Series 7 New Issues Market Quiz Mistakes

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 use the funds raised A) II and III B) I and III C) I and IV D) II and IV

A) II and III 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.

What is the profit to a syndicate member if a syndicate is offering an 8½% bond at 100, the syndicate manager is giving a 0.75 concession and a one-point total takedown, and the syndicate member sells 1,000 bonds? A) $10,000 B) $7,500 C) $1,000 D) $17,500

A) $10,000 When a member of the syndicate sells a bond, they are entitled to the total takedown—in this case, one point ($10) per bond (1,000 bonds sold × $10 per bond = $10,000 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.

Your manager notifies you that a new municipal revenue bond issue you have been working on has been oversubscribed. How is the order acceptance priority for this issue determined? A) As outlined in the agreement among underwriters B) As outlined in the indenture C) As outlined in the legal opinion D) On a first-come, first-served basis

A) As outlined in the agreement among underwriters The priority of filling municipal orders is established by the managing underwriter in the release terms letter sent to the syndicate once the bid is won. This letter is an amendment to the agreement among underwriters. The priority is also disclosed in the official statement.

Which of the following are exempt from the registration provisions of the Securities Act of 1933? Variable contracts issued by life insurance companies Bonds issued by the State of Alaska Shares of Mutual funds registered under the Investment Company Act of 1940 Commercial paper maturing in 90 days A) II and IV B) I and III C) I and IV D) II and III

A) II and IV Municipal bonds are always exempt from registration under federal law, as is commercial paper with a maturity of 270 days or less. It is state law that adds the $50,000 minimum denominations and top three rating categories to the exemption requirements. Variable contracts issued by insurance companies, i.e., variable annuities and variable life, are not exempt from registration with the SEC. Mutual fund shares must comply with the registration requirements of the Securities Act of 1933 (they are a continuous new issue). They also register as open-end management investment companies in accordance with the Investment Company Act of 1940.

Which of the following would exclude a bond from being covered under the Trust Indenture Act of 1939? A) Offering with a maturity of less than nine months B) Nonexempt debt securities C) Offering over $50 million D) Interstate offering

A) Offering with a maturity of less than nine months The Trust Indenture Act of 1939 is applicable to corporate debt issues that are nonexempt, are over $50 million to be issued within 12 months, are offered interstate, and have maturities of nine months or more. An offering made that would mature in less than nine months would be excluded from coverage under the act.

For the underwriting of a municipal bond issue, competitive bids are submitted by underwriters as A) a firm commitment. B) an all-or-none commitment. C) a best efforts underwriting commitment. D) a standby underwriting commitment.

A) a firm commitment. For new municipal bond issues, underwriters must submit bids for the entire bond offering—a firm commitment. Standby commitments are used only for corporate stock rights offerings. Best efforts commitments are used for corporate securities, and an all-or-none commitment is a type of best efforts commitment.

When an existing, long established publicly traded corporation issues a large block of new shares in order to expand or modernize, it is A) a primary distribution. B) a refunding. C) an IPO. D) a secondary distribution.

A) a primary distribution. New shares are always part of a primary distribution. When it is the first time, it is an initial public offering (IPO). That does not apply here because this company already has shares publicly trading.

A legal contract—known as an indenture—between a bond issuer and a trustee appointed to represent the bondholders is required for A) corporate bond issues of $50 million or more sold interstate. B) corporate bond issues of $25 million or more sold interstate. C) government bond issues of any size sold to domestic (U.S.) investors. D) municipal bond issues of $100 million or more sold within one municipality.

A) corporate bond issues of $50 million or more sold interstate. The Trust Indenture Act of 1939 requires corporate bond issues of $50 million or more sold interstate to be issued under a trust indenture, which is a legal contract between the bond issuer and a trustee representing bondholders.

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

A) obtain indications of interest from investors. A preliminary prospectus is used to obtain indications of interest from investors.

An underwriter should consider all of the following factors when determining the spread on a new issue except A) the amount of the good faith check. B) the prevailing interest rates in the marketplace. C) the amount bid on the issue. D) the type and size of the issue.

A) the amount of the good faith check. The spread is the difference between the reoffering price and the amount bid on an issue in competitive bidding. Municipal Securities Rulemaking Board rules state that an underwriter is entitled to make a profit in an underwriting. Therefore, the underwriter can take into account factors such as market conditions, the type and size of the issue, the dollar volume of the transaction, and any extraordinary costs incurred by the syndicate. The amount of the good faith check deposited before bidding on the issue has no relevance to the bid or to the reoffering prices.

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

A) the sale of restricted stock to institutional investors. Rule 144A regulates the trading of restricted securities to institutional investors known as qualified institutional buyers.

Your firm is a member of an underwriting syndicate for an issue of municipal bonds. The municipal syndicate release terms letter states that the bonds are being offered net, with a two-point concession and a half-point additional takedown. If your firm sells $100,000 of these bonds to a retail customer, it will receive a credit of A) $100,000. B) $2,500. C) $500. D) $2,000.

B) $2,500. A syndicate member receives the bonds net of the total takedown (which consists of the concession plus the additional takedown). Therefore, the bonds are taken by the syndicate net of 2½ points (2.5% × $100,000 = $2,500).

Which of the following refers to the primary market for municipal securities? A) A broker's broker B) A notice of sale C) The Real-Time Transaction Reporting System (RTRS) D) A sale from inventory

B) A notice of sale A notice of sale is published to provide syndicates with information on proposed new (primary market) issues. When bond dealers sell inventory, they are acting as principals in the secondary market. RTRS is the reporting system for secondary market trades. A broker's broker executes trades in municipal securities for or on behalf of another MSRB member firm. Transactions by a broker's broker could be in both the primary and secondary markets.

If a syndicate is formed under a Western account arrangement, what is the treatment of any unsold securities? A) All syndicate members will assist in the reallocation. B) Each member is responsible for its unsold securities. C) Any unsold securities are returned to the issuer. D) The underwriting manager will take responsibility for the unsold securities.

B) Each member is responsible for its unsold securities. Western accounts are divided accounts. That means each member of the syndicate is responsible for any portion of its commitment that remains unsold. This is in contrast to the Eastern account, where the unsold portion is the responsibility of all the syndicate members in proportion to their original commitment. Because these are firm commitment underwritings, the issuer knows it will receive all of the funds.

Sales made under the provisions of Rule 506(b) of Regulation D must be reported on A) Form 506. B) Form D. C) Form 13F. D) Form U4.

B) Form D. Form D is the form that must be filed electronically with the SEC no later than 15 days after the first sale of securities in the offering. Form U4 is the application for registration you filled out to become associated with your broker-dealer. There is no Form 506; private placements under Rule 506(b) or (c) use Form D. Form 13F is one you will learn about if you go on to the Series 65 or Series 66.

Identify the accredited investors from the list below. An individual with a net worth of $800,000 and an annual salary of $150,000 A married couple with a net worth of $2 million consisting of net equity in their primary residence of $500,000 and pension plans and other assets worth $1.5 million An insurance company A corporation with a net worth of $3 million A) I and II B) II and III C) I and IV D) III and IV

B) II and III Institutional investors such as insurance companies are regarded as accredited investors, regardless of size. An individual with a net worth of $800,000 and a salary of $150,000 does not meet either of the two qualification criteria for individuals. The married couple with a net worth of $2 million, which, after excluding the net equity in the primary residence is still in excess of $1 million, is accredited. In order for a corporation to meet the definition, it must have a net worth of at least $5 million.

The sale of nonexempt securities may take place without an SEC registration if done in a manner that qualifies for a transactional exemption. An example of this would a sale complying with A) Rule 156. B) Rule 506(b). C) Rule 135A. D) Rule 498.

B) Rule 506(b). If the transaction is exempt, a security that would otherwise have to be registered is exempt from registration. Rule 506(b) is part of the private placement exemption under Regulation D of the Securities Act of 1933. Rule 498 deals with a summary prospectus for a mutual fund and Rules 156 and 135A deal with advertising.

An order confirmed for the entire underwriting syndicate's benefit is called A) a member at the takedown order. B) a group net order. C) a market order. D) a net designated order.

B) a group net order. A municipal group net order is credited to syndicate members according to their percentage participation in the account. This order type is given priority over designated or member takedown orders (but not over presale orders). The normal order of priority is presale orders, group or syndicate orders, designated orders, and member orders.

A firm underwriting of a municipal bond issue usually has a number of different broker-dealers involved. Those who earn the total takedown on each sale they make are performing in the role of A) a selling group member. B) a selling syndicate member. C) the issuer. D) the syndicate manager.

B) a selling syndicate member. Selling syndicate members have a commitment to sell the bonds allocated to them. On each bond the member sells, the total takedown (the takedown plus the additional takedown) is earned. Selling group members earn the concession. The syndicate manager earns the entire spread on any bonds it sells.

A firm underwriting of a municipal bond issue usually has a number of different broker-dealers involved. Those who earn the total takedown on each sale they make are performing in the role of A) the issuer. B) a selling syndicate member. C) a selling group member. D) the syndicate manager.

B) a selling syndicate member. Selling syndicate members have a commitment to sell the bonds allocated to them. On each bond the member sells, the total takedown (the takedown plus the additional takedown) is earned. Selling group members earn the concession. The syndicate manager earns the entire spread on any bonds it sells.

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

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

Regarding the purchase of new equity issues, restricted persons may A) purchase shares of a new issue only if they are employed by a broker-dealer as a registered representative on a part-time basis. B) not purchase shares of a new issue. 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) purchase shares of a new issue only if they work for a bank.

B) not purchase shares of a new issue. Persons characterized as restricted persons are prohibited from purchasing shares of new issues.

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) reject the order. B) obtain a representation from the bank that the purchaser is not restricted. C) determine the identity of the purchaser. D) accept the order.

B) obtain a representation from the bank that the purchaser is not restricted. 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.

One of your customers is interested in purchasing the shares of a new issue from a local manufacturing company. The issue is for $15 million of common stock. The investor's net worth is $95,000 and net income is $75,000 per year. The plan is to invest $15,000 into this stock. Under Regulation A of the Securities Act of 1933, this investment is A) not permitted because Regulation A requires investors to be accredited. B) permitted. C) not permitted because it represents more than 10% of the customer's net worth. D) not permitted because it represents more than 10% of the customer's net income.

B) permitted. Under Regulation A, an offering of $20 million or less in a 12-month period is a Tier 1 offering. Unlike a Tier 2 (up to $75 million) offering, there are no restrictions based on net worth or net income. A separate question, but not relevant to this one, is the suitability of this investment. It is important to stick with the question being asked.

When an underwriting syndicate commits to distribute an entire offering, it may enlist other FINRA member firms to help in the offering. These member firms are known as A) affiliated members. B) selling group members. C) syndicate participants. D) co-managers.

B) selling group members. Underwriting syndicates often enlist other FINRA member firms to help with the distribution of an offering. These members become part of the selling group. Unlike the syndicate members, selling group members have no capital commitment. They are acting as agents of the syndicate and earn a selling concession on their sales

The SEC has just declared the registration of XYZ Corporation's IPO effective for sale. If XYZ wanted to run a tombstone ad, it would not include A) the public offering price. B) the dated date. C) the name of the lead underwriter. D) the type of security.

B) the dated date. A tombstone ad for a stock offering, published on or after the effective date, will always include the effective date. It will not include the dated date. That is only relevant to bonds and represents the date from which interest begins to accrue. How did we know this was not a debt issue? An IPO can only be of stock. That is, a company can only "go public" once and that is with the issuance of stock.

Under Rule 506(c) of Regulation D, advertising is permitted when A) the advertisements have been approved by a principal. B) the issue is limited to accredited investors. C) the advertisements have been filed with FINRA. D) there are no more than 35 nonaccredited investors.

B) the issue is limited to accredited investors. Rule 506 of Regulation D of the Securities Act of 1933 has two parts. Rule 506(b) prohibits any advertising of the private placement, while Rule 506(c) permits it. The primary condition to be met is that the issue is offered solely to accredited investors. It is Rule 506(b) that has a limit of 35 nonaccredited investors, but that has nothing to do with the advertising restriction. Regulation D applies to issuers, not broker-dealers, so there is no principal to go to for approval. In the same vein, because issuers are not FINRA members, filing with FINRA is irrelevant.

The underwriting manager of a Western underwriting syndicate has committed to sell $250,000 worth of bonds out of a total offering of $1 million. There are 10 underwriters of this new issue. The firm sells its entire share, but $100,000 worth of the total bonds remains unsold. What is the manager's remaining liability? A) $100,000 B) $25,000 C) $0 D) $10,000

C) $0 In a divided (Western) syndicate, each syndicate member is responsible only for its own underwriting obligation. Because the underwriting manager sold its share, it is not liable for the unsold bonds. Rather, the manager will confirm the bonds to each member that did not sell its participation.

A dealer that quotes a concession of half to another dealer means A) 0.5% of the market price. B) a 50% commission split. C) $5 per $1,000 of par. D) 0.5% of the dealer's price.

C) $5 per $1,000 of par. A concession between broker-dealers on secondary market transactions is a discount from the yield that the broker-dealer is quoting. It is common for a broker-dealer to offer bonds to other broker-dealers at a price, less the concession. The net price becomes the purchase price for the buying broker-dealer. If simultaneously sold to a retail account, the markup is from the net price paid. If not simultaneously retailed but held in the broker-dealer's inventory, it is fair for the broker-dealer to market her inventory and mark up from there for retail sale.

A syndicate won the bid for a general obligation bond of $1 million issued by a city. The syndicate has received the following orders: $500,000 net designated, $500,000 presale, and $1 million member at takedown. The orders would be filled as A) $250,000 presale, $500,000 net designated, $250,000 to members. B) none to presale, none to net designated, $1 million to members. C) $500,000 presale, $500,000 net designated, none to members. D) $500,000 presale, $250,000 net designated, $250,000 to members.

C) $500,000 presale, $500,000 net designated, none to members. Municipal syndicate customs dictate that presale orders have first priority, with group orders, net designated orders, and member orders following in that order.

In a municipal underwriting, the interest cost calculation discounts future interest payments to arrive at present value. This interest cost calculation method is A) the relative interest cost. B) the simple interest cost. C) the true interest cost. D) the net interest cost.

C) the true interest cost. When an issuer discounts future interest payments to arrive at present value, the interest cost method being used is the true interest cost. This method takes into consideration the time value of money.

An underwriting bid for a municipal general obligation issue would include which of the following? The dollar amount The coupon rate The yield to maturity The underwriting spread A) II and III B) II and IV C) I and II D) I and III

C) I and II The only information the underwriter must furnish to the issuer is the dollar amount of the bid (the amount the issuer will receive) and the coupon rate (the amount of interest the issuer will pay). From this, the issuer can determine the lowest net interest cost and award the bonds on that basis.

To determine the winning bid on an net interest cost (NIC) basis, an issuer will do which of the following? Add any premium to total interest cost Subtract any premium from total interest cost Add any discount to total interest cost Subtract any discount from total interest cost A) II and IV B) I and III C) II and III D) I and IV

C) II and III Interest cost to the issuer is reduced by any premiums received by the issuer when the bonds are initially sold or is increased by any discounts the issuer must accept when the bonds are initially sold. Reducing interest cost by the amount of any premium received or increasing interest cost by the amount of the discount the bonds are sold at is how the issuer will arrive at the NIC.

In the underwriting of a municipal bond, which of the following is determined by the issuer rather than the underwriter? A) Net interest cost B) Underwriting spread C) Maturity D) Yield to maturity

C) Maturity The maturity is determined by the issuer and stated in the official notice of sale before bids are received.

An offering of securities to no more than 35 nonaccredited investors would be associated with A) Regulation A+. B) Rule 144. C) Regulation D. D) Rule 147.

C) Regulation D. Under Rule 506(b) of Regulation D of the Securities Act of 1933, a private placement transaction exemption applies if the offering is limited to a maximum of 35 nonaccredited investors. It is the Rule 506(c) provision that requires 100% of the investors to be accredited.

ABC Corporation has just completed an IPO raising $100 million. The investment bankers handling the offering made total commissions of $4 million. It is most likely that this was A) a standby underwriting. B) an all or none underwriting. C) a best efforts underwriting. D) a firm commitment underwriting.

C) a best efforts underwriting. The key to the question is commissions. In a best efforts underwriting, the investment bankers have no financial responsibility and earn a commission on whatever they sell. In a firm commitment underwriting, the syndicate members have taken the financial responsibility and earn the spread (considered to be a markup rather than a commission). This would not be a standby underwriting because that applies to rights, and as an IPO, rights would not be applicable.

All the following statements are false about the process of awarding an underwriting to a syndicate except A) a competitive bid underwriting is the standard for corporate offerings. B) in a competitive bid situation, the contract is award to the syndicate bid that reflects the highest net interest cost to the issuer. C) a competitive bid underwriting is the standard for general obligation municipal underwritings. D) a negotiated underwriting is the standard in a general obligation municipal underwriting.

C) a competitive bid underwriting is the standard for general obligation municipal underwritings. The double negative in the question tells us we are looking for the true statement. A competitive bid underwriting is the standard for general obligation municipal bond underwritings. In many cases, state law requires competitive bidding. On the other hand, negotiated underwritings seem to dominate municipal revenue bonds. Negotiated is also the primary method for corporate issues. The award in a competitive bid is to the syndicate submitting a bid representing the lowest net interest cost (NIC). In some underwritings, it is the lowest true interest cost (TIC). TIC accounts for the time value of money.

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 presales meeting. B) a negotiation meeting. C) a due diligence meeting. D) a syndicate meeting.

C) a due diligence meeting. 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.

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

C) federal registration. 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. Securities do not register with FINRA.

Under Rule 506(c) of Regulation D, advertising is permitted when A) the advertisements have been approved by a principal. B) there are no more than 35 nonaccredited investors. C) the issue is limited to accredited investors. D) the advertisements have been filed with FINRA.

C) the issue is limited to accredited investors. Rule 506 of Regulation D of the Securities Act of 1933 has two parts. Rule 506(b) prohibits any advertising of the private placement, while Rule 506(c) permits it. The primary condition to be met is that the issue is offered solely to accredited investors. It is Rule 506(b) that has a limit of 35 nonaccredited investors, but that has nothing to do with the advertising restriction. Regulation D applies to issuers, not broker-dealers, so there is no principal to go to for approval. In the same vein, because issuers are not FINRA members, filing with FINRA is irrelevant.

During the cooling-off period of a new issue's registration with the SEC, a preliminary prospectus may be sent to prospective investors. This document would not include A) a statement that the securities may not be sold and offers to buy may not be accepted before the registration statement becomes effective. B) pertinent information about the upcoming offering. C) the offering price and effective date. D) disclosure of the issuer's planned use of the proceeds.

C) the offering price and effective date. The offering price, largely based on the indications of interest from prospective investors, is generally set on or immediately before the effective date. The SEC declares the effective date, and that is when orders can be accepted. The preliminary prospectus contains a statement to the effect that information included is subject to change and may be incomplete. There is enough information about the issuer and the offering for an investor to make a nonbinding indication of interest.

A registered primary offering of common stock differs from a registered secondary offering of common stock in that A) only the primary offering is sold by prospectus. B) the proceeds of the primary offering are received by the issuing company, while the proceeds of the secondary offering are received by the underwriting syndicate. C) the proceeds of the primary offering are received by the issuing company, while the issuer receives none of the funds from a secondary offering. D) the primary offering must be registered with the SEC, while the secondary offering is already registered.

C) the proceeds of the primary offering are received by the issuing company, while the issuer receives none of the funds from a secondary offering. A primary offering is always the sale of new shares. Therefore, the proceeds of the offering always go to the issuer. In the case of a registered secondary, the seller is generally a large stockholder, such as an institution or perhaps a founder of the company. That means the proceeds go to that seller. As registered issues, sales of both require a prospectus. Please note that it is possible that a company with treasury stock might register it for resale. That would be a registered secondary where the issuer receives the funds, but it is very unlikely the exam would go there. When testing, stick with the normal conditions unless the exam asks for an exception.

The portion of a municipal bond underwriting spread that remains after the syndicate manager subtracts the management fee is A) the concession. B) the total spread. C) the total takedown. D) the additional takedown.

C) the total takedown. The total takedown is that portion of the municipal underwriting spread that remains after the underwriting manager takes the management fee. The total takedown consists of the additional takedown and the concession.

A corporation plans to issue stock to the public at $10 per share. If the manager's fee is $0.10 per share, the underwriting fee is $0.25 per share, the concession is $0.45 per share, and the reallowance is $0.20 per share, the spread is A) $1.00. B) $0.90. C) $0.70. D) $0.80

D) $0.80. In a corporate offering, the spread has three components: the manager's fee, the underwriting fee, and the concession. The math here is $0.10 plus $0.25 plus $0.45 = $0.80. The reallowance is not a separate item; rather, it is part of the $0.45 concession and represents a give-up if a member of the selling group sells to a FINRA member firm that is not a member of the selling group.

Under the provisions of Rule 144, what percentage of outstanding stock may a control person sell every 90 days? A) .01% B) .1% C) 10% D) 1%

D) 1% Rule 144 (sale of restricted or control stock) allows for the sale of 1% of the outstanding shares or the weekly average of the past four weeks' trading volume (whichever is greater) every 90 days.

An affiliate holding restricted stock wishes to sell shares under Rule 144. He has held the shares, fully paid, for six 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 past 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.

D) 24,500. Under Rule 144, after holding the fully paid restricted shares for six 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 past four weeks' trading volume (the four 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 past four 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.

Which of the following statements regarding the good faith deposit submitted by interested bidders are true? It is usually 1%-2% of the total par value of the bonds offered. It is usually 10% of the total par value of the bonds offered. If the bid is unsuccessful, it is returned to the underwriting syndicate. If the bid is unsuccessful, it is retained by the issuer. A) II and III B) II and IV C) I and IV D) I and III

D) I and III A good faith deposit is required when the syndicate places a bid on a competitive offering. It is generally 1%-2% of the par value of the bonds offered for sale. If the bid is unsuccessful, the deposit is returned by the issuer to the syndicate manager.

New issue municipal bond orders are allocated according to priorities the syndicate sets in advance. The MSRB requires syndicates to establish priority allocation provisions for orders. Which of the following is the most common priority? A) Member, designated, presale, group net B) Group net, presale, designated, member C) Presale, designated, group net, member D) Presale, group net, designated, member

D) Presale, group net, designated, member Remember our abbreviation: PGDM (Pro Golfers Don't Miss) and that will get you the correct answer to any of these order allocation questions.

When used on the exam, the term "nonexempt security" refers to a security that must register with the SEC. There are cases, however, when registration may be avoided. In most cases, that would be when the transaction involving that security is exempt. Each of the following is a transaction exemption found in the Securities Act of 1933 except A) Regulation D. B) Regulation A+. C) Regulation S. D) Regulation M.

D) Regulation M. This is a process of elimination question. There is a Regulation M under the act, but it has no relevance to your exam (which is why it is nowhere in your material). It sometimes happens that the correct answer choice is something you've never heard of. That happens most often when the question ends with the word except. Regulation A+ is the exemption for small and medium corporate offerings. Regulation D is the most significant private placement exemption. Regulation S is the exemption for offers and sales made outside the United States by both U.S. and foreign issuers.

The sale of nonexempt securities may take place without an SEC registration if done so in a manner that qualifies for a transactional exemption. An example of this would a sale complying with A) Rule 501. B) Rule 5130. C) Rule 72(t). D) Rule 144.

D) Rule 144. Rule 144 of the Securities Act of 1933 regulates the sale of control and restricted securities, stipulating the holding period, quantity limitations, manner of sale, and filing procedures. Unless complying with the rule, control stock and restricted securities may not be sold without registration. Rule 501 defines an accredited investor. Rule 5130 is a FINRA rule dealing with restricted persons in a stock underwriting. Rule 72(t) is an IRS rule dealing with the substantially equal periodic payment exception avoiding the 10% early withdrawal penalty.

A new issue of common stock has been filed with the SEC, and a final prospectus can be found on the SEC website. This information has been given to a customer interested in the securities. In this instance, the access-equals-delivery requirements regarding that prospectus A) have been met for mutual funds only. B) have not been met, as a prospectus must always be physically delivered. C) have been met for equity issues only. D) have been met.

D) have been met. A prospectus must precede or accompany a security for sale and will be deemed so if the final prospectus has been filed with the SEC. Because prospectuses filed with the SEC can be viewed on the SEC website, the access-equals-delivery requirement is satisfied.

All of the following about a good faith deposit on a municipal bond underwriting are correct except A) it is lost if the syndicate fails to carry out the provisions of the underwriting agreement. B) it is returned to the unsuccessful bidders. C) it is applied against winning bidder's payment for the issue. D) it is returned to the winning syndicate to cover any loss incurred in the subsequent sale of the bonds.

D) it is returned to the winning syndicate to cover any loss incurred in the subsequent sale of the bonds. In a municipal bond underwriting, the good faith deposit is submitted by a potential syndicate as earnest money. If the syndicate is not awarded the issue, the check is returned. If the syndicate is awarded the issue, the money is applied against the payment. However, if the syndicate fails to carry out the provisions of the underwriting, the money is retained by the issuer. If you have ever bought or sold a house, this is comparable to the earnest money deposit turned in by the buyer with the offer.

SEC Rule 498 permits delivery of an abbreviated prospectus, usually referred to as a summary prospectus, in the sale of A) investment-grade bonds. B) closed-end investment companies. C) unit investment trusts. D) open-end investment companies.

D) open-end investment companies. The summary prospectus, authorized under SEC Rule 498, is only effective when the product being sold is an open-end investment company.

J.B. Collingsworth is the CEO and largest single shareholder in Collingsworth Industries, Inc. (CII). Three months ago, J.B. purchased 2,000 shares of CII in the secondary market at $6 per share. Yesterday, J.B. sold those shares for $8 per share. Under federal law, A) the shares must be registered before they can be resold. B) the sale could not have taken place without filing a Form 144. C) J.B. would likely be charged with insider trading. D) the $4,000 profit on the sale must be returned to CII.

D) the $4,000 profit on the sale must be returned to CII. J.B. has violated the "short swing" profit rule of the SEC. That rule states that any affiliate of a public company realizing a profit on a sale of that company's stock within a six-month period of the purchase, must return that profit to the company. The term used is "disgorged." There is nothing illegal about this, but J.B. doesn't get to keep the profit. The sale is well under the Form 144 de minimis limit of 5,000 shares or $50,000 in market value. Because the shares were purchased in the secondary market, they are already registered. Nothing in the question implies that J.B. was acting on inside information.

An investor purchases 1,000 shares of a stock in a Regulation D private placement. The investor is not deemed an affiliate of the issuer. If the investor wishes to sell, A) the stock must be held for a minimum of one year. B) as a nonaffiliate, there is no required holding period. C) the stock must be held for a minimum of nine months. D) the stock must be held for a minimum of six months.

D) the stock must be held for a minimum of six months. The resale of privately placed stock comes under Rule 144. As a nonaffiliate, the only restriction is that of time (affiliates have time and volume limits). The time limit for all purchasers is six months. Technically, the wording is six months fully paid for, but it is unlikely the exam will go that deep into the weeds.

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

D) the syndicate assumes liability for unsold shares, while the selling group does not. The underwriting syndicate makes a financial commitment in a firm underwriting to bring a new issue to market and 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.

When a client calls you and says they have some "lettered" stock, you know this stock A) has the number of shares written out on the certificate. B) is common stock. C) has the client's name on the certificate. D) was acquired in a private placement.

D) was acquired in a private placement. Lettered stock, sometimes called legend stock, has that name because there is a legend on the stock certificate indicating that sales of the shares is restricted. Invariably, this is stock acquired in a private placement that cannot be sold unless meeting the requirements of Regulation D or Rule 144 of the Securities Act of 1933. Once met, the legend is removed. Common and preferred stock can be the subject of a private placement.