Q Bank Unit 7

Which of the following securities is NOT exempt from the registration provisions of the Securities Act of 1933? A) A new stock being offered in three states. B) A U.S. government bond. C) A high-quality corporate zero-coupon bond maturing in 180 days. D) An equity security issued in only one state solely to residents of that state.

Answer: A Government securities, money-market instruments, and intrastate offerings are exempt from the registration provisions of the 1933 Act. A stock being offered in three states would have to register with the SEC and with those states.

Which of the following characteristics describes a final prospectus? A) Complies with the full and fair disclosure requirements of the Securities Act of 1933. B) Used to solicit indications of interest in a new issue. C) Filed with the SEC and not available to the general public. D) Filed with the SEC semiannually.

Answer: A A prospectus is a disclosure document meant for distribution to the public. It must constitute full and fair disclosure of all material facts about the issuer and the security.

Your customer wishes to purchase shares of an IPO. During the cooling- off period, the customer can: A) indicate an interest in the offering. B) pay in advance for shares to be purchased when the cooling-off period ends. C) enter an order to sell the new issue short upon the effective date. D) purchase shares in limited amounts.

Answer: A 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.

A shelf registration statement is good for two years, but once effective with the SEC, it allows shares to be sold over a maximum period of: A) 3 years. B) 30 days. C) 90 days. D) 1 year.

Answer: A Shelf offerings provide an issuer with the flexibility to raise money as needed throughout a 3-year period.

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) $.80. B) $.60. C) $.70. D) $.90.

Answer: A The spread is the sum of the manager's fee, the underwriting fee, and the selling concession.

Under the provisions of Rule 147, what percentage of an issuer's gross business revenues must be derived from sales within the company's home state? A) 1. B) 0.8. C) 0.7. D) 0.9.

Answer: B One of the provisions of Rule 147 states that at least 80% of an issuer's revenues must be derived from the company's home state.

The Securities Act of 1934 deals with all of the following EXCEPT: A) marking sales long or short on an order ticket. B) filing an updated prospectus . C) filing of financial statements by broker/dealers. D) monitoring accounts for insider trading violations.

Answer: B Prospectus filing is a requirement of the Securities Act of 1933.

Which of the following are characteristics of the Securities Act of 1933? Requires registration of exchanges. Called the Truth in Securities Act. Requires full and fair disclosure of material facts. Enabled the Federal Reserve Board to determine margin requirements. A) II and IV. B) II and III. C) I and II. D) I and III.

Answer: B The Securities Act of 1933 regulates new issues of corporate securities sold to the public. The act is also referred to as the Full Disclosure Act, the Paper Act, the Truth in Securities Act, and the Prospectus Act. The purpose of the act is to require full, written disclosure about a new issue. The Securities Exchange Act of 1934 requires registration of exchanges with the SEC and enabled the FED to set margin requirements.

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) under no circumstances. C) only if notice is given in the prospectus. D) only if the securities being distributed will be immediately listed for trading on the NYSE or other exchange.

Answer: C Stabilizing transactions are permitted if the SEC is notified in the registration statement and the investing public is notified in the prospectus.

A registered representative opens a new account for an investment club. His spouse is a member of the club and owns 15% of the club's assets. The registered representative wants to sell shares of a common stock IPO to the investment club. This is allowed: A) with written principal approval. B) with written notice to the SEC. C) only if the IPO is suitable for the investment club. D) under no circumstances.

Answer: D Rules prohibit member firms from selling common stock IPOs to restricted persons. Under the rules the account would not be restricted if the assets owned by the spouse composed less than 10% of the club's assets. Because the registered representative's spouse is a member of the investment club and owns more than 10% of the club's assets, the registered representative cannot sell shares of the IPO to the club.

If XYZ Corporation intends to offer stock in a public offering, it must do all of the following EXCEPT: A) publish a tombstone advertisement. B) issue a prospectus. C) file a registration statement. D) register the securities with the SEC.

Answer: A Tombstones are advertisements often appearing in business newspapers to publicize new issues and are generally placed by a syndicate manager. They are not required.

During the cooling-off period, a registered representative (in order to highlight key points) marks a preliminary prospectus and sends it to a client. This action is: A) prohibited. B) permitted without restriction. C) permitted if approved by a principal. D) permitted if the customer is an accredited investor.

Answer: A Under no circumstances may a registered representative mark a preliminary or final prospectus.

Your customer is interested in purchasing shares of a new issue where the demand for shares has already exceeded the number of shares the issuer intends to offer. Which of the following options might you look for that could allow your customer to receive shares? A) Firm commitment offering B) Over-allotment (Green Shoe Provision) C) Selling group D) Regulation A offering

Answer: B An over-allotment option (Green Shoe Provision), if one exists in the underwriting agreement, will allow the underwriters to sell up to 15% more shares than the issuer had originally intended to offer when demand exceeds supply.

All of the following may occur during the mandatory 20-day cooling-off period EXCEPT: A) forwarding a preliminary prospectus to a customer. B) soliciting transactions for the security. C) the performance of due diligence by the underwriters. D) publishing a tombstone ad.

Answer: B During the 20-day cooling-off period, only unsolicited requests for information may be honored. Soliciting sales is prohibited.

If a member firm is underwriting an initial public offering of common stock for ABCD Corp., a new issue that qualifies for Nasdaq listing, a prospectus must be provided to all purchasers for how many days following the effective date? A) 90. B) 25. C) 40. D) 60.

Answer: B For new issues that qualify for listing on an exchange or Nasdaq, the prospectus delivery requirement period in the aftermarket is 25 days. For non-listed and non-Nasdaq securities the period is 40 days. If the new issue will be specifically quoted on the OTCBB or the electronic OTC Pink, the period is 90 days.

Which of the following are TRUE of an over-allotment option or provision for a new issue? One is found in every underwriting agreement. It allows the underwriters to sell up to 15% more than the original number of shares offered. It allows the underwriters to sell up to 2 times the original number of shares offered. It is a way for underwriters to address demand exceeding the number of shares originally offered. A) I and III B) II and IV C) III and IV D) I and IV

Answer: B The over-allotment option found in the underwriting agreement is a process allowed by the SEC to handle demand for new issues exceeding the number of shares originally intended to be offered by the issuer. Not all underwriting agreements contain an over-allotment option, but for those that do, the option or provision allows the underwriters to sell up to 15% more than the original number of shares offered.

Under Regulation A, when must a broker/dealer furnish an offering circular to purchasers? A) 72 hours before the confirmation. B) Concurrently with the mailing of the customer confirmation. C) 48 hours before the confirmation. D) 24 hours before the confirmation.

Answer: C Regulation A requires that an offering circular be provided to purchasers at least 48 hours before the confirmation of sale.

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? A) 12. B) 18. C) 9. D) 6.

Answer: C Rule 147 stock cannot be sold to a nonresident of the state for a period of nine months from the last date of sale by the issuer.

Which of the following activities are characteristic of a primary offering? Raising additional capital for the company. Selling previously issued securities. Increasing the number of shares outstanding. Buying previously issued securities. A) II and IV. B) III and IV. C) I and III. D) I and II.

Answer: C 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.

The Securities Exchange Act of 1934 regulates or mandates each of the following EXCEPT: A) manipulation of the secondary market. B) extension of credit to customers. C) full and fair disclosure on new offerings. D) creation of the SEC.

Answer: C 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.

Which of the following acts requires publicly traded corporations to issue annual reports? A) Trust Indenture Act of 1939. B) Investment Company Act of 1940. C) Securities Exchange Act of 1934. D) Securities Act of 1933.

Answer: C The Securities Exchange Act of 1934 mandates that public issuers file annual and quarterly reports with the SEC.

When an investment banker is successful on a competitive bid corporate underwriting in which they agree to purchase the shares from the issuer, the underwriters will be handling the offering as: A) an all or none. B) a best efforts. C) a standby underwriter. D) a firm commitment.

Answer: D An underwriting is known as a firm commitment when the investment banking firm (underwriters) winning the competitive bid have agreed to purchase the entire issue from the issuing corporation with the obligation to resell to the public.

Within a firm commitment underwriting, which document details the responsibilities and liabilities of each firm? A) Registration statement. B) Underwriting agreement. C) Letter of intent. D) Agreement among underwriters.

Answer: D The agreement among underwriters, also called the syndicate letter, is signed by representatives of all syndicate members and establishes a joint account to sell newly-issued securities.

The largest portion of an underwriting spread is the: A) manager's fee. B) underwriting fee. C) stabilizing bid. D) concession.

Answer: D The largest portion of the spread is the concession.

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

Answer: D 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.

All of the following are covered under the Securities and Exchange Act of 1934 EXCEPT: A) short sales. B) proxy solicitation. C) margin. D) trust indentures.

Answer: D Trust Indentures are covered under the trust indenture act of 1939.

Under SEC Rule 134, a tombstone advertisement includes all of the following EXCEPT: A) number of shares to be sold. B) the public offering price. C) names of the syndicate members. D) net proceeds to the issuer.

Answer: D Under SEC Rule 134, a tombstone advertisement may be placed by the syndicate manager on or before the offering's effective date and is limited to the name of the issuer, type of security being offered, number of shares to be sold, public offering price, and names of the syndicate members.

If QRS, Inc., makes a new offering not registered with the SEC to accredited investors, this arrangement is called a(n): A) private placement. B) secondary offering. C) Rule 144 offering. D) intrastate offering.

Answer: A 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.

Each of the following persons is (are) accredited under Regulation D EXCEPT: A) a person with a net worth of $200,000 or more. B) a person with annual income of $200,000 or more. C) an institution. D) an officer of the issuer.

Answer: A Accredited investors include individuals with annual incomes of $200,000 or more, individuals with a net worth of $1 million or more not including net equity in a primary residence, officers or directors of the issuer, and institutions.

An investor unaffiliated with the issuer is permitted to sell restricted stock without being subject to volume restrictions after having held the shares, fully paid, for a period totaling: A) 6 months. B) 1 year. C) 2 years. D) 3 years.

Answer: A After six months, an unaffiliated investor can begin selling restricted stock and is not subject to volume restrictions.

Under FINRA rules, if a member firm receives an order to buy a new equity issue on behalf of an undisclosed principal from a bank, the member must: A) obtain a representation from the bank that the purchaser is not restricted. B) accept the order. C) reject the order. D) determine the identity of the purchaser.

Answer: A If a member receives an order from a conduit such as a bank, the member must make an inquiry as to whether the ultimate purchaser is restricted. It is not necessary to determine the identity and business affiliations of the purchaser.

All of the following are required to be registered with the SEC EXCEPT: A) insurance companies offering fixed annuities to investors. B) national stock exchanges. C) securities associations, such as FINRA. D) securities analysts.

Answer: A Insurance companies are generally not required to be registered with the SEC.

An investor files the necessary forms to sell stock under Rule 144. The filing is effective for a maximum of how many days? A) 90. B) 30. C) 60. D) 120.

Answer: A Investors who wish to sell stock under Rule 144 must file Form 144 with the SEC. The filing is effective for 90 days.

Under which of the following circumstances may a member firm sell a new equity issue to one of its nonregistered employees? A) Under no circumstances. B) Amount purchased is small and not disproportionate to the size of the issue. C) Transaction is consistent with the employee's normal investment practice. D) Permission of a principal is obtained.

Answer: A Member firms and employees of members (registered and nonregistered) are prohibited from buying a new equity issue at the public offering price.

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.

Answer: 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.

Under the provisions of Rule 144, what percentage of outstanding stock may a control person sell every 90 days? A) 0.01. B) 0.03. C) 0.04. D) 0.05.

Answer: A Rule 144 (sale of restricted or control stock) allows for the sale of 1% of the outstanding shares or the weekly average of the last 4 weeks' trading volume (whichever is greater), every 90 days.

An affiliate of a corporation wants to sell 80 calls covered by 8,000 shares of Rule 144 stock she owns. This transaction is: A) not allowed because Rule 144 stock may not be sold unrestricted by an affiliate. B) allowed because the calls will be considered covered by the stock. C) allowed because the 8,000 shares of stock may be sold unrestricted. D) not allowed because an affiliate of a corporation may not trade options in the company's stock.

Answer: A Rule 144 stock is considered to be illiquid. It cannot be sold unrestricted by an affiliate and could, therefore, not be used to cover the calls in the event the calls were exercised.

An offering of securities in compliance with Rule 144A is sold primarily to: A) qualified institutional buyers. B) American individual investors. C) foreign individual investors. D) All of these.

Answer: A Rule 144A allows securities to be sold to (qualified) institutional buyers without having to meet the holding period or volume requirements of Rule 144.

Which of the following statements regarding a Rule 144 sale of restricted stock are TRUE? Stock sold through a 144 sale is considered registered stock after the sale. After holding the stock for 6 months, nonaffiliates may sell unrestricted. After holding the stock for 6 months, there are no volume restrictions for affiliates. Form 144 must be filed with the SEC at least 10 business days before a 144 sale made by an affiliate. A) I and II. B) I and III. C) II and III. D) III and IV.

Answer: A 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.

Under Regulation D, accredited investors in a private placement must meet minimum standards that may include which of the following? Annual income in excess of $200,000 for at least the last two years Annual income in excess of $100,000 for at least the last two years. Net worth in excess of $1 million not including net equity in a primary residence. Net worth in excess of $200,000. A) I and III. B) I and IV. C) II and III. D) II and IV.

Answer: A The requirement for an accredited investor under the private placement exemption is either a net worth in excess of $1 million not including net equity in a primary residence or annual income in excess of $200,000 in the last two years and the same or more income expected this year, or $300,000 for joint incomes.

The maximum amount of securities that can be offered under Regulation A is: A) $5 million per issuer but no more than $1.5 million for each selling affiliate. B) $500,000 per issue but no more than $500,000 per selling affiliate. C) $500,000 per issue but no more than $100,000 per selling affiliate. D) $1 million per issuer but no more than $500,000 for all selling affiliates.

Answer: A Under Regulation A, the dollar limit on sales is $5 million per issuer in any 12-month period. Persons affiliated with the issuer may sell up to $1.5 million each.

All of the following statements regarding corporate insiders are true EXCEPT: A) only public information may be used to make transactions. B) purchases may not be made through the exercise of options. C) reports of changes in holdings must be filed with the SEC. D) short selling is prohibited.

Answer: B A corporate insider is defined as an officer, director, 10% stockholder, or family member of an insider. Insiders are required to report any changes in their holdings to the SEC within two business days. The Securities Exchange Act of 1934 also prohibits short selling of company shares by company insiders. They cannot use inside (nonpublic) information for their own benefit.

All of the following are nonexempt securities EXCEPT a: A) U.S. government bond mutual fund share. B) fixed annuity. C) variable annuity unit. D) municipal unit investment trust share.

Answer: B A fixed annuity is an insurance product exempt from registration with the SEC. Variable annuities, which carry investment risk, are nonexempt securities under the Securities Act of 1933 and must be registered before public sale. Similarly, unit trusts and mutual funds are nonexempt even though the underlying securities may be exempt, such as municipals and U.S. government securities.

Under Regulation D, all of the following are accredited investors EXCEPT: A) an individual with annual income of $200,000 for the past two years. B) an individual with a net worth of $750,000. C) an officer or director of the issuer. D) an institution.

Answer: B Accredited investors include institutions, individuals with a net worth of $1 million or more not to include net equity in a primary residence, individuals with annual income of $200,000 or more, and officers and directors of the issuer.

Which of the following securities are exempt from the registration and disclosure provisions of the Securities Act of 1933? Any interest in a railroad equipment trust certificate. Municipal bonds. U.S. government securities. Commercial paper maturing in 270 days or less. A) II and III. B) I, II, III and IV. C) I and II. D) I and III.

Answer: B All the securities listed are exempt from the registration and disclosure provisions of the Securities Act of 1933.

An officer of a broker/dealer firm would be categorized as a restricted person if he attempted to purchase: A) call options on a stock he believed was going down in price. B) a new issue. C) closed-end funds on the secondary market. D) a municipal bond in a state where he does not reside.

Answer: B As restricted persons officers of broker/dealer firms or other institutional investors are prohibited from purchasing a new issue.

If a wife owns 9% of the common shares of XYZ, and her husband owns 2% and wishes to sell his shares, he: is considered an affiliate. is not considered an affiliate. must file a Form 144 to sell. does not have to file a Form 144 to sell. A) II and IV. B) I and III. C) I and IV. D) II and III.

Answer: B 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.

A corporate insider may profitably sell the stock of his company, without penalty, after the stock has been held for more than: A) 12 months. B) 6 months. C) 3 months. D) 9 months.

Answer: B If corporate insiders sell their stock at a profit, they must do so after having held the stock for at least 6 months. This is termed the short swing profit rule. If they sell at a profit without having met the holding period requirement, any profit earned must be disgorged to the company.

Securities issued outside the United States by US issuers and sold to non-US residents A) must be registered with the SEC B) are considered to be offered in an exempt transaction C) are considered to be offered in a nonexempt transaction D) are considered to be offered by an exempt issuer

Answer: B Regulation S, a type of exempt transaction allowed by the SEC, permits US issuers to offer securities offshore to non-US residents only, without being registered with the SEC.

Regarding the sale of a new issue, a customer becomes a restricted person if he is: A) a private investigator collecting information on one of the issuing firm's officers. B) a salesperson who works for the issuing firm's underwriter. C) the grandfather of an associated person of a member firm. D) a salesperson who works for a supplier of the issuing corporation.

Answer: B Restricted persons include FINRA member firms and their associated persons, plus immediate family members.

Underwriters and selling group members violate rules regarding sales of new equity issues to restricted persons when they do which of the following? Sell a new issue to one of their own customers. Sell blocks of the new issue to accounts of partners or officers of the member firm. Sell to member firms that deal only in investment company products. Sell to brokers and dealers outside the selling group who position the securities for later resale at higher prices. A) II and III. B) II and IV. C) I and III. D) I and IV.

Answer: B Rules prohibit the sale of a new equity issue to other brokers, partners, officers, employees of firms in the syndicate or selling group offering the issue, and their supported family members. Firms selling only investment company products and/or direct participation programs, and their employees, are exempt from these rules.

SEC Rule 145 requires a corporation to receive approval of its stockholders for certain events. This rule does NOT require shareholder approval for: new shares issued because of a stock split. the offer of securities in one company for the surrender of securities in another. the exchange of one company's assets for another company's securities. shares issued for a stock dividend. A) II and IV. B) I and IV. C) I and III. D) II and III.

Answer: B SEC Rule 145 protects shareholders by requiring their approval for a merger, consolidation, acquisition, reclassification of securities, or the transfer of corporate assets. The rule does not pertain to a stock split or stock dividends.

A new client holds unregistered securities purchased offshore from a US issuer in an exempt Regulation S transaction. These securities A) must be held 9 months before they can be resold in the United States B) must be held 1 year before they can be resold in the United States C) may not be resold in the United States no matter how long they have been held D) may be resold in the United States unrestricted

Answer: B Securities offered under Regulation S in an exempt transaction (US issuers offering securities offshore to non-US residents) must be held for 12 months (1 year) before they can be resold in the United States.

Which of the following terms is used in connection with a municipal securities underwriting? A) Effective date. B) Agreement among underwriters. C) Cooling-off period. D) In-registration.

Answer: B The agreement among underwriters (or syndicate letter) details the participation and obligations of each syndicate member. "Cooling-off period", "registration period", and "effective date" are terms that apply to nonexempt issues that must be registered with the SEC in accordance with the Securities Act of 1933. Municipal issues are exempt from these registration requirements.

Under the Securities Act of 1933, an accredited investor is defined as one having: an annual income of at least $1 million. an annual income of at least $200,000 for the last two years and anticipating an income of $200,000 in the current year. a net worth of $1 million exclusive of net equity in a primary residence a net worth of $1 million. A) II or IV. B) II or III. C) I or III. D) I or IV.

Answer: B To qualify as an accredited investor under Regulation D of the Securities Act of 1933, the investor must be either an institutional investor or an individual with a net worth of at least $1 million (not to include net equity in a primary residence), or have an income of at least $200,000 for each of the past two years with the same expected in the current year.

An investor and his father own 20% and 10%, 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? He must file Form 144 to sell the shares. He does not have to file Form 144 to sell the shares. He is considered an affiliated person. He is not considered an affiliated person. A) II and IV. B) I and III. C) I and IV. D) II and III.

Answer: B Under Rule 144, an affiliate is a person in a control relationship with an issuer. Because the investors own at least 10% of the stock, they are control persons under Rule 144 and must sell in compliance with the rule.

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) refuse to accept the order. B) obtain a representation from the conduit that the purchaser is not a restricted person. C) obtain a list of all of the adviser's clients to determine eligibility. D) obtain a list of the client(s) whose account(s) will be credited with the shares in order to determine eligibility.

Answer: 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).

An intrastate offering is exempt from: A) blue-sky registration. B) all registrations. C) federal registration. D) state registration.

Answer: C An intrastate offering (Rule 147 exemption) is limited to companies that do business in one state and limit stock or bond sales to that state's residents. Even though this offering may be exempt from SEC registration, it is not exempt from registering with that one state. Blue-sky registration (Uniform Securities Act registration) means the same thing as state registration.

Pertinent information required for disclosure to customers in a Regulation A offering is delivered in a(n): A) Form 144 filing statement. B) registration statement. C) offering circular. D) letter of intent.

Answer: C An offering circular must be delivered to all potential Regulation A buyers to satisfy full and fair disclosure requirements of the Act of 1933.

Which statements are TRUE regarding the purchase of new equity issues by restricted persons? An investment club is permitted to buy a new equity issue at the POP. An investment club is not permitted to buy a new equity issue at the POP. An investment club that has a registered representative as a member is permitted to buy a new equity issue at the POP. An investment club that has a registered representative as a member is not permitted to buy a new equity issue at the POP. A) II and III. B) II and IV. C) I and IV. D) I and III.

Answer: C As long as an investment club has no restricted persons as members, they may purchase new equity issues. A registered representative is a restricted person regarding the purchase of new equity issues.

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) 0.2. B) 0.25. C) 0.1. D) 0.05.

Answer: C If the beneficial interests of restricted persons do not exceed 10% of an account, the account may purchase a new equity issue

An issuer may direct sales of a new issue to all of the following EXCEPT: A) officers of its largest supplier. B) officers of its largest customer. C) officers of the managing underwriter. D) officers of the issuer.

Answer: C 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.

The Securities Act of 1933 exempts all of the following securities EXCEPT: A) savings and loan issues. B) U.S. government issues. C) real estate investment trusts. D) municipal issues.

Answer: C REITs are nonexempt securities that must be registered with the SEC.

Under the rules regarding the sales of new equity issues, which of the following are restricted purchasers? Aunts and uncles. In-laws. Supported persons. Grandparents. A) I and IV. B) II and IV. C) II and III. D) I and III.

Answer: C Restricted purchasers include spouses, parents, children, siblings, and in-laws. Aunts and uncles, as well as grandparents, are excluded. A person supported by an employee of a member can never buy a new equity issue.

An affiliate or insider holding unregistered shares can sell under Rule 144: A) 2 times a year. B) 12 times a year. C) 4 times a year. D) 1 time a year.

Answer: C 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.

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.

Answer: C Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities.

Which of the following investors would be exempt from filing form 144 when selling securities they own? A) An affiliated person selling unregistered shares. B) An investor selling shares acquired in a Regulation D private placement. C) An employee of the company selling registered shares purchased in the open market. D) An employee of the company selling unregistered shares.

Answer: C Rule 144 regulates the sale of control or restricted securities. Securities bought in a registered public offering are not restricted and therefore an employee of the company selling registered shares need not file form 144. Unregistered shares or securities purchased in a private placement are restricted and Rule 144 would apply.

Under SEC Rule 145, which of the following events require(s) a corporation to receive the approval of its stockholders? Merger. Consolidation. Acquisition. Transfer of assets. A) I and IV. B) III only. C) I, II, III and IV. D) I and II.

Answer: C Rule 145 requires that a corporation have its stockholders' consent in the event of a merger, consolidation, acquisition, reclassification, or transfer of corporate assets.

Rules regarding restricted persons state that each of the following is considered immediate family EXCEPT: A) parents-in-law. B) brothers and sisters. C) aunts and uncles. D) parents.

Answer: C Rules regarding restricted persons define "immediate family" as spouses, parents, brothers, sisters, in-laws, and children. Aunts and uncles are among those excluded.

A member firm broker/dealer wishing to go public may sell a new equity issue of its own securities to all of the following EXCEPT: A) owners, officers, and employees of the firm. B) family members of owners, officers, and employees of the firm. C) employees of other full-service member firms. D) public customers.

Answer: C Rules regarding restricted persons generally prohibit member firms from selling new issue securities to employees of member firms including their own. However, when member firms sell their own securities, rules regarding restricted persons do not apply to the issuer's own employees but still apply to the employees of other full-service member firms.

Which of the following are considered to be nonexempt offerings according to the Securities Act of 1933? Government securities. Private placements. Public offering of $6 million by a brokerage firm. Sales of corporate bonds of $10 million. A) I and III. B) II and III. C) III and IV. D) I and II.

Answer: C The Securities Act of 1933 exempts U.S. government bonds and private placements from registration. Public offerings of less than $5 million are also exempt (under Regulation A), so an offering of $6 million and sales of corporate bonds are not exempt; they must be registered with the SEC.

Regarding the purchase of a new issue, a customer would NOT be considered a restricted person if he were: A) a registered representative working for a FINRA member firm not involved in the issue. B) the wife of a principal of a FINRA member firm. C) the retired uncle of a bank clerical employee. D) a registered representative working for the issuing firm's investment banker.

Answer: C 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.

The vice president in charge of marketing at Health, Inc., wants to sell some of his Health, Inc., stock acquired through bonuses. If he owns 12% of the outstanding shares, all of the following statements are true EXCEPT: A) he must hold the stock for six months before selling. B) the amount of stock he can sell in any 90-day period is limited by Rule 144. C) he must be an accredited investor in order to sell his stock. D) the stock he wishes to sell will be considered control stock by the SEC.

Answer: C This investor is an affiliate, and the stock, which was not acquired in the open market, is considered restricted. The stock is also considered control stock because the affiliate is holding at least 10% of the outstanding shares. Restricted stock must be held six months before it can be sold, and the amount that can be sold will always be subject to the volume restrictions of Rule 144. The term "accredited investor" applies to some purchasers of Regulation D private placement stock. One need not be accredited in order to sell restricted shares.

To be designated as an accredited investor under Regulation D, a married couple investing in a joint account must have income of at least: A) $200,000. B) $500,000. C) $300,000. D) $100,000.

Answer: C To be accredited, a couple must have at least $300,000 in annual income. For individuals, the income threshold is $200,000.

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. B) $1 million net worth including any equity in a primary residence and $100,000 annual income. C) $1 million net worth excluding net equity in a primary residence or $200,000 annual income. D) $200,000 net worth and $200,000 annual income.

Answer: C 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.

Officers of XYZ Corp., a listed company, are permitted to: A) benefit from short swing profits. B) benefit from material, non-public information. C) write calls against XYZ stock held long. D) short XYZ stock.

Answer: C Under the Securities and Exchange Act of 1934, insiders are prohibited from shorting stock and from keeping short-swing profits. Any short-swing profit (a profit made from buying and selling the issuer's stock in a six month period or less) must be disgorged. However, insiders may write calls against stock held long.

All of the following securities are exempt from the registration provisions of the Securities Act of 1933 EXCEPT: A) state and municipal bonds. B) commercial paper and bankers' acceptances that have maturities of no more than 270 days. C) national and state bank securities. D) commercial bank holding company securities.

Answer: D Commercial bank holding companies are corporations that have to register with the SEC. State and municipal bonds do not have to be registered under the Securities Act of 1933. Commercial paper and bankers' acceptances that have maturities of no more than 270 days are exempt from the registration provisions. National and state banks are regulated by various state and federal agencies.

If an officer of a public company buys 400 shares of the company's registered stock in the open market, he: A) may sell immediately without restriction. B) may sell under Rule 144 only after a 6-month holding period. C) may not sell until he leaves the company. D) may sell immediately subject to Rule 144 volume limitations.

Answer: D If purchased in the open market, the transaction is not a private placement and there is no required holding period. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations under Rule 144.

A customer must present a signed representation letter stating that he is not a restricted purchaser prior to buying a new issue of: A) U.S. government bonds. B) corporate bonds. C) municipal bonds. D) common stock.

Answer: D New issues of common stock may not be sold at the public offering price to any account in which a restricted person has a beneficial interest. Prior to buying an IPO, a customer must present a representation letter stating they are not a restricted person.

If you are an associated person of a FINRA member, which of the following individuals is NOT considered a restricted person and may buy shares of a new issue? A) Your spouse. B) Your parents. C) Your supervisor at the broker/dealer you are affiliated with. D) Your grandparent.

Answer: D Of those listed, grandparents would not be considered a restricted person and would be allowed to buy shares of a new issue. Remember that while immediate family members are restricted, aunts, uncles and grandparents are not considered to be immediate family members under the FINRA rule.

Regarding the purchase of new equity issues, restricted persons may: A) purchase shares of a new issue only if they work for a bank. B) purchase shares of a new issue only if they are employed by a broker/dealer as a registered representative on a part-time basis. C) purchase shares of a new issue only in amounts that are not substantial in relation to the total number of shares being issued. D) not purchase shares of a new issue.

Answer: D Persons characterized as restricted persons are prohibited from purchasing shares of new issues.

Regarding Regulation D (Private Placement) offerings, which of the following statements is TRUE? A) The amount of capital that can be raised via a private placement is limited. B) Purchasers need not be provided or have access to offering information normally provided by a prospectus. C) No filings with the SEC are required by the issuer. D) Registration with the SEC is not required.

Answer: D Regulation D offerings are exempt transactions and therefore no SEC registration is required. However, issuers must still file information with the SEC on Form D regarding the issue. This filing will contain all of the information a potential investor might want to know, similar to the information contained on a prospectus. There is no limit to the amount of capital that can be raised via a Regulation D private placement transaction.

All of the following identify exemptions from the registration statement and prospectus provisions of the Securities Act of 1933 EXCEPT: A) Regulation A. B) Regulation D. C) Rule 147. D) Regulation U.

Answer: D 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.

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? A) This is permitted, as the calls would be considered covered by the restricted shares. B) This is permitted because there is no restriction against using covered calls to bring income into any account. C) This is prohibited because the customer may need to sell the stock before the restriction is lifted. D) 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.

Answer: D Restricted shares under Rule 144 are considered illiquid until the restriction is lifted. They may never be used to cover short calls because the shares, due to the restriction, could not be sold if the owner of the calls were to exercise the right to buy the stock.

Rule 144A regulates: A) the sale of restricted stock by control persons. B) companies traded on the NASDAQ Global Select Market. C) personal trading by research analysts. D) the sale of restricted stock to institutional investors.

Answer: D Rule 144A regulates the trading of restricted securities to institutional investors known as qualified institutional buyers (QIBs).

SEC Rule 145 exempts which of the following from registration? Stock resulting from a stock split. Stock resulting from a stock dividend. Stock issued in connection with an acquisition. IPO in which the entire amount is being sold by officers. A) I and III. B) II and IV. C) III and IV. D) I and II.

Answer: D Rule 145 exempts (from registration) additional shares resulting from stock splits or stock dividends. Stock issued in connection with an acquisition must be registered, as must stock in an IPO.

All of the following are restricted persons EXCEPT: A) employees of members. B) finders and fiduciaries acting on behalf of the managing underwriter. C) portfolio managers. D) any persons owning 5% or more of a member firm.

Answer: D Rules prohibit member firms from selling initial equity public offering stock to any account in which restricted persons are beneficial owners. Restricted persons include FINRA members, employees of member firms, finders and fiduciaries acting on behalf of the managing underwriter, portfolio managers, and any person owning 10% or more of a member firm. Also included are a restricted person's immediate family members.

The Securities Act of 1933 requires securities issued by all of the following to register and be subject to prospectus provisions EXCEPT: A) corporations involved in interstate commerce. B) investment companies. C) foreign governments with which the United States maintains diplomatic relations. D) the U.S. government.

Answer: 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.

If a customer owns 7% of a publicly traded company's stock and his spouse owns 6% and wants to sell her shares, which of the following statements is TRUE? A) The spouse is not an affiliate and Rule 144 applies. B) The spouse is an affiliate and Rule 144 does not apply. C) The spouse is not an affiliate and Rule 144 does not apply. D) The spouse is an affiliate and Rule 144 applies.

Answer: D Together, the client and wife own 13% of the company's stock, so the spouse is considered an affiliate and is bound by Rule 144. If there is a 10% or more ownership interest among members of an immediate family, then all members are considered control persons (affiliates) subject to Rule 144.

Which of the following provisions govern the offering of restricted shares to the public without filing a Form 144? The dollar amount is $1 million or less. 100,000 shares or fewer are sold. 5,000 shares or fewer are sold. The dollar amount is $50,000 or less. A) I and II. B) I and III. C) II and IV. D) III and IV.

Answer: D Under Rule 144, 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.

If an officer of a bank wants to purchase new issues, which of the following statements is TRUE? A) He may purchase a new issue because anyone is allowed to purchase new issues. B) He may purchase a new issue because no banking rules prohibit it. C) He may not purchase a new issue unless the amount he wishes to purchase is considered small in relation to the total offering. D) He may not purchase a new issue because he is considered a restricted person.

Answer: D Under the rules regarding the purchase of new issues bank officers would be characterized as restricted persons. They may not, therefore, purchase new issues.

ABC is engaged in a stock rights offering with the help of Alpha Securities as managing underwriter. If Alpha Securities agrees to purchase the unused rights for any stock that ABC cannot sell to current stockholders, and use them to purchase stock for resale to the public, what type of underwriting arrangement is this? A) Special. B) Best efforts. C) All-or-none. D) Standby.

Answer: D A standby underwriting allows a corporation to sell as much of a new issue to current stockholders as possible, backed by the underwriter's promise to purchase any unsold rights. Remember that a standby underwriting agreement is associated with a rights offering.

In which of the following types of offerings does a brokerage firm have no financial obligation for unsold securities? All-or-none. Best efforts. Standby. A) I and III. B) II and III. C) I, II and III. D) I and II.

Answer: D In a best efforts underwriting, the underwriter serves as an agent with no financial obligation for unsold securities. In an all-or-none (AON) offering, the underwriter agrees to devote its best efforts to sell the issue, but the entire offering is canceled if all shares cannot be sold. In a standby underwriting, the underwriter agrees to purchase any unsold shares remaining after the expiration of a rights offering (firm commitment).

Which of the following statements regarding a shelf offering are TRUE? It can be used to distribute an initial public offering only. It can be used to distribute an additional offering only. Its maximum duration is 90 days. Its maximum duration is 3 years. A) I and III. B) I and IV. C) II and III. D) II and IV.

Answer: D Shelf offerings are used by publicly traded companies to issue additional equity or debt securities. The issuer must sell the securities within 3 years after the registration is declared effective.

An affiliate of an issuer sells shares using a Form 144. This form is valid for: A) 180 days. B) 90 days. C) 30 days. D) 60 days.

B 90 Days

Under the intrastate offering rule (Rule 147), when may a resident purchaser of securities resell them to a nonresident? A) Nine months from the end of the distribution. B) Three months after the first sale made in that state. C) Six months after the last sale made in that state. D) None of these.

Answer: A In an intrastate offering, a purchaser of the issue may not sell the securities to a resident of another state for at least nine months from the end of the distribution.

A due diligence meeting occurs between: A) the issuing corporation and the underwriters to review and reexamine the full details of the pending underwriting and negotiate final terms to be included in the formal underwriting contract. B) the FINRA member firm and FINRA's Corporate Finance Department to discuss the fairness of the underwriting spread on a pending public offering. C) the underwriter and the SEC before the issuance of a final prospectus to insert the public offering price and make any last minute changes at the SEC's request. D) All of these.

Answer: A A due diligence meeting is held between the issuer and the underwriter before the effective date and is one of the final meetings held before the sale of the security so that each party may review all aspects of the issue.

To which of the following firms could a member grant concessions or other allowances? Another member firm. A suspended member firm. A foreign nonmember broker/dealer ineligible for FINRA membership. A U.S. nonmember broker/dealer. A) I and III. B) I and II. C) II and IV. D) III and IV.

Answer: A A member can grant discounts and other concessions only to other member firms. A suspended member must be treated like a member of the general public (no discounts or concessions). The only exception is that a member firm can grant concessions to a foreign nonmember firm that is ineligible for FINRA membership.

Which of the following statements regarding red herrings are TRUE? They may be used to obtain indications of interest. They may be sent out with sales literature. They contain the final offering price. Their use ends when the offering becomes effective. A) I and IV. B) I and III. C) II and III. D) II and IV.

Answer: A A preliminary prospectus, or red herring, is used only during the cooling-off period. The red herring does not contain the final price; offerings are priced immediately before the effective date.

In the case of an unsolicited order, a prospectus must be delivered to the purchaser of a unit investment trust: A) with the purchase confirmation. B) before the purchase. C) before the month's end. D) between 45 days and 18 months following the initial deposit.

Answer: A A purchaser of newly issued securities must receive a prospectus no later than by receipt of the purchase confirmation. However, any solicitation must be preceded or accompanied by a prospectus.

A corporate offering of 200,000 additional shares to existing stockholders may be made through a: A) rights offering. B) tender offer. C) secondary offering. D) warrant.

Answer: A A rights offering is an offering of additional shares of stock to existing shareholders.

Which of the following are defined as securities? Fixed annuities. Variable annuity units. Investment company shares. Negotiable CDs insured by the FDIC. A) II and III. B) I and III. C) I and IV. D) II and IV.

Answer: A A security is any investment for profit with management performed by a third party, in which an element of risk is present.

Alpha is the managing underwriter for a new issue of 1 million shares of ABC common. While Alpha has agreed to sell as much stock as possible in the market, ABC will cancel the offering if any portion of the stock remains unsold. This arrangement is known as what type of underwriting? A) All-or-none. B) Standby. C) Best efforts. D) Mini-max.

Answer: A All-or-none underwritings require the underwriter to either sell the entire issue of stock or cancel the offering completely.

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) concession. B) reallowance. C) give up. D) spread.

Answer: A If selling-group members liquidate into the stabilizing bid, they may be required to return the concession they were originally paid.

Which of the following is least likely to impact an underwriter's considerations when establishing the offering price for a new issue? A) Geographic location of the company headquarters. B) Projected earnings for the company. C) Demand for the security by the investing public. D) Earnings multiples for other companies in the market in the same industry.

Answer: A Of the choices given, unless the geographic location of the company was critical to its financial success in some way it is the least likely factor to be considered by underwriters when pricing the new issue. Indications of interest (demand for the securities), projected earnings and comparative financial data for similar companies in similar industries are much more likely to impact pricing of the new issue.

ABC Corporation is offering 500,000 units to the public at $5 per unit. Each unit consists of 2 shares of ABC preferred stock and 1 perpetual warrant for ½ common share of ABC exercisable at $5. How much capital was raised by the initial sale of the issue? A) $2.5 million. B) $1.25 million. C) $5 million. D) $7.5 million.

Answer: A Since the issuing corporation is offering 500,000 units to the public at $5 per unit, the total amount of capital to be raised by this sale will be $2.5 million (500,000 units x $5 per unit).

Stabilizing bids may be entered at: A) a price no higher than the public offering price. B) any reasonable price necessary to support the public offering price. C) a price not exceeding 5% above the public offering price. D) whatever stabilizing price is stated in the prospectus.

Answer: A Stabilizing bids cannot be used to raise the market price of an issue. Stabilization may only be used to support a new issue security at or below the public offering price.

Which of the following acts requires full and fair disclosure of all material information about equity and debt securities offered for the first time to the public? A) Securities Act of 1933. B) Securities Exchange Act of 1934. C) Trust Indenture Act of 1939. D) Securities Investor Protection Act of 1970.

Answer: A The Securities Act of 1933 regulates new issues of nonexempt securities sold to the public.

The Securities Exchange Act of 1934 covers all of the following EXCEPT: A) issuance of corporate securities. B) trading on exchanges. C) trading of corporate securities. D) issuance of financial reports by corporations.

Answer: A The Securities Exchange Act of 1934 regulates secondary trading or trading markets, including reporting requirements. The Securities Act of 1933 regulates the issuance of new, nonexempt securities.

Which of the following will NOT be found in a final prospectus? A) Agreement among underwriters. B) Business plan. C) Date and offering price. D) Statement that the SEC neither approves nor disapproves of the issue.

Answer: A The agreement among underwriters is a separate document and is not included in a prospectus.

Which of the following is typically the largest component of a corporate underwriting spread? A) Concession. B) Reallowance. C) Manager's fee. D) Underwriting fee.

Answer: A The concession tends to be the largest component of a corporate underwriting spread; the manager's fee is generally the smallest component.

Shortly before the end of the cooling-off period, the underwriters and representatives of the issuer have a meeting to review the status of the new issue. This is called a: A) due diligence meeting. B) pre-sales meeting. C) syndicate meeting. D) negotiation meeting.

Answer: A The final meeting before the end of the cooling-off period is known as a due diligence meeting and is always held before the effective date of the new offering.

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? Filing the registration statement with the SEC and state regulatory bodies. Providing advice on the type of security to be issued. Distributing the security to the public. 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.

Answer: 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.

The letter of intent in a corporate underwriting is typically signed by which of the following parties? Issuer. Managing underwriter. Syndicate members. Selling group members. A) I and II. B) I and III. C) II and IV. D) III and IV.

Answer: A The letter of intent initiates the underwriting process and is signed by the issuer and managing underwriter.

In a corporate underwriting, the syndicate letter is signed by which of the following? Issuer. Managing underwriter. Syndicate members. Selling group members. A) II and III. B) I and II. C) I and IV. D) II and IV.

Answer: A The syndicate letter is signed by the managing underwriter and syndicate members and identifies these parties' rights and responsibilities.

If an investment representative gave her retail customers copies of sales literature for a variable annuity she was recommending and promised to send the prospectus soon, which of the following statements are TRUE? She should not have distributed sales literature without the prospectus. It was okay to distribute the sales literature and send the prospectus later to those who were interested. She should not have recommended a specific variable annuity without having the prospectus available. Because she only answered questions about the investment, she was not required to provide a prospectus. A) III and IV. B) I and III. C) I and II. D) II and IV.

Answer: B A prospectus must precede or accompany any solicitation, including distribution of sales literature to retail customers.

A company without business operations that raises money through an IPO in order to have its shares publicly traded for the sole purpose of seeking out a business or combination of businesses is known as: A) a regulation D, Private Placement company. B) a special purpose acquisition company (SPAC). C) a growth company. D) a special situation company.

Answer: B Generally, with IPOs the business purpose and products or services offered by a company are clearly defined. However, both the NYSE and Nasdaq allow companies without a defined business purpose to raise capital through an IPO in order to have it's shares traded for the sole purpose of seeking out a business or combination of businesses that when located would be submitted to shareholders for their approval. These types of companies are known as special purpose acquisition companies (SPACs).

If a company has filed a registration statement for an initial public offering of its common stock with the SEC, as a registered representative you may take which of the following actions? Send out a research report on the company to your customers. Take indications of interest from your customers. Send a preliminary prospectus to each of your customers. Take orders for the stock from customers in cash accounts only. A) II and IV. B) II and III. C) I and III. D) I and IV.

Answer: B New issues may be sold only by prospectus. Indications of interest may be taken when the issue is in registration. During the registration period, only the preliminary prospectus may be sent to clients. Sales literature, such as research reports, may not be distributed while the IPO is in registration, nor may orders be taken.

All of the following are unlawful EXCEPT: A) omitting a statement of a material fact. B) giving written notification to a customer that the broker/dealer is acting as a principal for the trade. C) selling new issues on margin. D) representing that the SEC has approved of a broker/dealer or a security being sold.

Answer: B New issues may not be sold on margin. The Securities and Exchange Commission does not approve or disapprove of securities, broker/dealers, or registered representatives. It is always unlawful to make a fraudulent communication in connection with the sale or purchase of securities; making a fraudulent communication includes failing to state a material fact.

Which of the following factors is (are) considered when determining whether underwriting compensation is fair and reasonable? The size of the offering. The type of underwriting commitment. The market conditions. The profitability of the underwriter. A) II and IV. B) I and II. C) I and III. D) II and III.

Answer: B Relevant factors considered by FINRA in determining the fairness of underwriting compensation include the size of the offering (total dollar amount), the type of commitment (firm commitment or best efforts), the type of securities (i.e., stocks or bonds), the form of compensation (i.e., cash or stock), the total value of all forms of compensation, the underwriter's relationship to the issuer, and any form of potential conflicts of interest.

If the SEC has cleared an issue, which of the following statements is TRUE? A) The SEC has guaranteed the accuracy of the information in the prospectus. B) The issuer has filed a standard registration statement. C) The SEC has guaranteed the issue. D) The SEC has endorsed the issue.

Answer: B The SEC does not approve, disapprove, endorse, or guarantee a registration statement's accuracy.

To which securities market does the Securities Act of 1933 apply? A) Fourth. B) Primary. C) Secondary. D) Third.

Answer: B The Securities Act of 1933 covers the registration and disclosure requirements regarding new issues, or the primary market. The secondary markets are covered under the Securities Exchange Act of 1934.

Which of the following securities issues must be registered with the SEC under the Securities Act of 1933? Public DPPs. Variable annuities. Open-end funds. Closed-end funds. A) III and IV. B) I, II, III and IV. C) I and II. D) II and III.

Answer: B The Securities Act of 1933 requires the registration of all new nonexempt issues of securities sold to the public. In general, exempt issues include municipal securities, U.S. government securities, bank issues, and nonprofit organization securities. The securities in this question are all nonexempt.

Which of the following acts requires corporate public issuers to send annual reports to their shareholders? A) Securities Investors Act of 1970. B) Securities Exchange Act of 1934. C) Securities Act of 1933. D) Trust Indenture Act of 1939.

Answer: B The Securities Exchange Act of 1934 requires public issuers to inform the shareholders of their operations at least on an annual basis. Said reports should include a statement of the company's financial condition (i.e., balance sheet and income statements). The act further requires public companies to provide proxies to all shareholders regarding any action that requires a vote of the shares outstanding.

The smallest component of a corporate underwriting spread is usually the: A) underwriter's fee. B) manager's fee. C) selling concession. D) takedown.

Answer: B The syndicate manager's fee is typically the smallest percentage of the underwriting spread.

The demand is far less than anticipated for a new issue of common stock. In this situation, the underwriter may stabilize the issue by placing bids in the open market: A) at or anywhere above the public offering price. B) at or slightly below the public offering price. C) at the public offering price only. D) slightly above the public offering price.

Answer: B When demand for a new issue is less than anticipated, thus causing the price to fall, an underwriter may place a stabilizing bid at or just below the public offering price.

XYZ Corporation is preparing a registration statement for a new issue consisting of 300,000 new shares and 200,000 existing shares held by officers. The offering price is $30 per share and the spread taken by the underwriters is $2 per share. After the offering is complete, XYZ will receive: A) 15000000. B) 8400000. C) 9000000. D) 14000000.

Answer: B XYZ Corporation will receive $28 per share for each of the 300,000 new shares being issued ($30 per share price less the $2 spread). The proceeds from the 200,000 shares sold by the officers will benefit the officers themselves, not XYZ Corporation.

Corporate debt securities (such as commercial paper) are exempt from registration under the Securities Act of 1933 if their maturities do not exceed how many days? A) 90. B) 365. C) 270. D) 30.

Answer: C Corporate debt securities (such as commercial paper) with maturities of 270 days or less are exempt from registration; longer maturities would subject them to the act's registration and disclosure requirements.

Which of the following securities is NOT exempt from the Securities Act of 1933? A) U.S. government agency issues. B) U.S. government issues. C) Real estate investment trusts. D) Municipal issues.

Answer: C REITs are nonexempt securities subject to the registration and new issue disclosure provisions of the Securities Act of 1933. Agency issues, U.S. government issues, and municipals are exempt.

A customer is interested in an IPO of a stock in registration. He requests that you highlight the important information on the preliminary prospectus and send an analysis of the company's past performance. You may: A) comply with the request because the customer solicited the information and analysis. B) not comply with the request because the stock is not yet listed for trading on any exchange. C) not comply with the request because the preliminary prospectus may not be altered. D) comply with the request because it involves an IPO in which little information is known about the issuer.

Answer: C A prospectus, whether preliminary or final, is a legal document that cannot be altered by the registered representative. It is illegal for a registered representative to mark on or attach anything to a prospectus (even if requested by a client). Important information may be pointed out orally but not highlighted.

Which of the following underwriting arrangements allows an issuer whose stock is already publicly traded to structure the timing of sales for an additional issue? A) Standby. B) Competitive. C) Shelf. D) Negotiated.

Answer: C A shelf registration with the SEC allows an issuer to sell the registered securities for up to 3 years from the effective date. This allows an issuer to time its sales with market conditions.

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.

Answer: 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.

Under the Securities Act of 1933, the Securities and Exchange Commission has the authority to: issue stop orders regarding a new issue registration filing. approve new issues. review standard registration forms. guarantee the accuracy of the information contained in the registration forms. A) II and III. B) II and IV. C) I and III. D) I and IV.

Answer: C During the cooling-off period, the SEC reviews registration statements and can issue stop orders if the registration is not complete or was not filed properly. The SEC does not approve securities or guarantee that any information found within a prospectus is accurate; it only clears the securities for distribution (sale) to the public.

A final prospectus must include which of the following? The effective date of the registration. Intended use of the proceeds. A statement indicating that the SEC has neither approved nor disapproved the issue. Disclosure of material information concerning the issuer's financial condition. A) I and IV. B) II and III. C) I, II, III and IV. D) I and II.

Answer: C Every prospectus must state the intended use of the proceeds and contain material financial information. The SEC disclaimer must appear on every prospectus and state that the SEC has neither approved nor disapproved the issue. The effective date must be printed on the final prospectus.

LMN Securities is the managing underwriter for a new issue of one million MIC common shares. LMN has agreed to sell as much stock as possible in the market, and MIC has agreed to take back any unsold shares. If MIC has not specified a minimum amount of capital for LMN to raise, this is what type of offering? A) All-or-none. B) Contingency. C) Best efforts. D) Standby.

Answer: C In a best efforts underwriting, any stock that remains unsold is returned to the issuing corporation.

Alpha Securities is the managing underwriter for a new issue of 1 million shares of ABC common on a firm-commitment basis. If part of the ABC issue remains unsold and results in a loss, the loss will be divided proportionately among the: A) selling group firms. B) underwriting firms and the selling group firms. C) underwriting firms. D) underwriting firms and the issuer.

Answer: C In a firm-commitment arrangement, any losses incurred are divided among the underwriters' syndicate members according to the terms in the agreement among underwriters.

Which of the following describe indications of interest secured during the 20-day cooling-off period? Binding on the customer. Nonbinding on the customer. Binding on the broker/dealer. Nonbinding on the broker/dealer. A) I and IV. B) II and III. C) II and IV. D) I and III.

Answer: C Indications of interest are not binding on either party.

Which of the following actions of XYZ Corporation would raise additional capital? Issue callable preferred stock. Declare a stock dividend. Make a rights offering. Encourage convertible bondholders to convert to common stock. A) II and III. B) II and IV. C) I and III. D) I and II.

Answer: C Issuing new stock either through an underwriting or a rights offering allows a corporation to raise capital. Stock dividends represent more shares given to existing shareholders, but no money is raised. Conversion results in the exchange of one security for another and no money is raised.

Which of the following are SROs? FINRA. SIPC. SEC. Chicago Stock Exchange. A) II and III. B) II and IV. C) I and IV. D) I and III.

Answer: C Like FINRA, the exchanges are registered with the SEC. FINRA regulates the OTC market and members of the New York Stock Exchange, whereas the other exchanges regulate transactions occurring on their trading floors. The SEC is a federal commission, not an SRO. All SROs are subject to SEC oversight.

Which of the following two are NOT included in a preliminary prospectus? Final public offering price Effective (release) date. Intended purpose for the funds being raised. Financial statements and history of the company. A) III and IV B) I and IV C) I and II D) II and III

Answer: C Neither, the final public offering price or the effective date (date the SEC releases the securities to be sold) are found in a preliminary prospectus.

If a customer purchases a new issue of stock from a syndicate member, the customer will pay the public offering price: A) plus a commission. B) plus the spread. C) with no mark-up or commission. D) plus a mark-up.

Answer: C 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).

The Act of 1934 applies to all of the following EXCEPT: A) the extension of credit on purchase of securities. B) secondary market trading. C) regulation of new issues. D) registration of broker/dealers.

Answer: C The Act of 1933 deals with new issues. The Act of 1934 created the SEC, required the registration of broker/dealers, empowered the Federal Reserve to control the extension of credit on securities transactions, and created rules dealing with secondary market trading.

In reviewing prospectuses and registration statements, the SEC: A) certifies the accuracy of the disclosures made in a prospectus. B) passes on the merits of a particular security covered by a registration statement. C) does not approve or disapprove of the issue. D) guarantees the adequacy of the disclosures made in a prospectus.

Answer: C The SEC requires full disclosure regarding a new issue so that investors can make informed decisions on the security. The SEC does not, however, guarantee the accuracy or adequacy of the information, nor does it approve or disapprove of the issue.

Where must the SEC's no-approval clause appear in a prospectus? A) On the last page, under the name of the fund. B) Anywhere as long as it is conspicuous. C) On the cover. D) It is not mandatory, but, if used, it must appear on the first page.

Answer: C 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.

The provisions of the Securities Act of 1933 include all of the following EXCEPT: A) prohibition of fraud in the sale of new securities. B) requirement that an issuer provide full and fair disclosure about an offering. C) regulation of the secondary market. D) regulation of offerings of new securities.

Answer: C The Securities Act of 1933 regulates new issues of corporate securities sold to the public and is designed to prevent fraud in the sale of newly issued securities. Trading and the secondary markets are regulated under the Securities Exchange Act of 1934.

The Securities Exchange Act of 1934: created the SEC. regulates trading in the secondary market. prohibits fraud in the distribution of new issues. A) II and III. B) I, II and III. C) I and II. D) I only.

Answer: C The Securities Exchange Act of 1934 regulates secondary market activity. It created the SEC, which oversees all trading activity. The Securities Act of 1933 prohibits fraud in the distribution of new issues, whereas the Act of 1934 prohibits fraud in the trading of securities.

The Act of 1933 applies to all of the following EXCEPT: A) full and fair disclosure. B) prospectus preparation. C) regulation of insider trading. D) registration of new issues .

Answer: C The regulation of insider trading is covered under the Act of 1934. The Act of 1933 deals with new issues and related disclosures.

A prospectus must be delivered to customers who purchase which of the following new issues? U.S. government bonds. Corporate bonds. Fixed annuities. Unit Investment Trusts. A) I and IV. B) II and III. C) II and IV. D) I and III.

Answer: C U.S. government bonds are exempt securities under the Act of 1933 and are not subject to the Act's registration and prospectus delivery requirements. Fixed annuities are not considered securities as the risk is borne by the insurance company issuer. Corporate bonds and UITs, however, are non-exempt securities and are subject to prospectus delivery requirements.

If a broker/dealer is assisting in the registration of a stock issue, a registered representative of the firm may: A) promise a specific number of shares. B) perform a private transaction for a customer. C) accept an indication of interest. D) accept an order.

Answer: C When an issue is in registration during the cooling-off period, no sales may take place. The registered representative may, however, distribute preliminary prospectuses and accept nonbinding indications of interest.

A Regulation A exemption covers a(n): A) offering of letter stock. B) private offering. C) offering of $5 million or more in 12 months. D) offering of $5 million or less in 12 months.

Answer: D A Regulation A filing under the Securities Act of l933 exempts the security from registration and limits offerings to $5 million or less within a 12-month period.

An affiliate holding restricted stock wishes to sell shares under Rule 144. He has held the shares, fully paid, for 6 months, and the issuer has 2.4 million outstanding shares. Form 144 is filed on Monday, April 10, and the average weekly trading volume for the last four weeks is 24,500 shares per week. The maximum number of shares the customer can sell with this filing is: A) 23,000. B) 24,000. C) 24,250. D) 24,500.

Answer: D Under Rule 144, after holding the fully paid restricted shares for 6 months, the affiliate can begin selling. For affiliates, volume restrictions always apply. They can sell the greater of 1% of the total shares outstanding or the weekly average of the prior 4 weeks' trading volume (the 4 weeks preceding the Form 144 filing). In this case, 1% of the total shares outstanding is 24,000 (1% × 2.4 million). The weekly average of the prior 4 weeks' trading volume is 24,500. Therefore, the most the affiliate can sell during the 90 days following the Form 144 filing is 24,500 shares.

A registered representative may use a preliminary prospectus to: A) solicit orders from investors for the purchase of a new issue. B) demonstrate SEC approval of the issue. C) accept nonbinding orders from investors for a specific number of shares at a specific price. D) obtain indications of interest from investors.

Answer: D A preliminary prospectus is used to obtain indications of interest from investors.

An underwriting spread is the: A) amount a managing underwriter receives. B) amount a selling group receives. C) amount a syndicate receives. D) difference between an offering price and the proceeds to an issuer.

Answer: D A spread is the difference between the public offering price and the price an underwriter pays an issuer.

The names of all of the following are included on tombstone ads EXCEPT: A) the issuer. B) the managing underwriter. C) a syndicate member. D) a member of the selling group.

Answer: D A tombstone ad lists the syndicate manager(s) in bold print and all syndicate members in smaller print. Selling group members are not included on the tombstone.

During the 20-day cooling-off period for an initial public offering, all of the following are permitted EXCEPT: A) publishing a tombstone advertisement. B) mailing a red herring to a customer. C) accepting indications of interest. D) accepting a deposit from a customer to purchase the new issue.

Answer: D Accepting a deposit from a customer during the cooling-off period is tantamount to accepting an order, which is prohibited until the offering is effective.

A customer owns 1,000 shares of ABC corporation. Which of the following actions on the part of ABC would dilute her equity? A) Registered secondary offering of shares. B) Payment of a 10% stock dividend. C) 2-1 stock split. D) Registered primary offering of shares.

Answer: D An additional primary issue of shares would dilute a present shareholder's ownership, unless she personally purchases a portion of the new shares (as in a rights offering). In a secondary offering, ownership of existing outstanding shares is simply changing hands. With a stock dividend or stock split, percent equity does not change.

Which of the following statements regarding a red herring is NOT true? A) A red herring is used to accept indications of interest from investors. B) The final offering price does not appear in a red herring. C) Additional information may be added to a red herring at a later date. D) 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.

Answer: D An agent is not permitted to accept funds from potential purchasers of a new issue before the effective date.

When the SEC rules that an offering has become effective, the SEC has: A) verified the accuracy of the statements in the registration statement. B) not verified the accuracy of each statement in the registration statement but has approved of the offering. C) approved the offering for registration. D) cleared the offering for sale.

Answer: D An offering is effective when released by the SEC for sale. The SEC does not approve or disapprove of new offerings; it releases them for sale after determining that enough information is available for public investors to make sound investment decisions.

Before the filing of a registration statement for a new issue, an investment representative may NOT: solicit indications of interest for the security. solicit orders. confirm the sale of the security to a customer. A) I only. B) II only. C) II and III. D) I, II and III.

Answer: D Before the registration statement is filed, no sale, solicitations, or indications of interest in the issue may occur.

Using a prospectus to sell a security eliminates a salesperson's responsibility to disclose: A) None of these. B) a company's negative financial information. C) a company's poor growth potential. D) speculative factors about the security.

Answer: D Distributing the prospectus may satisfy the prospectus delivery requirements of the Securities Act of 1933, but it does not negate the antifraud rules, or the provisions and regulations set forth under the Securities Exchange Act of 1934.

Which of the following statements regarding a firm commitment underwriting are TRUE? An underwriting syndicate is a group of broker/dealers who have banded together to distribute new issue securities to the public and whose members have made financial commitments to the issuer. A selling group consists of 2 or more broker/dealers who have agreed to participate in the distribution of new issue securities to the public and have made financial commitments to the underwriting syndicate in advance. An underwriting syndicate is a group of broker/dealers who have banded together to buy new issue securities to be held by the syndicate members for investment purposes. A selling group consists of 2 or more broker/dealers who have agreed to participate in the distribution of new issue securities as selling agents only, without principal risk. A) I and III. B) II and III. C) II and IV. D) I and IV.

Answer: D Members of an underwriting syndicate buy securities from issuers in principal transactions, assuming financial risk (in a firm commitment underwriting). Members of a selling group act merely as agents and assume no financial risk.

A customer requests information on a new mutual fund and asks her registered representative to circle the important information in the prospectus and information he thinks will be of special interest to her. This is permitted: A) if approved by a principal. B) if accompanied by an unmarked prospectus. C) without restriction. D) under no circumstances.

Answer: D The prospectus is a legal document and may not be altered.

The Securities Act of 1933 covers all of the following EXCEPT: A) liabilities for misleading filings. B) prospectus requirements. C) full and fair disclosure. D) blue-sky laws.

Answer: D 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.

All of the following must be part of a registration statement EXCEPT: A) a prospectus. B) the signatures of CEO, CFO, CAO, and majority of the board. C) a statement as to whether the company is involved in any legal proceedings. D) identification of investors who own 5% or more of the company.

Answer: D The registration statement must identify investors who own 10% or more of the company.

The underwriting agreement is the contract that establishes the relationship between A) the issuer and the investing public B) the managing underwriter and the underwriting group members C) the underwriting group and selling group members D) the issuer and the underwriters

Answer: D The underwriting agreement is the contract that establishes the relationship between the issuer and the underwriters setting forth both parties' rights and obligations.