to recover the cost of an investment on account of fraudulent info in a registration statement, the investor would need to sue the issuer. Filing a claim with the SEC is not possible. Also, SIPC only covers investors in the case of a broker-dealer's insolvency. It does not guarantee the value of a stock position.
Proxy statement
In a one-step merger transaction, the target obtains approval from its shareholders through a vote at a shareholder meeting - prior to the vote, the target provides appropriate disclosure to the shareholders via a proxy statement. Contains a summary of the background/terms of the transaction, a description of the financial analysis underlying the fairness opinions of the financial advisers, a copy of the definitive agreement, and summary and pro forma financial data. Proxy statement is filed with the SEC under the codes PREM14A and DEFM14A
In which case would a buyer need to make Representations ("Reps") and Warranties about its business?
In a stock-for-stock transaction In a stock-for-stock transaction, the buyer needs to make reps about its own business because the seller will be receiving the buyer's stock as purchase consideration. This is not necessary in an all-cash transaction. Transaction size is also not relevant for reps in this case, nor would an established public European company need to make reps
Graphic communication
Include audiotapes, videotapes, faxes, CD-ROMS, emails, websites, computer networks, computer data files, blast voicemail messages - if it falls under this definition it is treated as WRITTEN COMMUNICATION does NOT include real-team oral communication Simulcasts of live road show presentations is a live presentation, not written communication
Accredited investor
Includes: - officers and directors of the issuer - institutions with assets of $5mm and with have legitimate business purposes - individuals with $200K of net income ($300K if married) and in each of the last 2 years $1mm net worth Note: - while banks, insurance companies, and others are accredited investors, there are certain institutions (i.e. trusts) that need $5mm in assets to be accredited - employees of the issuer are NOT accredited --> would NOT be solicited in a private placement BAD ACTOR PROVISION - issuers cannot rely on private placement exemption if the issuer or an individual associated with the issuer (i.e. predecessor, officer/director, beneficial owner of > 20% of equity securities, investment manager) has been convicted of a felony or securities related misdemeanor in the past 10 years, has been subject to a securities related court injunction in the previous 5 years, or subject to an order from a state securities commissioner barring securities related activities
Why is the size premium added to WACC?
It is added to the WACC of smaller companies to account for risk not reflected in the stock's beta due to a lack of liquidity
What is the clearing bid in a Dutch auction tender?
It is the accepted bid - it establishes the price that the company pays for all accepted bids
When must a recorded road show first be made available?
It must be made available no later than the date of first use
At which point in an M&A sale process is a fairness opinion typically rendered?
Just prior to Board approval and execution of the definitive agreement
Master limited partnership
Limited partnerships offered the public and traded on exchanges
When evaluating the value of a company, is a high or low PEG ratio preferable?
Low
Regulation M
M for MANIPULATION - regulation M was enacted to prevent manipulative conduct by persons with an interest in the outcome of an offering - applies to the SUBJECT SECURITY and the REFERENCE SECURITY (security into which the subject security can be converted) 3 categories of securities and applicable restricted periods: 1) Actively traded securities are subject to no restricted period - these are securities with an average daily trading volume (ADTV) or $1mm and public float value of $150mm - FINRA must be notified of the transaction by the day after pricing 2) For a security with an ADTV of $100K and a public float of $25mm, the restricted period begins 1 business day prior to determination of offer price and ends when the person's participation in the distribution is complete - notification required to FINRA 1 day prior to restricted period 3) For all other securities, the restricted period begins 5 business days prior - notification required to FINRA 1 day prior to restricted period The lead underwriter must notify FINRA of the restricted period
What are the two COINCIDENT economic indicators to remember?
Monthly non-agricultural payroll Industrial production index
Qualified institutional buyer
Must control a DISCRETIONARY securities portfolio of at least $100mm
The role of the specialist (Designated Market Maker) is most closely associated with which of the following markets?
NYSE
Return on Assets
Net income/Average assets
Are members of a limited liability company personally liable for its debts?
No
Do Canadian companies issue ADRs?
No
Do unsponsored ADRs trade on the NYSE or Nasdaq?
No
When must firms report to FINRA after receiving a written customer complaint?
No later than 10 business days after the firm or a representative becomes the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery. This incident would be reported to FINRA on an amended U-4.
Is nonagricultural employment a leading, coincident, or lagging indicator?
Non-agricultural employment is a COINCEDENT indicator In contrast, average duration of employment is a lagging indicator as it must be calculated after an individual has found a new job
What is the trading venue of unsponsored ADRs?
OTC
What are the eligibility requirements for OTC Pink and OTCCB?
OTC Pink: at least 1 market maker OTCBB: at least 1 market maker, SEC filer
When does the prudent man burden of proof standard apply?
On the effective date
Rule 144A
Permits companies to buy/sell unregistered securities through a broker dealer as long as they are classified as QUALIFIED INSTITUTIONAL BUYERS
When must an individual notify an employer regarding a personal account?
Prior to the execution of the initial trade in the account
What is the size requirement for registration with the SEC?
The size requirement for registration with the SEC or with an exchange has two components: 1) number of shareholders (2,000 or more); and 2) an asset threshold ($10 million or above).
The statute of limitations for arbitration is
The statute of limitations for an arbitration proceeding is 6 years from the occurrence or event giving rise to the claim.
Which of the following are included in the organization and offering expenses (O&O) of a Direct Participation Program
There are three components of O&O expenses: bona fide issuer expenses, underwriting compensation and due diligence expenses connected to the offering. Total O&O expenses are limited to 15% of gross offering proceeds.
How are T-bills quoted?
They are quoted as an annualized discount percentage, or basis
Which of the following refers to a stock sale which is treated as an asset sale for tax purposes thereby allowing the target's assets to be written up and depreciated over time?
§338 (including its various subsections such as §338(h)(10) of the Internal Revenue Code permits, if all conditions are met, a stock sale to be treated as an asset sale for tax purposes. This allows the seller the benefits of a stock sale (i.e. clean exit of the business) and provides the buyer with potential value enhancement from the tax shield generated from the asset step-up.
Registered representatives are required to re-qualify by examination if their registrations are not sponsored by a member firm for a period of
2 years
Records of office inspection and reviews must be retained by member firms for at least
3 years
What is the days counting methodology for muni / corp bonds?
30/360 T+3 settlement
When must a preliminary prospectus be deliver to a potential purchaser?
48 hours prior to the mailing of the confirmation of the sale
Rule 147
= Intrastate offering exemption - Applies to companies that are incorporated in the state where the securities are to be offered, carry out a significant amount of their business in that state (has principal office located in state, derives 80% of gross revenues in past 6 months from state, has 80% of assets located in that state, uses 80% of proceeds from offering to operate within state), and offer and sell their securities only to residents of that state
An affiliate must file a notice of a proposed sale under Rule 144 with the SEC under which of the following scenarios?
An affiliate must file notice with the SEC on Form 144 if he/she wishes to sell 5,000 shares or $50,000 in aggregate in any three-month period. In addition, the sale must take place within three months of filing the Form.
Under the rules of SEC 10b-18, when is an issuer with an average trading volume less than $1 million per day or a public float value below $150 million not advised to repurchase its own securities?
An issuer with an average trading volume of less than $1 million per day or a public float value below $150 million is not covered under the safe harbor within the last 30 minutes of trading. Companies with higher average daily trading volume or public float value are within the safe harbor up until the last 10 minutes of trading.
Dividend payout ratio
Annual dividend / basic earnings per share
Eurodollar bods
Bonds denominated in USD, outside of the US
Yankee bonds
Bonds in the US, denominated in US dollars that are issued by a foreign entity
Limited partnership
Business structure used for investing in industries such as oil and gas drilling and real estate development General partners = responsible for organizing and managing the business --> unlimited liability Passive investors have no saying the business - limited liability
What does "know-your-customer" rule apply to?
Customer accounts
Regulation D
D FOR DEBT Establishes three exemptions from registration for private placements of equity and debt securities. Requires the issuing company to file a notice (Form D) with SEC within 15 days of the first sales of securities - allows sales to an unlimited number of accredited investors and up to 35 non-accredited investors
What currency do ADRs pay dividends in?
Dollars
At what point during the sale process does the financing provider typically commit to the final staple terms and conditions?
During the second round of the sale process, prior to submission of final bids.
What is the trading venue of sponsored ADRs?
Exchange
Regulation FD
FD = FAIR DISCLOSURE Prevents the selective disclosure of material information about a publicly traded company to outsiders prior to the time that the same information is generally available to all investors Intentional disclosure --> broadly disclosed SIMULTANEOUSLY Unintentional disclosure --> broadly disclosed PROMPTLY (24 later or the open of trading on the next business day) Disclose this via an 8K
Under most circumstances a general securities firm is required to have a minimum of how many principals?
FINRA generally requires that general securities firms have a minimum of two principals. They must also have access to a Financial and Operations Principal.
Firms that conduct investment banking, research or arbitrage activities are required to maintain I. Rumor lists II. Watch lists III. Restricted lists
FINRA requires that firms that conduct investment banking, research or arbitrage activities maintain some form of restricted and watch lists. Rumor lists are encouraged but not required.
Over whom does an attorney representing a company in bankruptcy have priority?
Fees for bankruptcy attorneys have a claim after secured creditors but before recent employee wages
Schedule TO
Filing made after the acquirer mails an offer to purchase to the target's shareholder's for a tender offer. In response to the tender offer, the target files a Schedule 14D-9 within 10 business days of commencement which contains a recommendation from the target's board of directors on how to respond to the tender offer, typically includes a fairness opinion NOTE: Schedule TO filed by ACQUIRER vs. Schedule 14-D9 filed by TARGET
Who are affiliates of the issuing company?
- offer of the company - member of the board of directors - an individual owning at least 10% of the voting shares
What must an individual do when opening a personal account?
- NOTIFY employer and provide employer duplicate trade confirmation and account statements - notify employee that employer is being contracted
Company A enters into a definitive agreement to purchase Company B. Immediately after signed the Definitive Agreement, the two companies issue a joint press release announcing the transaction. Which of the following are true regarding the press release?
- The press release is defined as a prospectus. - The press release is required to be filed with the SEC Under SEC Rule 425, communications regarding a business combination transaction may be distributed to the public but are defined as a prospectus and must be filed with the SEC no later than the date of first use.
A company declares a dividend. Which of following occurs on the balance sheet:
1) Dividends Payable increases 2) Retained Earnings decreases A declaration of a dividend does not mean cash is actually given out.
A person who has not been registered for the past three years has now become newly registered with another broker-dealer. With regard to Regulatory Element, this representative...
1) Must take the appropriate module as if subject the program for the first time 2) Must complete the Regulatory Element within a 120-day period that begins with the second anniversary of their registration NOTE: - have to re-do if you have left the securities industry for more than 2 YEARS - the program is completed 120 days after the second anniversary after initial registration but THREE YEARS thereafter
Takedown price
The price at which the syndicate members purchase the securities from the managing underwriter
Regulation A
A public offering is EXEMPT from SEC registration if the amount of securities offered does not exceed $5 million in any 12 month period - permits shareholders to sell up to 1.5 million of securities - this sale counts against the 5 million total - if you claim this exception you must file an offering statement with the SEC for review (consists of notification, offering circular, and exhibits) Advantages: financial statements are simpler & do not need to be audited, there are no Exchange Act reporting obligations unless the company has more than $10mm in total assets, Filing with the SEC is less expensive than with the normal process
Accounts Payable Turnover
Accounts Payable Turnover = COGS/Average Accounts Payable
What is the days counting methodology for Treasury bonds?
Actual days/365 days per year T+1 settlement
Operating leverage is best described as:
The extent to which sales growth results in growth at the operating income level
According to Regulation M Rules 101 and 102, FINRA must receive notification from offering participants
For listed and unlisted securities, whether or not a restricted period applies
Rule 144
For restricted securities: - A restricted stock must be held for a minimum of 6 months before being sold - there must be adequate current info about the issuer before the sales can be made For control securities: - Control securities = those held by an affiliate of the issuing company - An affilait can sell within a 3 month period only 1% of the outstanding shares of the same class being sold or the average reported weekly trading volume during the FOUR WEEKS preceding the sale A corporate insider intending to sell shares under Rule 144 must file Form 144 no later than the DATE OF SALE
Who is required to sign-off on the final registration statement, after any deficiencies have been addressed?
For securities registration, the final sign-off is required of corporate officers of the issuer and underwriters.
HSR Filing
Hart-Scott-Rodino act governs regulatory approval for US M&A transactions - the HSR filing must be made directly following the execution of a definitive agreement HSR filing is required for all transactions where the assets of voting securities are worth at least $303.4mm Transactions smaller than this amount must still be filed if all 3 criteria are satisfied: 1) Value of transaction is $75.9mm 2) One party had assets or sales of at least $15.2 in the prior fiasco year 3) The other party had assets or ales of $151.7mm during the prior fiscal year
Limited liability company
Hybrid structure between a partnership and corporation - NOT an incorporated entity - does NOT have a perpetual life - passes through gains and losses - LLC owners (aka members) have limited liability (aka only liable for what they invest, they are shielded from personal liability for debts and judgments against the entity)
Which two of the following are typically true regarding the market's reaction to an announced M&A deal? I. The target stock price trades down based on perceived deal risks and premiums paid II. The target stock price trades up to the offer price III. The acquirer stock price trades up to the offer price IV. The acquirer stock price trades down based on perceived deal risks and premium paid
II and IV. Following a deal's announcement, the market immediately starts to assimilate the publicly disclosed information. In response, the target's and acquirer's share prices begin to trade in line with the market's perception of the transaction. The target's stock price typically trades up to the offer price while the acquirer's stock price often trades down due to the market's perception of deal risks and the fear that it may have overpaid. It would be extremely rare for the target's stock price to trade down or not to react at all to the announcement of an offer to buy the company.
Schedule 13D
Required for anyone who acquires more than 5% of a voting class of a public company's common stock. In addition to acquirers, it may be required of traders and arbitrageurs who participate in tenders for profit
Schedule 14(d)
Required under the '33 Act, provides public information about entities involved in tenders, other than the acquirer
How to calculate ROIC
Return on Invested Capital = (EBIT - Taxes)/Average Invested Capital Average invested capital = total stockholders equity + net debt (take the AVERAGE)
Regulation S
S for SEA Offshore offerings are not subject to SEC registration. They are exempt as along as 1) no offer is made to any person physically located in the US and 2) no directed selling efforts are made in the US
When a rep sells securities outside the jurisdiction of their firm, what must they do/agree to with the firm?
Sell for compensation: PERMISSION Sell without compensation: NOTIFICATION Always: firm must provide SUPERVISION
Which of the following are "fiduciaries" covered under FINRA Rule 2060's restrictions on using information about the ownership of an issuer's securities to solicit transactions?
Specified types of fiduciaries are covered under FINRA Rule 2060. They consist of transfer agents, paying agents, trustees and others who have privileged access to information about ownership of the issuer's securities.
Do ADRs have voting rights
Sponsored - YES Unsponsored - sometimes
Which securities are quoted as a percentage of par in 32nd of a point?
T-notes and T-bonds
Underwriting spread
The difference between what the underwriters pay an issuing company per share and the public offering price Three components: - Manager's fee (10-20%) - Underwriting fee (20-30%) - Selling concession (50-60% of spread) Full takedown: underwriting fee + selling concession Ex. the managing underwriting will get the basic takedown fee on the amount it sells but then the additional fee as the lead underwriter on the entire securities offering). Only the manager can potentially receive the full spread as compensation = full takedown = underwriting concession Selling group members receive only the selling concession.
To begin quoting a security on the OTCBB, a market maker must first register by filing a form with
To begin quoting an OTCBB security, a market maker must first register by filing a Form 211 with FINRA OTC compliance.
Regulation A+
Two tiers of registration exempt offerings: Tier 1: eligible issues may offer and sell up to $20mm of securities in a 12 month period of which no more than $6mm may constitute secondary sales by security holders Tier 2: Issuers may offer and sell up to $50mm of securities in a 12 month period of which no more than $15mm may constitute secondary sales by affiliates Both must be accompanied by financial statements for the previous 2 fiscal years. Tier 2 must be audited and requires annual reports to be filed.
In an M&A scenario, the acquirer typically needs to receive shareholder approval if the shares offered as part of the purchase consideration exceed what threshold of the acquirer's pre-deal common shares outstanding?
U.S. public acquirers listed on a major exchange typically need to obtain shareholder approval if stock is being offered as a form of consideration and the new shares issued represent over 20% of the acquirer's pre-deal common shares outstanding.
In all of the following scenarios, diluted shares outstanding is greater than basic shares outstanding, EXCEPT:
Un-exercisable options are not accounted for in the calculation of diluted shares outstanding in accordance with the Treasury Stock Method.
Dividend discount formula
Under the dividend discount model, Stock Price = last year's dividend x (1 + growth rate) / (discount rate - growth rate) = $0.15 x (1 + 0.05) / (0.09 - 0.05) = $3.94.
Are bonds usually traded at a centralized location or exchange?
Unlike equity trading, bond trading usually takes place between dealers in decentralized over-the-counter markets.
When does an individual have a duty of trust?
When he has assured or led the communicating party to believe that he can be trusted to keep information confidential. Ex. employee who learns of material inside information while engaged in an assignment for his employer has a duty of trust - information communicated by a spouse or family member is not always subject to this duty of trust
The cooling off period after the filing of a registration statement ends
When the SEC declares the registration effective
When issuers include warrants in bond offerings, the issuer Can...
When warrants are added as sweeteners to a bond offering, the issuer is able to attract greater investor interest. The bond is more marketable and the issuer can sell it with a lower interest rate.
Where must a registered representative be registered?
Wherever he or she transacts business
When is a Schedule 14-D9 supposed to be filed?
Within 10 business days of a Schedule TO Filing -
Filing date for a Schedule 8K
Within 4 business days of the event for all issuers
Can variations of road shows exist?
Yes, as long as the investors receive the same "core presentation"
Does a recorded road show need to be filed with the SEC?
Yes, before viewing
Is the SEC filing of a recorded road show considered a free-writing prospectus?
Yes, since it uses written communication
Dividend yield
a dividend expressed as a percentage of a current share price
Joe Schmo recently acquired unregistered stock of a company as compensation for consulting services. Four months later, Joe queries his registered representative as to how he can subsequently sell the shares in the market. The rep could accurately reply that Joe can
sell the shares to a Qualified Institutional Buyer (QIB) under Rule 144A. Rule 144 permits the sale of unregistered stock of an existing public company after a six-month holding period. In this case, the shares have only been held for four months, making them ineligible for sale under Rule 144. Rule 144A allows the sale of unregistered securities to Qualified Institutional Buyers (QIBs) with no holding period. A QIB is generally defined as an institutional investor with $100mm in assets.
