Unit 1 test prep questions
Your customer informs you that he has shares of stock restricted under Rule 144. He suggests that he wants to sell covered calls against the shares he owns to bring additional income into his account. Which of the following should you advise?
Selling calls against restricted (Rule 144) shares is prohibited because the restricted shares could not be delivered if the calls were exercised by the buyer. Reference: 1.7.4 in the License Exam Manual
Under which circumstances will an investor be considered accredited under Regulation D?
$1 million net worth excluding net equity in a primary residence or $200,000 annual income in the last two years. Under Regulation D, the SEC defines an accredited investor as an individual who either has a net worth of at least $1 million (excluding net equity in a primary residence), or has had annual income of at least $200,000 ($300,000 joint return) in the last two years with the same or more expected this year. Reference: 1.7.2 in the License Exam Manual
Under the de minimis exemption, an initial public offering of common stock may be sold to an account where restricted persons have a beneficial interest as long as their interest in the account does NOT exceed:
10%. If the beneficial interests of restricted persons do not exceed 10% of an account, the account may purchase a new equity issue. Reference: 1.7.6 in the License Exam Manual
A resident of a state who acquires stock pursuant to Rule 147 (intrastate offerings) is prohibited from selling the stock to a nonresident of that state for how many months?
6 months. Rule 147 stock cannot be sold to a nonresident of the state for a period of six months after the purchase date. Reference: 1.7.3 in the License Exam Manual
An underwriting spread is the: A) difference between an offering price and the proceeds to an issuer. B) amount a managing underwriter receives. C)amount a selling group receives. D)amount a syndicate receives.
A. A spread is the difference between the public offering price and the price an underwriter pays an issuer. Reference: 1.6.7 in the License Exam Manual
A company is offering a private placement with the intent of selling shares to nonaccredited investors up to the 35 allowed for in Regulation D. Which of the following is TRUE? A) The offering may not be advertised B) While the offering can be advertised to anyone, only accredited investors could be solicited to purchase shares C) The offering can be advertised to all except the 35 nonaccredited investors D) Anyone may be solicited
A. Advertising private placements is considered a solicitation to sell. If the securities are advertised, all purchasers must be accredited or the company must reasonably believe they are. In this instance, the intent is to sell to up to 35 allowable nonaccredited investors and with that intent clearly stated the offering could not be advertised to anyone. Reference: 1.7.2 in the License Exam Manual
Which of the following statements regarding a red herring is NOT true? A) An agent may accept funds to be placed in escrow until the effective date if the request to do so is made by a potential purchaser. B) Additional information may be added to a red herring at a later date. C) The final offering price does not appear in a red herring. D) A red herring is used to accept indications of interest from investors.
A. An agent is not permitted to accept funds from potential purchasers of a new issue before the effective date. Reference: 1.6.6 in the License Exam Manual
Which statement is an accurate interpretation of FINRA rules governing the use of retail communications?
All retail communications must be approved by a principal. A broker/dealer's retail communications must be approved by a principal of the firm before use or filing with FINRA when filing is required. Pre-filing with FINRA can depend on a number of factors, such as the product. For example, pre-filing of retail communications is required for certain pieces having to do with investment companies and VAs, but not for pieces having to do with DPPs or CMOs. Internal communications are not retail and communications with an individual (natural person) with $50 million or more of total assets is considered institutional, not retail. Reference: 1.3 in the License Exam Manual
Which of the following activities are characteristic of a primary offering? I) Raising additional capital for the company. II) Selling previously issued securities. III) Increasing the number of shares outstanding. IV) Buying previously issued securities.
I and III. A primary offering involves the sale of previously unissued securities. The issuing company receives the proceeds from the sale; once the securities are sold, more securities will be outstanding. Reference: 1.6 in the License Exam Manual
A registered representative wants to place advertisements in his daughters youth athletic league quarterly sponsorship booklet and in the weekly bulletin at his church describing that he specializes in retirement planning and 529 plans. Which of the following statements regarding these advertisements is TRUE? A) The piece will be regulated as correspondence because it is only being forwarded to two organizations. B) Pre-approval by a principal of the broker dealer is required. C) No approval is required because both the youth athletic league and the church would be recognized as bona-fide non-profit organizations by the IRS. D) The advertisement is considered institutional communications because it is placed in literature being distributed by organizations such as the youth athletic league and the church organization and therefore no principal pre-approval is required.
B. Any piece promoting securities services and / or products intended to be received by more than 25 retail customers within any 30 calendar-day period must be pre-approved by a principal before use. Given the intended placements of the piece there is no way to determine the exact number of retail customers who will be exposed to it and within what time frames and therefore it must be regulated as retail communications. It fits neither the definition of correspondence or institutional communications. Reference: 1.3 in the License Exam Manual
Which of the following would NOT be considered institutional communications with the public? A) A letter to a municipality offering your firm's services as an underwriter B) An internal memo promoting a new product that will be offered to your firm's institutional customers only C) A communication with an individual designated to act on behalf of your institutional customer D) A letter to another broker/dealer
B. Institution communications specifically exclude internal communications. Communications with another member firm, a government entity, such as a municipality or with someone designated to act on behalf of one of your firm's institutional customers, would all fall within the definition of institutional communications. Reference: 1.1.1 in the License Exam Manual
An issuer may direct sales of a new issue to all of the following EXCEPT: A) officers of the issuer. B) officers of the managing underwriter. C) officers of its largest customer. D) officers of its largest supplier.
B. Issuer-directed sales are permitted if the persons to whom the new issue is sold are not restricted. Officers of the managing underwriter are restricted. Reference: 1.7.6 in the License Exam Manual
Which of the following observations may a registered representative make when giving a sales presentation based on performance statements and charts? A) The portfolio's broad diversification will ensure the continuation of the 6% yield. B) The fund has had a positive performance in the last few years. C) The fund has consistently outperformed the market and should continue to do so. D) Yield over the last 5 years has fluctuated between 6% and 8%, indicating it will continue at 6% or better.
B. Predictions are strictly prohibited and conjecture about future trends or occurrences must be labeled as such. Reference: 1.4 in the License Exam Manual
Which of the following exemption provisions of the Act of 1933 may NOT be used for an initial offering of securities? A) Regulation D B) Rule 144 C) Regulation A D) Rule 147
B. Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities. Reference: 1.7.4 in the License Exam Manual
Private placements A) can only be advertised when 35 or fewer of the investors are nonaccredited B) may be advertised if all of those solicited are accredited investors C) may be advertised under all circumstances D) may never be advertised under any circumstance
B. In order to solicit or advertise private securities offerings, all purchasers of the advertised securities must be accredited investors or the business must reasonably believe that the investors are accredited investors at the time of the sale. Reference: 1.7.2 in the License Exam Manual
Before the filing of a registration statement for a new issue, an investment representative may NOT: I) solicit indications of interest for the security. II) solicit orders. III) confirm the sale of the security to a customer.
I, II, and III. Before the registration statement is filed, no sale, solicitations, or indications of interest in the issue may occur. Reference: 1.6.6 in the License Exam Manual
A registered representative has reproduced a research report prepared by an independent research analyst on his broker-dealer's letterhead, with no mention of the party who prepared the report. If this literature is forwarded to a select group of clients only, the registered representative's action is:
Not allowed. A broker-dealer is prohibited from presenting to a client research reports, analyses, or recommendations prepared by other persons or firms without disclosing that they were prepared by a third party. Reference: 1.2.3 in the License Exam Manual
Regarding the purchase of new equity issues, restricted persons may:
Not purchase shares of a new issue. Persons characterized as restricted persons are prohibited from purchasing shares of new issues. Reference: 1.7.6 in the License Exam Manual
Where must the SEC's no-approval clause appear in a prospectus?
On the cover. The SEC wants investors to know that it does not approve or disapprove new issues. The disclaimer statement must appear on the cover of all prospectuses. Reference: 1.6.8 in the License Exam Manual
A registered representative makes several statements to a customer considering an investment under Regulation D. All of them are accurate statements EXCEPT A) if the offering is advertised, all purchasers must be accredited B) a special inscription or legend on the stock certificate indicates that its transfer is restricted C) under no circumstances can more than 20 nonaccredited investors participate in the purchase of shares D) investors agree to terms by signing an investment letter
C. A maximum of 35 nonaccredited investors may participate in the purchase of securities offered under a Regulation D exempt offering. Reference: 1.7.2 in the License Exam Manual
From the point of view of a corporate issuer, the most conservative means of raising capital would be the issuance of: A) convertible bonds B) convertible preferred stock C) common stock D) preferred stock
C. Common stock issues add to the capital of a corporation and do not saddle it with additional cash flow demands. This approach is the most conservative. Because of the desire of bondholders and preferred stockholders to receive their interest and dividends, respectively, the issuance of preferred stock or bonds creates additional and ongoing demands on a corporation's cash flow. Reference: 1.6 in the License Exam Manual
Your customer wishes to purchase shares of an IPO. During the cooling- off period, the customer can: A) purchase shares in limited amounts. B) pay in advance for shares to be purchased when the cooling-off period ends. C) indicate an interest in the offering. D) enter an order to sell the new issue short upon the effective date.
C. During the cooling-off period, neither purchases or sales can be made, and orders for either cannot be accepted by the broker/dealer, However, indications of interest can be made by customers and accepted by broker/dealers. Indications of interest are non-binding for both parties. Reference: 1.6.6 in the License Exam Manual
The Securities Exchange Act of 1934 deals with all of the following EXCEPT: A) monitoring accounts for insider trading violations. B) filing of financial statements by broker/dealers. C) filing an updated prospectus. D) marking sales long or short on an order ticket.
C. Prospectus filing is a requirement of the Securities Act of 1933. Reference: 1.6.1 in the License Exam Manual
Underwriters that reserve the right to stabilize the price of securities distributed to the public under an SEC registration statement may do so: A) without restriction. B) only if the securities being distributed will be immediately listed for trading on the NYSE or other exchange. C) only if notice is given in the prospectus. D) under no circumstances.
C. Stabilizing transactions are permitted if the SEC is notified in the registration statement and the investing public is notified in the prospectus. Reference: 1.6.6 in the License Exam Manual
An officer of a broker/dealer firm would be categorized as a restricted person if he attempted to purchase: A) closed-end funds on the secondary market. B) a municipal bond in a state where he does not reside. C) a new issue. D) call options on a stock he believed was going down in price.
C. As restricted persons officers of broker/dealer firms or other institutional investors are prohibited from purchasing a new issue. Reference: 1.7.6 in the License Exam Manual
An affiliate of an issuer that holds control stock for five months, sells 1,000 shares for a $10,000 profit. How will this transaction be treated?
These short swing profits must be disgorged from the holder of the stock to the issuing corporation. If control stock is sold prior to a six month holding period, any profits are defined as short swing profits and the company receives the profits The term disgorged refers to the profits being removed from the affiliate and given to the issuer. Reference: 1.7.4 in the License Exam Manual
The primary difference between an underwriting syndicate member and a selling group member in a firm commitment underwriting is that:
the syndicate assumes liability for unsold shares; the selling group does not. The underwriting syndicate makes a financial commitment in a firm underwriting to bring a new issue to market and to take liability for unsold shares. A member of a selling group only agrees to provide a sales service for a certain number of shares in exchange for a commission on shares it sells. It has no responsibility for any unsold shares. The securities offered are identical and the public offering price is the same. Both large and small firms can be either syndicate members or selling group members. Reference: 1.6.4 in the License Exam Manual
institutional communication
- any entity with $50 million in assets is an institution - any account that isn't institutional is a retail account - DOES NOT have to be promotional in nature - DOES NOT have to get preapproved by principal prior to use
rule 2210 for first-year member firms
- retail communications be prefiled with FINRA - FINRA Rule 2210(b)(3) permits a firm to distribute an institutional communication without having a registered principal approve the communication prior to distribution, provided that the firm establishes and implements certain written procedures for the supervision and review of such communications.
Which of the following does NOT occur during the cooling-off period for a new issue? A) delivery of red herrings B) due diligence meetings C) tombstone ads D) binding indications of interest
D.
If another member broker/dealer has already received clearance from FINRA for a retail communication, filing the piece with FINRA so that your broker/dealer can now use it A) must be done 10 days before your broker-dealer can use it, even if unaltered B) must be done before publication by your broker-dealer whether it is altered or unaltered C) must be done within 3 days after use by your broker-dealer, even if unaltered D) is not necessary if unaltered and used as originally intended
D. If unaltered and used as it was originally intended, re-filing with FINRA is not required. If the piece had been altered or was intended to be used in a manner inconsistent with how it had been originally intended to be used, filing with FINRA would be required. Reference: 1.1.2 in the License Exam Manual
An affiliate or insider holding unregistered shares can sell under Rule 144: A) 1 time per year B) 2 times per year C) 12 times per year D) 4 times per year
D. Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last four weeks' trading volume with each Form 144 filing. The filing is good for 90 days, which would allow for as many as four filings per year. Reference: 1.7.4 in the License Exam Manual
The registration requirements of the federal securities acts are intended to provide retail investors with the ability to make a fully informed investment decision by a review by the SEC and providing for a prospectus on new issues. Which of the following is the true of this process? A) By clearing the offering for sale, the SEC absolves the underwriter and issuer from financial responsibility regarding the sale. B) When released for sale, the SEC guarantees that the prospectus does not have untrue material facts. C) When submitted to the SEC, the registration document provides adequate information for the SEC to approve the new issue. D) The SEC does not endorse new issues for sale.
D. The SEC does not endorse or approve new issues for sale and does not guarantee the accuracy of the information. Reference: 1.6.8 in the License Exam Manual
The Securities Act of 1933 requires securities issued by all of the following to register and be subject to prospectus provisions EXCEPT A) foreign governments with which the United States maintains diplomatic relations. B) corporations involved in interstate commerce. C) investment companies. D) the U.S. government.
D. The Securities Act of 1933 does not require U.S. government securities to be issued by prospectus. The act covers the issuance of securities by companies engaged in interstate commerce. Investment company shares must be sold by prospectus. The exemption for securities issued by foreign governments is found in the Uniform Securities Act, not the federal law. Reference: 1.6.2 in the License Exam Manual
If a corporation issues stock to the public at $10 per share, and the syndicate manager's fee is $.10 per share, the underwriting fee is $.25 per share, and the selling concession is $.45 per share, what is the spread? A) $.90 B) $.60 C) $.70 D) $.80
D. The spread is the sum of the manager's fee, the underwriting fee, and the selling concession. Reference: 1.6.7 in the License Exam Manual
If a customer purchases a new issue of stock from a syndicate member, the customer will pay the public offering price: A) plus the spread. B) plus a mark-up. C) plus a commission. D) with no mark-up or commission.
D. New issues are sold at the public offering price without a commission or mark-up. In the secondary market, securities are traded on an agency basis (commission) or on a principal basis (mark-up or mark-down). Reference: 1.6.7 in the License Exam Manual
Rule 144A regulates: A) the sale of restricted stock by control persons. B) personal trading by research analysts. C) companies traded on the NASDAQ Global Select Market. D) the sale of restricted stock to institutional investors.
D. Rule 144A regulates the trading of restricted securities to institutional investors known as qualified institutional buyers (QIBs). Reference: 1.7.5 in the License Exam Manual
The Securities Exchange Act of 1934 regulates or mandates each of the following EXCEPT: A) creation of the SEC. B) extension of credit to customers. C) manipulation of the secondary market. D) full and fair disclosure on new offerings.
D. The Securities Exchange Act of 1934 created the SEC and regulates the secondary market. The Securities Exchange Act of 1934 does not address full and fair disclosure issues; the Securities Act of 1933 addresses such issues. Reference: 1.6.1 in the License Exam Manual
Regarding the purchase of a new issue, a customer would NOT be considered a restricted person if he were: A) the wife of a principal of a FINRA member firm. B) a registered representative working for a FINRA member firm not involved in the issue. C) a registered representative working for the issuing firm's investment banker. D) the retired uncle of a bank clerical employee
D. The definition of a restricted person includes FINRA members and their associated persons. Immediate family members of such persons are also included under the definition. Reference: 1.7.6 in the License Exam Manual
The Securities Act of 1933 covers all of the following EXCEPT: A) prospectus requirements. B) full and fair disclosure. C) liabilities for misleading filings. D) blue-sky laws.
D. Blue-sky laws The purpose of the Securities Act of 1933 is to provide investors with full disclosure about a new securities issue. The act is federal in scope, whereas blue-sky laws refer to state securities regulations. Reference: 1.6.3 in the License Exam Manual
Which of the following provisions govern the offering of control stock to the public without filing a Form 144? I) The dollar amount is $1 million or less. II) 100,000 shares or fewer are sold. III) 5,000 shares or fewer are sold. IV) The dollar amount is $50,000 or less.
III and IV. Under Rule 144, when shares are sold by an affiliate (control), Form 144 need not be filed if 5,000 or fewer shares are sold and the dollar amount is $50,000 or less. This de minimis rule applies to sales in any 90-day period. Reference: 1.7.4 in the License Exam Manual The de minimis rule states that if a discount is less than 0.25% of the face value for each full year from the date of purchase to maturity, then it is too small (that is, de minimis) to be considered a market discount for tax purposes. Instead, the accretion should be treated as a capital gain.
The latest issue of a newsletter your firm subscribes to is especially relevant to one of your firm's investment products. If you decide to send it to clients and prospects, you must disclose that:
If a third party is the creator of the newsletter, that fact must be disclosed together with the name of the third party and the date of publication. Reference: 1.2.3 in the License Exam Manual
A RR delivers a powerpoint presentation on retirement planning for 29 attendees at a corporate headquarters. How is the powerpoint presentation defined by FINRA?
Retail communication
Under which circumstances may a member firm sell a new equity issue to one of its nonregistered employees?
Under no circumstances. Member firms and employees of members (registered and nonregistered) are prohibited from buying a new equity issue at the public offering price. Reference: 1.7.6 in the License Exam Manual
