Unit 20 Marketing New Issues

Under which of the following terms does the underwriter act in a dealer capacity? A) Best efforts B) Selling group C) Syndicate D) Firm commitment

D) Firm commitment 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.

Each of the following trades occurs in the secondary market except A) an agent buying unlisted securities for a client. B) an insurance company buying corporate bonds directly from another insurance company. C) a specialist (designated market maker) on the NYSE buying stock as a principal. D) a corporate bond syndicate selling new issues to the public.

D) a corporate bond syndicate selling new issues to the public. New issues sell in the primary market. Sales between investors are always in the secondary market.

Which of the following is contained in an official notice of sale? A) Agreement among underwriters B) Delivery date C) Amount of good-faith deposit required with the bid D) Reoffering yields on the bond

C) Amount of good-faith deposit required with the bid The official notice of sale contains the information a syndicate needs to prepare a bid, including the amount of the good-faith deposit the syndicate must submit with the bid. The delivery date has not been determined. The syndicate develops the yield for each maturity and the agreement among underwriters.

TCB Corporation wants to offer $75 million worth of common stock solely to residents of its home state. The issue will not be registered at the federal level. What type of registration will TCB use to register with the state? A) Notice filing B) Coordination C) Qualification D) Regulation D

C) Qualification 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.

If the State of Texas has solicited bids for a proposed municipal bond offering, the underwriters for that offering would be the syndicate that would A) generate the most proceeds for the State of Texas. B) sell the issue at the highest price. C) sell the issue at the lowest net interest cost to the State of Texas. D) sell the issue at the lowest price.

C) sell the issue at the lowest net interest cost to the State of Texas. The syndicate manager that offers the lowest net interest cost to the State of Texas will be awarded the bid. Once the State of Texas decides how much money it must raise, the question is how much this issue will cost in net interest during its entire life. Keeping it simple, the borrower (the state) is looking to borrow money at the lowest rate.

Regarding a summary section and a statement of additional information (SAI) for management investment companies, which of the following is true? A) A statement of additional information need not be included in the prospectus of a management company. B) Both must be included in the prospectus of a management company. C) Neither are required to be in the prospectus of a mutual fund. D) A summary section need not be included in the prospectus of a mutual fund.

A) A statement of additional information need not be included in the prospectus of a management company. A statement of additional information (SAI) need not be in a prospectus. It must be available for investors in open- and closed-end investment companies. It consists of information that is not necessarily needed to make an informed purchase decision but is still useful to the investor. The SEC, however, mandates that enhanced disclosure in the form of a summary section be included in the prospectus of open-end investment companies (mutual funds). It must be written in plain language, and the SEC mandates which items must be addressed in the summary and in what order.

A municipal bond underwriter looking in The Bond Buyer would recognize the percentage of new issues sold versus new issues offered for sale the prior week as A) the acceptance or placement ratio. B) the visible supply. C) the revenue bond index. D) the general obligation (GO) index.

A) the acceptance or placement ratio. The placement ratio, also known as the acceptance ratio, is compiled weekly and reflects the municipal bonds sold divided by the municipal bonds offered in the previous week.

To be designated as an accredited investor under Regulation D, a married couple must have an income in excess of A) $200,000 for the past two years with an expectation of reaching that level again this year. B) $300,000 for the past two years with an expectation of reaching that level again this year. C) $500,000 for the past two years with an expectation of reaching that level again this year. D) $100,000 for the past two years with an expectation of reaching that level again this year.

B) $300,000 for the past two years with an expectation of reaching that level again this year. To be accredited, a couple must have more than $300,000 in annual income for the past two years with an expectation of reaching that level again this year. For individuals, the income threshold is more than $200,000.

A Western account underwriting of $100 million in municipal bonds is established. A member firm agrees to underwrite 10% of the issue and sells out its entire allotment of $10 million. However, some of the other firms participating in the underwriting are unable to sell their full allocation, and $15 million of the bonds remain unsold. What is the financial obligation of the underwriting firm who sold their entire allotment? A) $150,000 B) $1.5 million C) Pooled responsibility for $15 million D) $0

D) $0 Divided liability in a Western account means that if a member meets its commitment, it has no further liability for unsold bonds. If that had been an Eastern account, the member would be obligated for 10% of the unsold bonds, or $1.5 million.

Which of the following underwriting arrangements is associated with an invitation, typically found in The Bond Buyer, directed at investment bankers and broker-dealers, intended to solicit interest in underwriting a new municipal issue? A) All or none B) Negotiated C) Best efforts D) Competitive bid

D) Competitive bid With a competitive bid underwriting, a municipality publishes invitations to bid in The Bond Buyer or another municipal bond publication. Investment bankers and broker-dealers interested in underwriting the new municipal issue would respond to the invitation to bid.

Your firm is bidding on a new general obligation bond issue. As the issuer weighs and evaluates the competitive bids, what factor will be most important in deciding who will be awarded the winning bid? A) Takedown B) Scale C) Concession D) Net interest cost

D) Net interest cost Net interest cost measures an issuer's overall cost of borrowing for a particular bond issue. It is, therefore, the most important item an issuer considers when evaluating competing bids.

The Jefferson County Water Works revenue bond is being underwritten by a syndicate led by ABC Securities, Inc. The bond has serial maturities going out up to 25 years with a balloon at 30. The coupons range from 3.2% to 4.1%, and all the bonds are offered at par. The terms of the syndicate agreement call for a total takedown of ¾ of a point with a selling concession of ½ point. A syndicate member who sells 500 of the bonds will earn A) $3,750. B) $7,500. C) $2,500. D) $6,250

A) $3,750 When a member of the syndicate sells a bond it is entitled to the total takedown—in this case, ¾ of a point ($7.50) per bond. The computation is 500 bonds sold × $7.50 per bond = $3,750 underwriting profit. Remember that the concession would only go to those who are not members of the syndicate but are part of the selling group instead. Did you notice how much extraneous information is in this question?

Danielle is the CFO of the XYZ Manufacturing Company. XYZ's shares are listed on the NYSE. She purchased shares of XYZ common stock through her registered representative of a FINRA member firm 165 days ago and, wishing to add on to her home, sells the stock and realizes a $50,000 profit. Under SEC rules, how will this transaction be treated? A) This is considered a short-swing profit and it must inure to the benefit of the issuer. B) The sale will be reversed and she will have her initial investment returned to her. C) Because the shares were purchased in the open market, she gets to keep the profit. D) This is a violation of the rules on insider trading and could result in fines and/or imprisonment.

A) This is considered a short-swing profit and it must inure to the benefit of the issuer. The first point to understand is that this question has nothing to do with Rule 144 concerning the sale of control or restricted stock. It relates to another SEC rule that also deals with control stock, but for a different purpose. As an executive officer, Danielle is subject to the short-swing profits rule involving the sale of control stock. When control stock is sold prior to a six-month holding period, any profits are defined as short-swing profits and must be disgorged to the issuer. The phrase "inure to the benefit" refers to the profits being returned to the issuer.

A limited partnership brought to market through a Rule 506(b) private placement may be sold to any of the following except A) an unlimited number of unaccredited investors. B) an investor with over $1 million net worth. C) 35 unaccredited investors. D) an unlimited number of accredited investors.

A) an unlimited number of unaccredited investors. The primary sale of a limited partnership through a private placement is usually done in compliance with Regulation D. Under Rule 506(b), the offering is limited to a maximum of 35 non-accredited investors with the rest required to meet the accredited investor standard. Rule 506(c) is for accredited investors only, but unlike Rule 506(b), advertising is permitted. An accredited investor would include an investor with $1 million in net worth, not including net equity in a primary residence; an individual who has earnings in excess of $200,000 in each of the two previous years with a reasonable expectation of reaching that level in the current year ($300,000 if jointly with spouse); or an individual who is an officer or insider of the offering. Also, any large financial institution—such as a bank, an insurance company, or a savings and loan—would be considered an accredited investor.

Which of the following is associated with a process whereby a municipal issuer first appoints and then works with the underwriters who will be establishing the interest rate and offering price for a new municipal bond issue? A) Western underwriting B) Negotiated underwriting C) Eastern underwriting D) Competitive bid

B) Negotiated underwriting In a negotiated underwriting the municipality appoints an underwriting group of investment bankers or broker-dealers to underwrite the offering. The underwriters will then work with the municipal issuer to establish the interest rate and offering price of the new issue to best meet the municipality's needs and in light of current market conditions.

Which of the following exemption provisions of the Act of 1933 may not be used for an initial offering of securities? A) Rule 147 B) Rule 144 C) Regulation A D) Regulation D

B) Rule 144 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.

Which of the following documents spells out the rights of each member of the underwriting syndicate and how the issue is allocated? A) Legal opinion B) Syndicate letter C) Preliminary official statement D) Official notice of sale

B) Syndicate letter The syndicate letter (also called the agreement among underwriters, syndicate agreement, syndicate account letter, or account summary report) is the document that forms the syndicate and spells out each member's rights and obligations. The allocation of the new bond offering that is accorded each syndicate member is detailed in this agreement.

The Securities and Exchange Commission regulates all of the following except A) investment adviser and client relationships. B) intrastate securities offerings. C) initial public stock offerings. D) the secondary market.

B) intrastate securities offerings. 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 a single state and solely to residents of that state, it will generally qualify for the Rule 147 exemption from registration. However, it will likely have to register in that state before the offering may take place.

All of the following are exempt securities except A) bankers' acceptances. B) municipal bond mutual funds. C) commercial paper. D) T-bills.

B) municipal bond mutual funds. While municipal bonds are an exempt security, bond mutual funds are not; they are investment company securities, which must be registered with the SEC prior to public sale.

The ABC Corporation would like to raise capital via a Regulation D private placement. Under Rule 506(c), which of the following statements is true? A) If the offering is limited to no more than 35 nonaccredited investors, advertising is permitted. B) Private placements under Regulation D cannot be publicly advertised. C) If the offering is limited to accredited investors, advertising is permitted. D) Under Rule 506(c), a prospectus is only required for nonaccredited investors.

C) If the offering is limited to accredited investors, advertising is permitted. Rule 506(c) of Regulation D differs from Rule 506(b) in that all of the investors must be accredited. In that case, advertising is permitted. It is Rule 506(b) that permits the exemption if no more than 35 of the investors are nonaccredited, but advertising would not be permitted. If the sale is exclusively to accredited investors, the private placement may advertise.

A member of the board of directors of the Able Baker Charlie Company (ABCC) took her director's fees and purchased 200 shares of ABCC on the Nasdaq Stock Market at $20 per share. If she wished to sell these shares, compliance with Rule 144 would entail A) meeting a time limit, but not a size limit. B) meeting both a size limit and a time limit. C) meeting a size limit, but not a time limit. D) meeting neither a size limit nor a time limit.

D) meeting neither a size limit nor a time limit. A member of the board of directors of a publicly traded corporation is considered a control person. These individuals come under the provisions of Rule 144 when they wish to sell their stock in the company. In this question, there are two factors to consider. The first is that the stock is not restricted. How do we know that? Because it was purchased on the Nasdaq Stock Market in a secondary transaction. Therefore, there is no time limitation before she can sell. The second is that the sale meets the de minimis level (no more than 5,000 shares and less than $50,000). That means there is no need to file a Form 144 with its size limitations (the greater of 1% of the total outstanding shares of the same class at the time of sale, or the average weekly trading volume in the stock over the past four weeks on all exchanges or as reported through Nasdaq.) Be careful to answer the question being asked, because there is another issue for this director to consider. Section 16(b) of the Securities Exchange Act of 1934 prohibits control persons from taking short-swing profits, defined as those realized within a period of less than six months. You can read more about that in your LEM at LO 20.e.

The primary difference between an underwriting syndicate member and a selling group member in a firm commitment underwriting is that A) the securities offered by each differs within the offering. B) the size of a syndicate member firm will always be larger than a selling group member firm. C) the price per share paid by the public (POP) is more if purchasing new shares from a selling group member. D) the syndicate member assumes liability for unsold shares and the selling group member does not.

D) the syndicate member assumes liability for unsold shares and the selling group member 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 the 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.