Series 7 Review - Unit #1
If the customers of a selling-group member sell into a penalty stabilizing bid, the selling-group member must pay back to the underwriter the: A) reallowance. B) give up. C) concession. D) spread.
C If selling-group members liquidate into the stabilizing bid, they may be required to return the concession they were originally paid. Reference: 1.6.6 in the License Exam Manual
Which of the following would NOT be considered institutional communications with the public? A) A communication with an individual designated to act on behalf of your institutional customer B) A letter to another broker/dealer C) An internal memo promoting a new product that will be offered to your firm's institutional customers only D) A letter to a municipality offering your firm's services as an underwriter
C 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
Which of the following exemption provisions of the Act of 1933 may not be used for an initial offering of securities? A) Regulation A B) Regulation D C) Rule 144 D) Rule 147
C Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities. 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
All of the following are included to represent communications with the public EXCEPT A) market letters B) billboards C) internal memos D) research reports
C Each of the terms qualifies as either a form of advertising or sales literature except internal memos, which are communications pieces intended only for use within the broker/dealer and not for public distribution. Reference: 1.1.1 in the License Exam Manual
Smith and Company, a FINRA member firm, is preparing to underwrite securities to be issued by KLC Corporation for a new business venture. For which of the following will Smith and Company be responsible? I. Filing the registration statement with the SEC and state regulatory bodies. II. Providing advice on the type of security to be issued. III. Distributing the security to the public. IV. Providing advice on how KLC can best utilize the funds raised. A) II and III. B) I and III. C) I and IV. D) II and IV.
A The issuer is ultimately responsible for filing registration statements with federal and state regulatory bodies and has already determined how the money will be used. The underwriter confines his activities and advice to the type and sale of the securities. Reference: 1.6.4 in the License Exam Manual
A member firm receives an order from an investment adviser to purchase shares in a common stock IPO. Regarding restricted persons, the member must: A) obtain a list of all of the adviser's clients to determine eligibility. B) obtain a representation from the conduit that the purchaser is not a restricted person. C) refuse to accept the order. D) obtain a list of the client(s) whose account(s) will be credited with the shares in order to determine eligibility.
B When receiving an order to buy a new equity issue from a bank, investment adviser, or other conduit, a member must obtain a representation from the conduit that all purchasers are in compliance with rules regarding sales of new issues to restricted persons (i.e., they are not restricted persons). Reference: 1.7.6 in the License Exam Manual
Which of the following statements regarding a Rule 144 sale of restricted stock are TRUE? I. Stock sold through a 144 sale is considered registered stock after the sale. II. After holding the stock for 6 months, nonaffiliates may sell unrestricted. III. After holding the stock for 6 months, there are no volume restrictions for affiliates. IV. Form 144 must be filed with the SEC at least 10 business days before a 144 sale made by an affiliate. A) II and III. B) III and IV. C) I and III. D) I and II.
D Stock sold through a 144 sale is considered registered stock after the sale. When required to be filed by affiliates or insiders, Form 144 must be filed with the SEC on or before the date of sale. After holding the stock fully paid for 6 months, nonaffiliates may sell unrestricted but affiliates are subject to the volume restrictions of Rule 144. Reference: 1.7.4 in the License Exam Manual
Under which of the following terms does the underwriter act in a dealer capacity? A) Selling group B) Best efforts C) Syndicate D) Firm commitment
D The firm commitment is the most commonly used type of underwriting contract. Under its terms the underwriter commits to buy the securities from the issuer, and as such is acting in a dealer capacity. Reference: 1.6.5 in the License Exam Manual
An investor and his father own 8% and 5%, respectively, of a corporation's outstanding shares, and the father wants to sell his holding. According to Rule 144, which of the following statements are TRUE? I. He must file Form 144 to sell the shares. II.He does not have to file Form 144 to sell the shares. III. He is considered an affiliated person. IV. He is not considered an affiliated person. A) II and III. B) I and III. C) I and IV. D) II and IV.
D Under Rule 144, an affiliate is a person in a control relationship with an issuer. Because neither of the investors own at least 10% of the stock, they are not control persons under Rule 144 and do not have to comply with the rule. There is a requirement to combine holdings by certain family members, such as a spouse or other immediate family residing in the same home. If the question indicated that the father and son share the same residence, then the filing requirements of the rule would apply because the 13% total would make them control persons. Reference: 1.7.4 in the License Exam Manual
A generic ad for an investment company placed by a broker-dealer would contain A) the name of the broker-dealer placing the ad, but not the name of the investment company B) both the name of the investment company and the broker-dealer C) the name of the investment company, but not the name of the broker-dealer D) neither the name of the investment company nor the broker-dealer
A Generic advertising of investment companies presents a nonspecific introduction to investment company shares. A specific fund or investment company is not mentioned in generic advertising, but the broker-dealer who is placing the ad must be named. Reference: 1.2.5 in the License Exam Manual
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) is not necessary if unaltered and used as originally intended 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) must be done 10 days before your broker dealer can use it, even if unaltered
A 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
To be exempt under Regulation D of the Securities Act of 1933, the sale of securities must be limited with respect to the number of: A) nonaccredited investors to whom the security is sold. B) shares issued. C) broker/dealers who offer the securities. D) agents authorized to sell the security.
A Regulation D provides a private placement exemption for securities that are sold to no more than 35 nonaccredited investors. There is no limit to the number of shares that can be issued nor the number of accredited investors who may purchase the shares. Reference: 1.7.2 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) Rule 144. B) Regulation A. C) Rule 147. D) Regulation D.
A 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
The Securities and Exchange Commission regulates all of the following EXCEPT A) intrastate securities offerings B) the secondary market C) initial public stock offerings D) investment adviser and client relationships
A The Securities and Exchange Commission was created by the Securities Exchange Act of 1934 as a federal commission with the power to enforce the Securities Act of 1933 and all subsequent federal securities acts. If a security is being offered in only a single state, however, it need not register with the SEC but, according to Rule 147, only in the one state (intrastate) where it is being offered. Reference: 1.7.3 in the License Exam Manual
All of the following identify exemptions from the registration statement and prospectus provisions of the Securities Act of 1933 EXCEPT: A) Regulation D. B) Regulation U. C) Regulation A. D) Rule 147.
B Regulation U regulates loans from lenders other than broker/dealers for the purpose of purchasing securities and is not related to exempt transactions under the Securities Act of 1933. Reference: 1.7 in the License Exam Manual
Under one of the provisions allowing a company to qualify under Rule 147 for an intrastate exemption, what percentage of an issuer's gross business revenues must be derived from sales within the company's home state? A) 90% B) 80% C) 100% D) 70%
B Any one of the three 80% test provisions can be met to qualify for a Rule 147 Intrastate exemption. One of the provisions states that at least 80% of an issuer's gross revenue must be derived from the company's home state. In addition, there is a fourth test which may be used; a majority of the issuer's employees are based in the state. Reference: 1.7.3 in the License Exam Manual
An issuer may direct sales of a new issue to all of the following EXCEPT: A) officers of its largest supplier. B) officers of the managing underwriter. C) officers of its largest customer. D) officers of the issuer.
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
The ABC Corporation would like to raise capital via a Regulation D private placement. Regulation D is the private placement exemption from registering with the SEC. Rule 506(c) of the Regulation states that advertising is A) allowed if selling to a maximum of 35 nonaccredited investors. B) allowed if the offering is limited solely to accredited investors. C) allowed if selling to a maximum of 35 accredited investors. D) never allowed under any provision of Regulation D
B Rule 506(c) of Regulation D permits advertising of a private placement as long as the offering is limited to accredited investors only. There is no maximum number of accredited investors permitted under Rule 506(c). Rule 506(b) has a maximum limit of 35 nonaccredited investors in order for the registration exemption to apply, but advertising is never permitted under that rule, regardless of the number. Reference: 1.7.2 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) only if the securities being distributed will be immediately listed for trading on the NYSE or other exchange. B) only if notice is given in the prospectus. C) under no circumstances. D) without restriction.
B 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
Under which of the following circumstances will an investor be considered accredited under Regulation D? A) $1 million net worth excluding net equity in a primary residence or $100,000 annual income in the last two years. B) $1 million net worth excluding net equity in a primary residence or $200,000 annual income in the last two years. C) $200,000 net worth and $200,000 annual income in the last two years. D) $1 million net worth including any equity in a primary residence and $100,000 annual income in the last two years.
B 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
When an officer or director acquires control stock when a company goes public and then wants to sell the securities to a retail investor, what is the mandatory holding period? A) 3 months B) 6 months C) None D) One year
C Because the securities were received in a public offering, the securities are registered securities (not restricted) and therefore there is no holding period. However, the sale is subject to Rule 144 volume limits. Control stock that is received in something other than a public offering is restricted and would have a 6 month holding period in addition to volume limitations. Reference: 1.7.4 in the License Exam Manual
If a wife owns 9% of the common shares of XYZ, and her husband owns 2% and wishes to sell his shares, he: I. is considered an affiliate. II. is not considered an affiliate. III. must file a Form 144 to sell. IV. does not have to file a Form 144 to sell. A) I and IV. B) II and IV. C) I and III. D) II and III.
C If a husband and wife (either individually or jointly) own a combined total of 10% or more of a corporation's voting shares, they are considered affiliates and are subject to the requirements of SEC Rule 144. Reference: 1.7.4 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. A) II and IV. B) I and II. C) III and IV. D) I and III.
C 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
All of the following statements regarding municipal bond official statements are true EXCEPT: A) a retail customer must receive an official statement no later than the settlement date. B) all retail purchasers of a new municipal bond issue must receive a final official statement. C) the MSRB requires issuers to prepare a final official statement for new municipal bond issues. D) an official statement must be delivered only upon request of a retail customer.
D A final official statement must be delivered to retail buyers of a new issue on or before the settlement date. The MSRB does not regulate issuers, but does make this requirement of its member brokers and dealers. Reference: 1.6.12 in the License Exam Manual
If QRS, Inc., makes a new offering not registered with the SEC to accredited investors, this arrangement is called a(n): A) intrastate offering. B) Rule 144 offering. C) secondary offering. D) private placement.
D A private placement, which is exempt from registration with the SEC, is an offering of a new issue to an unlimited number of accredited investors and, for larger offerings, a maximum of 35 nonaccredited investors. Reference: 1.7.2 in the License Exam Manual
A new issue has been filed with the SEC and a final prospectus can be found on the SEC website. This information has been made known to a customer interested in the securities. In this instance, the access equals delivery requirements regarding that prospectus A) have been met for mutual funds only B) have not been met as a prospectus must always be physically delivered C) have been met for equity issues only D) have been met
D A prospectus must precede or accompany a security for sale and will be deemed so if the final prospectus has been filed with the SEC. Because prospectuses filed with the SEC can be viewed on the SEC website, the access equals delivery requirement is satisfied. Reference: 1.6.8 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 can be advertised to all except the 35 nonaccredited investors B) The offering may not be advertised C) Anyone may be solicited D) While the offering can be advertised to anyone, only accredited investors could be solicited to purchase shares
D 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
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: A) 25% B) 5% C) 20% D) 10%
D 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
TCB wants to offer $75 million worth of common stock in its home state. It will not register at the federal level. What type of registration will TCB use to register with the state? A) Coordination B) Regulation D C) Notice D) Qualification
D If the registration is just with one state, the registration will be done through qualification. Qualification means that the state will collect all the information and decide whether or not to clear the offering for sale in the state. Reference: 1.6.3 in the License Exam Manual
Private placements A) may never be advertised under any circumstance B) may be advertised under all circumstances C) can only be advertised when 35 or fewer of the investors are nonaccredited D) may be advertised if all of those solicited are accredited inv
D 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
An affiliate or insider holding unregistered shares can sell under Rule 144: A) 12 times a year. B) 2 times a year. C) 1 time a year. D) 4 times a 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
Rule 144A regulates: A) companies traded on the NASDAQ Global Select Market. B) the sale of restricted stock by control persons. C) personal trading by research analysts. 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
