Chpt 11: Offerings & SIE Practice Questions

Securities Act of 1933 Registration Process

(1) the Pre-registration period (2) cooling off (waiting) period (3) the post-effective period

Payments for Market Making

**FINRA worried about issuers paying U/Ws to act as market makers to inflate stock (can't regulate issuers) so decided to make these rules prohibit: (1) Publishing a quote (including indication of interest) (2) Acting as a market maker in a security (3) Submitting an application in connection with market-making activites

If a broker-dealer decides to change the electronic storage method that it currently uses to maintain its records, what's the firm's obligation? A) It must notify its primary regulator at least 90 days prior to using the new method B) It must notify its primary regulator within 30 days after beginning the new method C) It must notify its primary regulator prior to the beginning the new method D) It must receive prior written approval from its primary regulator

A) It must notify its primary regulator at least 90 days prior to using the new method

An investor asks a registered representative to underline the most important facts found in a preliminary prospectus. The registered representative: A) May not do this since it violates federal securities laws B) May do this with the approval of a principal at the firm C) May do this with the approval of FINRA D) May do this without restrictions or approvals

A) May not do this since it violates federal securities laws Once a prospectus is filed with the SEC, it may not be altered in any way. (73073)

Broker-dealers are required to send balance sheets to customers every: A) Nine months B) Six months C) Three months D) 12 months

A) Nine months

A primary offering of securities is being made for a company listed on the NYSE. Prospectuses must be delivered: A) Only on purchases made at the public offering price B) For 25 days after the deal has closed C) For 40 days after the deal has closed D) For 90 days after the deal has closed

A) Only on purchases made at the public offering price

A broker-dealer is underwriting an initial public offering (IPO) for a company that will be exchange-listed. The broker-dealer continues to deliver prospectuses: A) Only on purchases made, at the public offering price B) For 25 days after the deal has closed C) For 40 days after the deal has closed D) For 90 days after the deal has closed

A) Only on purchases made, at the public offering price

A registered representative's broker-dealer is an underwriter of an initial public offering of stock. The RR's father-in-law may purchase: A) The IPO from a different broker-dealer B) The IPO from the RR's broker-dealer C) Only a limited quantity of the IPO from any broker-dealer D) The IPO but only from a member of the selling group

A) The IPO from a different broker-dealer

Due Diligence

Just prior to the effective date, due diligence meeting held -include lead underwriters, syndicate members, officers of the issuer, attorneys, and accountants -Purpose: review different aspects of underwriting

Responsibilities of a Syndicate Manager (Rule G-11) for Munis

Keeping Records: -Settlement date with issuer -Allotment of securities and sales prices -Names of syndicate members and % of liab.

Cooling Off Period

*after Filing date -20-days, during this time the SEC reviews the issuer's registration statement to determine if its complete and that is contains nothing misleadings -If believe incomplete or misleading --> send deficiency letter to the issuer -B/Ds are able to send Preliminary prospectus -B/Ds allowed to: *discuss the issue *provide red herring to potential customers *record the names of ppl interest -B/D prohibited from: *accept payment for the new issue in advance *sell the new issue **Can't amend the prospectus -Comply with state blue sky laws -Due Diligence Meeting -Effective Date

Official Statement Summary: -Electronic Municipal Market Access (EMMA) -Rule G-32: -Assignment of Underwriters and Obtaining CUSIP Numbers:

-Electronic Municipal Market Access (EMMA) -Rule G-32: rules requires disclosure documents be filed with the MSRB and provided to customers. -Assignment of Underwriters and Obtaining CUSIP Numbers: Underwriters also expected to apply for a CUSIP (Committee on Uniform Security Identification Procedures) number which is a nine-digit alpha-numeric number used to identify securities and is assigned to each maturity Application window follows: (1) for a negotiated sale, the U/W must apply no later than the time pricing is finalized (2) for a competitive sale, the U/W must apply immediately after winning the bid (3) a financial advisor must apply by no later than 1 business day after of notice of sale s

After market prospected delivery requirements: -For an unlisted IPO -For an unlisted follow-on security -For an IPO of a security to be listed on the NYSE or Nasdaq -For follow-on offering on exchanges:

-For an unlisted IPO: 90 days -For an unlisted follow-on security: 40 days -For an IPO of a security to be listed on the NYSE or Nasdaq: 25 days -For follow-on offering on exchanges: No req.

Underwriting Spread: -Manager's fee: -Member's underwriter's fee: -Concession:

-Manager's fee: the portion that's paid to the managing underwriter for each share of the offering -Member's underwriter's fee: the portion that's paid to the syndicate members that assumes the risk or liab. for the shares -Concession: the portion that's paid to the firms that sells the shares

Underwriting Documentation for Munis

-Notice of sale: -Legal opinion: -Official Statement:

Exempt Offerings Based on

-Regulation D: -Rule 144 -Rule 144A -Rule 145 -Rule 147 and 147A

Types of Prospectuses: -Statutory Prospectus: -Preliminary Prospectus: -Mutual Fund Summary Prospectus: -Fee Writing Prospectus:

-Statutory Prospectus: condensed form of the registration statement -Preliminary Prospectus: this is the red herring -Mutual Fund Summary Prospectus: __ -Fee Writing Prospectus (FWP): is any communication that does not meet the standards of a statutory prospectus (i.e. press releases, emails/webpages)

Exempt Securities from filing with the SEC:

-US gov't agencies -Muni securities -Securities issued by non-for profits -Short term debt instruments (max of 270 days) -Securities issued by domestic banks and trusts -Securities issued by small investment companies

The Pre-Registration Period

-an issuer prepares registration statement (U/W can help but not communicate with customers yet) -No discussion with customers *In between Pre-registration and cooling off have filing date

Rule 147 and 147A

A federal registration exemption for securities that are sold within the borders of one state Has to meet 1 of the 4 reqs: (1) 80% of consolidate gross revenues are derived from the operation of a business or real property in that state territory (2) 80% of consolidate assets are located within the state (3) 80% of net proceeds from the offering are intended to be used by the for stuff in the state (financing) (4) A majority of the issuer's employees are based in the state/territory **can't sell to people outside for 6months

If an investor buys $3,000 of ABC common stock in a margin account, what's the required initial deposit? A) $2,000 B) $1,500 C) $750 D) $3,000

A) $2,000 Rationale: If an investor's initial margin purchase is less than $4,000 of stock, his initial deposit requirement is $2,000, rather than 50%. For example, if an investor's initial purchase is $3,000 of stock, his required margin deposit is $2,000 and he's able to borrow the remaining $1,000. If an investor's initial margin purchase is for less than $2,000 of stock, his required margin deposit is 100% of the purchase price. In this case, he's not able to borrow any portion of the purchase price (i.e., not buy on margin).

GL1: A brokerage firm creates an in-house, non-cash incentive program. This is permitted if it's tied to the RR's sale of which of the following products? A) All securities products that are sold by the RR B) Equity securities that are sold by the RR C) Mutual fund shares that are sold by the RR D) Only the securities that are created by the RR's employing firm

A) All securities products that are sold by the RR

A client is heavily invested in an exchange-listed security and decides to liquidate the investment to purchase shares of an S&P 500 Index fund. In doing so, the investor has protected against: A) Business risk B) Liquidity risk C) Market risk D) Systematic risk

A) Business risk Rationale: By diversifying his portfolio through the investments in the S&P 500 Index fund, the client is primarily reducing business risk. Business risk is the risk that a company is doing something wrong which will lead to its poor performance (i.e., poor management or the wrong product line). Liquidity was not a concern since the original investment was an exchange-listed company. Market risk is a type of systematic (non-diversifiable) risk.

A security that pays a fixed amount on a quarterly basis, and also allows the holder to profit if the common stock rises, is known as a: A) Convertible preferred stock B) Convertible bond C) Warrant D) Right

A) Convertible preferred stock

A broker-dealer's anti-money laundering (AML) compliance program must be approved: A) In writing by a member of senior management B) By FINRA and a member of senior management of the broker-dealer C) By the SEC and the head of compliance for the broker-dealer D) In writing by both the CEO and the CFO

A) In writing by a member of senior management

If a firm places a temporary hold on a customer's account: A) It applies to either the entire account or specific disbursements B) It applies to the entire account C) It only applies to specific disbursements D) It only applies to a specific transfer of securities

A) It applies to either the entire account or specific disbursements

In an equity offering, what's the function of a syndicate desk? A) To create an order book and allocate the stock to investors B) To record the existing shareholders that are selling their shares in the offering C) To solicit interest in the stock offering from investors D) To coordinate road show meetings with company management and investors

A) To create an order book and allocate the stock to investors Rationale: The syndicate guarantees (i.e., underwrites) an offering. A broker-dealer's syndicate desk assists in the pricing of the offering, helps to build the book of orders, markets (distributes) the issue, and allocates the stock to investors.

All of the following are considered a good delivery in the sale of 500 shares of common stock, EXCEPT: A) Four 50-share certificates and ten 30-share certificates B) Ten 50-share certificates C) Five 100-share certificates D) One 500-share certificate

Answer is A Rational: Delivery must be made in 100-share certificates, multiples of 100, or any combination that adds up to 100 shares. Four certificates of 50 shares is acceptable, but ten 30-share certificates is not, since 30-share certificates cannot be combined to add up to 100 shares.

A limited partner would be in jeopardy of losing her limited liability if the partner: A) Received a portion of the project's income and deductions B) Assisted in the decision of which properties to acquire C) Insisted on examining the partnership's financial records D) Made a loan to the partnership

B) Assisted in the decision of which properties to acquire Rationale: Limited partners have the right to receive their portion of income and losses, examine books and records, and make loans to the partnership. If they get involved in the management of the program, such as deciding which properties to acquire, they could be considered general partners and lose their limited liability. **Can't be involved in MGMT

The beneficial owner of stock held in street name is the: A) Broker-dealer B) Customer C) Issuer D) Trustee

B) Customer

Which of the following statements is TRUE regarding contributions to a 401(k) plan? A) Contributions are in after-tax dollars. B) Employee participants should be aware of the risk of investing too much in their employer's stock. C) The employer determines the investments into which the contributions are allocated. D) Contributions of an unlimited amount can be made by employees.

B) Employee participants should be aware of the risk of investing too much in their employer's stock. Rationale: Employee participants should be aware of the risk of investing too much in their employer's stock. If the stock performs below expectations, a significant decline could be exhibited in the amount available for retirement. Contributions are made in pre-tax dollars and there is a limit to the amount that can be contributed annually. The employee determines the allocation of contributions from a list of investment options selected by the employer. The employer does not determine the investments into which the contributions are allocated.

An individual was convicted of insider trading four years ago and served out her sentence in federal prison. If she is seeking a position as a registered representative, she should be informed that: A) She can be hired, but won't be permitted to talk to clients B) She cannot be hired as an registered representative for six years C) She can only provide advice on securities distributed through private placements since the securities are exempt securities D) Any sales she executes must be preapproved in writing by a principal

B) She cannot be hired as an registered representative for six years

If mutual fund has a breakpoint at $100,000, which of the following purchases is a breakpoint sale? A) An unsolicited purchase at $99,000 B) An unsolicited purchase at $101,000 C) A solicited purchase at $99,000 D) A solicited purchase at $101,000

C) A solicited purchase at $99,000 A breakpoint sale occurs when an RR solicits or recommends a purchase just below a breakpoint level. Although unsolicited purchases just below a breakpoint level are permitted, a registered representative should explain to a customer the other methods by which sales charges may be reduced (e.g., letter of intent).

Compliance meetings must be attended by registered representatives no less frequently than: A) Quarterly B) Semi-annually C) Annually D) DMonthly

C) Annually

How frequently is a firm required to notify customers regarding how to access BrokerCheck®? A) Only at the time the account is opened B) Semi-annually C) Annually D) Quarterly

C) Annually

An uncle would like to invest for his nephew's college education. Which of the following factors is a benefit of a 529 plan? A) Uniformity of state taxation B) Pretax contributions C) Change of beneficiaries allowed D) No limits on contributions

C) Change of beneficiaries allowed

Funds collected from 12b-1 fees cannot be used to pay for which of the following fund expenses? A) Sales concessions paid to registered representatives B) Printing the fund's prospectus C) Commissions paid for executing trades in the fund's portfolio D) Costs associated with creating the fund's website

C) Commissions paid for executing trades in the fund's portfolio

Which of the following statements is TRUE about the SEC Customer Protection Rule? A) broker-dealer may only hold securities in its vault. B) The customer protection rule only applies to funds and/or securities in a cash account. C) If a client sells securities and fails to deliver them within 10 business days of the settlement date, the broker-dealer must buy-in the customer. D) A creditor of a broker-dealer is considered a customer of the broker-dealer.

C) If a client sells securities and fails to deliver them within 10 business days of the settlement date, the broker-dealer must buy-in the customer.

Which of the following statements about Form 10-K is TRUE? A) It must be filed with the SEC within 40 days of the end of the fiscal quarter. B) It contains voting information and must be sent to shareholders before an election. C) It must be filed with the SEC within 60 days of the end of the fiscal year. D) It must be offered to shareholders on a monthly basis.

C) It must be filed with the SEC within 60 days of the end of the fiscal year.

If interest rates decline, which of the following securities is likely to have the greatest increase in market value? A) Short-term bonds B) Intermediate-term bonds C) Long-term bonds D) All bonds will experience the same change in market value

C) Long-term bonds When interest rates decline, the bonds with the longest maturities will have the greatest price increase.

Which of the following activities is NOT performed by a transfer agent? A) Handling lost, destroyed, or stolen certificates B) Acting as proxy agent C) Maintaining the issuer's ownership register for each issuance of securities D) Acting as the company's paying agent for interest payments on bonds and for cash or stock dividends on equities

C) Maintaining the issuer's ownership register for each issuance of securities

May a brokerage firm place a temporary hold on a securities transaction? A) Yes, for the account of any investor. B) Yes, for the account of a senior investor. C) No, since this is beyond the scope of SRO rules. D) Yes, if the customer has a margin account.

C) No, since this is beyond the scope of SRO rules.

The main difference between a registered exchange-traded REIT and a registered nontraded REIT is: A) The type of assets in which they are permitted to invest B) The types of disclosures they are required to make to investors C) The amount of liquidity each of the securities has D) The tax treatment of each of the securities

C) The amount of liquidity each of the securities has

Which of the following statements is NOT TRUE concerning the opening an account for a new client? A) The RR may NOT open the account using a P.O. box as an address. B) The RR may send mail to a P.O. box. C) The client must sign the new account form. D) The RR must make an effort to obtain the client's tax ID number, such as a Social Security number.

C) The client must sign the new account form.

Within a brokerage firm, a registered representative solicits customers to purchase securities, another person works in the firm's cashier's department as a clerk, a managing director supervises the research department, and a consultant has been brought in to work on an accounting project. Which of these persons is NOT required to be fingerprinted? A) The registered representative B) The clerk C) The consultant D) The managing director

C) The consultant Rationale: Fingerprints are required of any securities industry person who is engaged in the sale, recommendations, or transactions of securities, or any person who regularly has access to the keeping, handling, or processing of securities, monies, or the original books and records relating to securities or monies. In addition, any person who has direct supervisory responsibility over any persons who are engaged in these activities is required to comply with these regulations. The consultant is neither engaged in the sale or handling of securities nor responsible for the firm's books and records and is therefore not required to be fingerprinted. **Involves people who are keeping records as well

For how many successive quarters must gross domestic product (GDP) fall for the economy to be considered in recession? A) One quarter B) Three quarters C) Two quarters D) Four quarters

C) Two quarters

Rule 145

Certain types of securities reclassifications are considered to be sales and are subject to the registration and prospectus requirements of the act Reclassifications include: -Substitutes: An issuer that substitutes one security for another -Mergers/Consolidation: A merger or consolidation in which the securities of one corp are exchanged for the securities of another corp -Transfer of assets: A transfer of assets from one corp to another *Stock split, reverse stock splits, or changes in par value are not considered reclassifications

The net asset value (NAV) of an open-end investment company is $22.20 and its sales charge is 8%. What is the public offering price? A) $20.42 B) $22.20 C) $23.98 D) $24.13

D) $24.13 The public offering price (POP) or asked price is $24.13. To find the POP, the net asset value is divided by the complement of the sales charge, as follows: NAV / (100% - sales charge) $22.20 / (100% - 8%) $22.20 / 92% $22.20 / 92% = $24.13 Remember, a mutual fund's sales charge is always expressed as a percentage of the POP. For this reason, it is incorrect to multiply the sales charge (8%) by the NAV ($22.20).

Which statement best summarizes the difference between a primary and secondary distribution? (Chpt 11) A) A primary distribution can only be made for equity issues, while a secondary distribution can only be made for debt issues. B) A primary distribution must be made at the current market price, while a secondary distribution must be made at a fixed public offering price (POP). C) A primary distribution can only be made if the issuance exceeds a specified dollar amount, while a secondary distribution can be made for issues of any size. D) primary distribution involves the sale of new shares by the issuer, while a secondary distribution involves the sale of shares that are already issued and outstanding.

D) A primary distribution involves the sale of new shares by the issuer, while a secondary distribution involves the sale of shares that are already issued and outstanding.

Which of the following is NOT included in a list of institutional investors? A) hedge fund B) A public pension plan C) An insurance company D) An accredited investor

D) An accredited investor Rationale: Institutional investors are typically large entities that pool their money to purchase securities. Institutional investors include banks, insurance companies, pension plans, endowments, and hedge funds. Some accredited investors may also be institutional investors, but not all. Under Regulation D, the definition of an accredited includes individuals who meet either one of the following two criteria: Have a net worth of at least $1 million (excluding their primary residence) or, Have gross annual income of at least $200,000 (or $300,000 combined with a spouse) for each of the past two years, with the anticipation that this level of income will continue.

Under MSRB rules, firms that transact business in municipal securities are required to notify customers of the availability of a investor brochure: A) Only when the account is opened B) With each customer statement C) Each quarter D) Annually

D) Annually

Which of the following is the rate that commercial banks charge on loans to broker-dealers for margin purposes? A) Prime rate B) Discount rate C) Federal funds rate D) Call rate

D) Call rate

An individual wants a real estate investment that offers tax benefits and provides the ability to share directly in the earnings of the business. Which of the following BEST meets those objectives? A) ETN B) REIT C) ETF D) DPP

D) DPP

Which of the following statements describes the greatest risk associated with mortgage-backed securities? A) Borrowers might default on their mortgage payments B) The market for mortgage-backed securities is illiquid C) The market price of the bonds might fall due to a rating downgrade D) Falling interest rates might accelerate early repayment of principal

D) Falling interest rates might accelerate early repayment of principal Rationale: Mortgage-backed securities are subject to prepayment risk. The early return of principal would then need to be reinvested when rates are low. Many mortgages that underlie mortgage-backed securities are backed by government guarantees or private mortgage insurance, which insulates many holders from defaults on the underlying mortgages.

Which of the following choices helps the U.S. balance of payments? A) U.S. corporations building plants abroad B) Lending money to foreigners at high interest rates C) U.S. investment in foreign securities D) Foreign investment in the U.S.

D) Foreign investment in the U.S.

Why do no-load mutual funds have lower expense ratios than mutual funds with a sales load? A) No-load funds cannot assess 12b-1 fees. B) Fees for managing no-load funds are always lower when compared to mutual funds with sales loads. C) Sales loads on mutual funds will increase the annual expense ratio of the mutual fund. D) No-load funds cannot assess a 12b-1 fee that exceeds 25 basis points.

D) No-load funds cannot assess a 12b-1 fee that exceeds 25 basis points.

If an investor's portfolio is significantly weighted with mortgage-backed securities, she is MOST concerned with: A) Credit risk B) Political risk C) Legislative risk D) Prepayment risk

D) Prepayment risk

Which of the following statements is NOT TRUE regarding the Uniform Gifts to Minors Act? A) Only one custodian is allowed for each account B) The minor is responsible for all taxes due on dividends and interest received from securities held in the account C) Only an adult may be a custodian D) Securities must be held in the name of the brokerage firm

D) Securities must be held in the name of the brokerage firm

The primary concern for investors who use a buy-and-hold strategy to maintain their portfolios is: A) Interest-rate risk B) Reinvestment risk C) Opportunity cost D) The allocation of assets

D) The allocation of assets Rationale: If an investor follows a buy-and-hold approach and fails to adjust the allocation of assets as the portfolio drifts, the portfolio balance will be altered and may no longer meet the investor's objectives. Although the individual investments within the portfolio are subject to various risks, those risks don't necessarily affect the allocation of the assets.

person has had a brokerage account with an online securities trading firm, but has just been hired by a broker-dealer. Which of the following statements is TRUE? A) The person is not permitted to maintain the account. B) The person is only permitted to maintain the account if a principal of the employing firm provides written approval for each order prior to the order being entered. C) The person is permitted to maintain the account if his employer provides written consent within three months of being hired. D) The person is permitted to maintain the account if his employer provides written consent within 30 days of being hired.

D) The person is permitted to maintain the account if his employer provides written consent within 30 days of being hired.

Preliminary Prospectus (Red herring)

During cooling off period, can send a condensed form of the registration statement to potential buyers Includes: -Red writing that has been filed with SEC, but not declared effective -offers a price range (not a single price)

Rule 144 -Holding Period -Filing Req

For controlled and restricted stock: -Holding Period: for restricted stock its 6m for a reporting company and 1 year for a non-reporting company -Filing Req: Must file for either at the time wish to sell

Offering Memorandum

For private placements, no registration with SEC is need just a private placement memorandum (PPM)

Securities Act of 1933

Need to file with offering it make sure investors have adequate info

Post Effective Period

The Public Offering Price (POP) is set by the U/Ws. Now can start selling

Selling Group

When syndicate recruits other B/Ds to assist in the distribution -Do not assume financial liab, instead just help with selling -must sign selling group agreement **Distribution participants = U/Ws + Selling Group

Regulation D

an issuer private placement of securities qualifies for an exemption provided the following conditions are met: (1) the issuer has reasons to believe the buyer is sophisticated (2) buyer must have access to same info (PPM) (3) Issuer must be assured the buyer does not intend to quick sell (lock-up agreement) (4) the securities are sold to no more than 35 accredited investors **Restrictive Legend- printed on the face of the certificate and indicate that have not been registered with the SEC

Shelf Registration

certain issuers of existing publicly traded securities can utilize a form of registration that allows them to sell additional securities on either a delayed or continuous basis (reasonably sold within 3 years )

Registration Statement

detailed info about the issuer, it's business, its owners, and its financial condition. Includes: -the character of the issuer's business -a BS created within 90 days prior to filing of the registration -Financial stmts for latest 3 years -The amount of capitalization and use of proceeds -Funds paid to affiliate persons or business of the issuer -Shareholdings of execs, officers, underwriters, etc. No Guarantees (Section 23 of the Securities Act of 1933): SEC does not guarantee the truthfulness of the information that's contained within a registration stmt

Subsequent offering (after IPO) normally priced at

discount to existing shares

State or Blue-Sky Laws

issuers are required to comply with state registration laws for the securities they issue in the cooling off period 3 methods of state securities registrations are: (1) Notification (filing)- not allowed in all states, submit an application to state administrator asking for approval (2) Coordination- this form is complete simultaneously with a federal registration that's field under the securities act (3) Qualification- meeting the specific requirements of one state and becomes effective at the discretion of the state administrator

Rule 144A

permit the sales of restricted securities to sophisticated investors without being subject to the conditions that are imposed by Rule 144. -144A: creates a more liquid private placement market, After issuance may be immediately resold to QIBs **can sell to QIBs whenever want

Private Investment in Public Equity (PIPE)

private placement that occurs after a company's IPO

Effective Date

represents the end of the cooling-off period and the beginning of post-effective period **normally 20 days after filing

Syndicate Letter

written agreement among the syndicate and states everyones obligations