1933 and 1934
FNRA 5130
Applies to New Issues Only member firms can't sell new issues to any account where restricted persons are beneficial owners.
Prospectus delivery and Quiet Period
New issue primary 90 days Secondary 40 days Exchange or NASDAQ listed 25 days Quiet period is while the prospectus is being delivered, no hype of the issue
Manipulation
No wash trading No trading pools No short tendering Rule 10b-5 - if you do something the act doesn't specify and it's wrong, it's fraud
1933
Remember paper. covers NON-EXEMPT and EXEMPT Reg A Reg D Reg 144, 144a, 144b Reg 145 Reg 147 FNRA 5130
Rule 145 - Exempt
Reorganization rules Stockholder must be sent full disclosure document Reclassification Merger/consolidation Transfer of Assets
Rule 144 regulates restricted/control
Restricted stock unregistered, held by non-insider has a 6 month hold then can sell freely Restricted stock unregistered, held by insider has 6 month hold and can then sell in volume limits Control stock registered, held by insider has no hold, but volume limits always apply
Disclosure 15G-2
Risk disclosure Penny Stocks
Sarbanes Oxley
Rules against creative "accounting" schemes
Reg A - Exempt
Small Offerings Raise up to $5 million in 12 mos without registration Files abbreviated notice of sale (offering circular) w SEC Cooling off period is 20 days Issuer doesn't need to provide audited financial info Circular must be recvd by investors 48 hrs before sale
Under the Code of Procedure, disciplinary action taken by FINRA against a registered representative can be all of the following EXCEPT: A. Termination of employment B. Arbitration C. Fine D. Censure
The Code of Procedure is a hearing process used by FINRA if the FINRA Department of Enforcement wishes to take action against a firm or representative. It also can be used by a customer who has a complaint who has not signed an arbitration agreement. If the hearing panel finds that there was a violation, the disciplinary actions taken can include censure, suspension, expulsion, fines and taking away securities licenses. Arbitration occurs under the Code of Arbitration, which is used for settling intra-industry disputes and customer disputes where the customer has signed an arbitration agreement.
Which of the following are TRUE about new registered stock offerings? I. Any purchaser who received a preliminary prospectus must also receive a final prospectus II. Any purchaser who received a preliminary prospectus need not receive a final prospectus III. Any purchaser will pay the POP IV. Any purchaser will pay the POP plus a commission mark up A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. New stock issues are sold under a prospectus that states the Public Offering Price which is inclusive of any compensation to the underwriter (the spread). Additional commissions or charges above the P.O.P. are not allowed. Whether or not the purchaser received a preliminary prospectus is a moot point - any purchaser must get the final prospectus at, or prior to, confirmation of sale.
Which of the following statements are TRUE regarding margin regulations? I In-house rules may be more stringent than FINRA rules II Exchange rules may be more stringent than Federal Reserve rules III In-house rules may be less stringent than FINRA rules IV Exchange rules may be less stringent than Federal Reserve Rules A. I and II B. III and IV C. I and IV D. II and III
The best answer is A. Regarding margin rules, FINRA rules may be more stringent than Federal Reserve rules, but cannot be less stringent. Firm rules can be more stringent than FINRA rules, but cannot be less stringent.
Restricted stock is best described by which of the following? A. A security which was never registered and can only be sold in the public markets when it is either registered, or sold under an exemption provision B. A security of an issuer which has been bought in the open market by an officer or director of that company C. A security purchased by a non-accredited investor in a Regulation D private placement D. A security which is purchased by an issuer that is not exempt from the provisions of the Securities Acts
The best answer is A. Restricted stock is stock which was never registered and cannot be sold in the public markets unless registration takes place or an exemption (such as Rule 144) is available. Note, however, the restricted securities may always be sold in a so-called "private transaction" - these are not considered to be public offers of that restricted security.
Restricted securities can be sold under Rule 144 if all of the following conditions are met EXCEPT: A. they are sold on a dealer basis B. they are sold on an agency basis C. solicitation of orders to buy is restricted to customers expressing interest within the past 10 days D. the issuer is reporting currently the the SEC
The best answer is A. Rule 144 requires that restricted securities be sold on an agency basis only. Your firm cannot act as a market maker in "144" shares. Solicitation of orders to buy "144" shares is prohibited (to stop you from soliciting potential customers to buy 144 shares, which would tend to push the price up). However you are allowed to recontact individuals expressing buying interest in "144" transactions within the past 10 days. Since 144 shares are being sold in the open market, the issuer must comply with SEC issuer reporting rules to maintain the public market in the securities.
A registered representative that wishes to purchase Initial Public Offerings is restricted from buying IPOs of: A. common stock B. non-convertible preferred stock C. convertible preferred stock D. any new issue security
The best answer is A. The FINRA rule restricting member firms and their employees from buying IPOs from underwriters only applies to equity offerings. This is the case because the pricing of equity issues has a large "expectations" component that is difficult to quantify - and substantial price increases in the aftermarket due to overblown "expectations" for the issue are not uncommon. The rule does not apply to preferred stock or bond offerings, where the pricing is determined by the present value of the income flows to be received over the life of the security. For these issues, there is no "expectations" component to pricing.
Which of the following is defined as options "sales literature"? A. Member firm options website B. Standard option worksheet C. Options memorandums for internal use D. Letters of an "individual" nature sent to customers
The best answer is B. Options Sales Literature is any written communication distributed to customers or the public that contains any analysis, performance report, projection or recommendation. Included, as well, are standard forms of options worksheets (these detail gain, loss, and breakeven for a given strategy to be employed by a customer), and seminar texts for lectures to be given to the public about options. Sales literature must be accompanied or preceded by an Options Disclosure Document. Options Advertising is defined as any sales material that reaches a public audience through a mass media, including: newspapers, periodicals, magazines, websites, radio, television, telephone recordings, motion pictures, billboards, signs, or through written sales communications to the public that are NOT required to be preceded by an Options Disclosure Document. The content of these communications is very limited so that they are not "promotional" and they must state where an Options Disclosure Document can be obtained. A letter of an individual nature to a customer is defined as correspondence. Letters for internal use by a member firm do not come under any of these definitions, since they are not distributed to the public.
A director of a publicly held company wants to sell 5,000 registered shares of that company's stock at $8 per share that she has held for 3 months. Does the Form 144 filing requirement apply to this sale? A. Yes, because any sale of shares by a director requires the filing of a Form 144 B. No, because the shares are being sold under a "de minimis" exemption C. Yes, because she has not held the shares for 6 months D. No, because the shares are not restricted
The best answer is B. Rule 144 includes a "de minimis" exemption, permitting the sale every 3 months of 5,000 shares or less, worth $50,000 or less, without having to file a Form 144. The transfer agent is authorized by the SEC to transfer the shares without a copy of the Form 144. Because this sale is 5,000 shares @ $8 = $40,000, it can be done under this exemption. Rule 144 applies to the public resale of restricted (unregistered private placement) stock and to the sale of registered control shares. Control shares are registered shares owned by a key officer or director. These do not have to complete the 6 month holding period requirement because they are registered, but to sell them, the officer must file a Form 144 Notice of Sale and is subject to the rule's volume restrictions.
A registered representative has mailed promotional material and response cards to potential clients in near-by affluent neighborhoods. The registered representative receives a returned signed response card from one of the prospects, and when calling the phone number provided, finds that it is on the National Do-Not-Call List. Which statement is TRUE? A. This prospect cannot be called by the registered representative B. This prospect can be called by the registered representative C. This prospect can only be called by the registered representative between the hours of 8:00 AM and 9:00 PM D. This prospect can only be called by the registered representative with written approval of the #24 General Principal
The best answer is B. There are 3 exceptions provided for cold calls to individuals that are on the National Do-Not-Call list. These are the: Established Business Relationship Exception; Prior Express Written Consent Exception; and Personal Relationship With The Associated Person Exception. Because this prospect signed and returned the response card, this qualifies for the "Prior Written Consent" exception. Furthermore, if the prospect has given such consent, the prohibition on making solicitations before 8:00 AM and after 9:00 PM does not apply.
A Regulation A exemption from full SEC registration is available for new issue offerings that do not exceed: A. $500,000 within a 12 month period B. $1,000,000 within a 12 month period C. $5,000,000 within a 12 month period D. $10,000,000 within a 12 month period
The best answer is C. Regulation A allows securities offerings of up to $5,000,000 within 12 months to be exempt from full SEC registration.
Which of the following rules allows securities offerings of up to $5,000,000 within 12 months to be exempted from full SEC registration? A. Rule 144 B. Rule 144A C. Regulation A D. Regulation D
The best answer is C. Regulation A allows securities offerings of up to $5,000,000 within 12 months to be exempted from full SEC registration.
All of the following statements are true about Regulation A offerings EXCEPT: A. the maximum offering amount permitted under the exemption is $5,000,000 within a 12 month period B. an offering circular must be provided to all purchasers at least 48 hours prior to confirmation of sale C. sales are limited to purchasers who are "resident" in the state where the issuer resides D. Regulation A's provisions may not be used for offerings of oil and gas program interests
The best answer is C. Regulation A exempts issuers from registering offerings of small dollar amounts. The limitation is $5,000,000 within a 12 month period. While no prospectus is required, each buyer must be given disclosure in an Offering Circular. Regulation A Offering Circulars must be delivered to buyers at least 48 hours prior to confirmation of sale. We call this the "2 day free look" because purchasers have 2 days to review the offering before sale can be confirmed. There is no limitation on the number of purchasers or the number of states in which this offering is made. Regulation A may not be used to offer oil and gas program interests (which is done under Regulation B, and which is not tested on the Series 7 examination).
All of the following securities are exempt from the registration provisions of the Securities Act of 1933 EXCEPT: A. U.S. Government bonds B. Government National Mortgage Association Pass Through certificates C. Collateral Trust certificate D. General Obligation bonds
The best answer is C. Securities that are exempt from the registration provisions of the Securities Act of 1933 are principally governmental debt issues, including U.S. Government debt, U.S. Government agency debt, such as Ginnie Mae debt, and municipal debt such as general obligation bonds. Collateral trust certificates are issued by corporations, where the stock of a subsidiary is put up as collateral for the bond issue. This is a non-exempt security.
The Official Statement is: I required by the Securities Act of 1933 for all new issue municipal bonds II required to be delivered at or prior to settlement, if available III required by the MSRB for all new issue municipal bond offerings exceeding $5,000,000 IV requested by underwriters to satisfy SEC due diligence requirements and the disclosure requirements of new issue purchasers A. I and II B. II and III C. II and IV D. I, II, III, IV
The best answer is C. The Official Statement for a new municipal issue is not required under the Securities Act of 1933 since municipal issues are exempt, nor is it required by the MSRB, since the MSRB has no regulatory authority over municipal issuers. It is requested by underwriters to help them perform due diligence on the offering (as required by the SEC) and also to help sell the issue. The MSRB states that if one is available, it must be given to purchasers at or prior to settlement of sale.
Under MSRB rules, all of the following records must be kept for specified time periods EXCEPT: A. Customer complaints B. Customer account statements C. Official Statements D. Trade comparisons
The best answer is C. There is no requirement to keep Official Statements filed at the firm. The underwriter for the issuer files a copy of the Official Statement with the MSRB, which puts it up on its EMMA website for public access.
Under the Trust Indenture Act of 1939, which of the following statements are TRUE? I The trustee will pay the issuer for services rendered II The issuer will pay the trustee for services rendered III The trustee protects the interests of the bondholders IV The issuer protects the interests of the trustee A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. Under the requirements of the Trust Indenture Act of 1939, trustees are appointed by the issuer (so the issuer pays the trustee). The trustee is appointed to protect the interests of the bondholders.
Under MSRB rules, confirmation disclosure for bonds sold at a discount or premium must include all of the following EXCEPT: A. the yield at which the transaction was effected and the resulting dollar price B. whether the securities are callable C. capacity in which the broker-dealer acted D. the rating assigned to the bond by a national ratings agency
The best answer is D. Confirmation information that must be shown for municipal bonds traded at a discount or premium from par includes the yield at which the transaction was effected (which will differ from the stated rate of interest because the bonds were not traded at par) and the resulting dollar price; whether the securities are callable, with disclosure of "in-whole" call dates; the capacity in which the broker-dealer acted (either as "agent" or "principal"); and the total dollar amount of the transaction. There is no requirement to disclose the bond's rating on the confirmation.
Which of the following activities are allowed prior to the filing of a registration statement? I Solicitations of indications of interest II Solicitations of orders III Sending a preliminary prospectus IV Publishing a tombstone announcement A. I and II only B. II and III only C. I, II, III, IV D. None of the above
The best answer is D. Prior to the filing of a registration statement for a new issue, nothing can be done. Once the registration statement is filed, a preliminary prospectus can be sent; indications of interest can be accepted; and a "tombstone" announcement can be published. Once the registration is effective, orders can be accepted if customers receive the final prospectus, at or prior to, confirmation of sale.
Under MSRB rules, all of the following statements are true about a registered representative sharing in a customer account EXCEPT the: A. registered representative must receive approval to do so from the principal B. registered representative must share only in proportion to the capital contributed C. registered representative must share in both gain and loss D. MSRB must be notified in advance of the sharing arrangement
The best answer is D. Sharing in a customer account is prohibited unless the registered representative gets written approval for the account from the principal; opens a joint account with the customer; and shares in gain and loss in proportion to the capital contributed. There is no requirement to give notice of such an arrangement to the MSRB - if this were the case, the MSRB couldn't do anything about it anyway since they do not enforce their rules (enforcement for broker-dealers is performed by FINRA).
Securities Investor Protector Act SIPC
$500,000.00 coverage on accounts, but only up to $250,000.00 cash.
Cooling off period CANNOT DOs
20 day full and fair disclosure Issue can't be sold, advertised, recommended, and orders can't be solicited
Reg 415
3 year shelf rule
13G
5% owner can file if wants to take passive role
8K reports
For BKO filing Also for acquisitions, reorgs, resignations of directors...
Rule 145
For Re-organizational changes Send full disclosure of: reclassification merger/consolidation transfer of assets
Effective Date
After 20 day cooling off, registration is effective Any purchaser of issue gets final prospectus
Trust Identure 1939
All interstate non-exempt offerings of $5,000,000.00 or more Not for Gov, or muni bonds
FNRA 5130
Anti-fraud Can't sell new issues to members, associated persons, or beneficial owners in an IPO
Rules for Insiders
Cannot sell short Securities sold but held less than 60 days is considered short swinging, and they have to pay back proceeds
Cooling off period CAN DOs
Distribute preliminary prospectus (red herring) Customers can take interest
Fines for fraud
Go to dept of treasury
Reg 144
Holder of restricted shares can sell if: - Issuer registers the shares, form 144 notice of intention to sell - Seller had fully paid shares 6 months - Form 144 can be filed only 4 times a yr
Insider rules
Insiders report trade win 2 business days No trading based off non public information Can't sell own company's stock short Both tipper and tippee responsible
1934 Security Exchange Act
M&M S IMPRESS Manipulation, Margin, SEC, Insiders, Short sale rules, Proxy rules, Exchanges, Reports, Stabilization Does not apply to Exempt Securities
SEC Rules
Meet minimum liquid capital Segregate fully paid securities Buy in if customer fails to deliver in 10 days Segregate excess margin (140% of the debit bal) Notification of free credit balances (un-invested money)quarterly Send semi annual financial statements of the firm - Balance sheet - Net capital computation Notification of payment overflow Notification of customer routing in prior 6 mos (where order was executed) Reporting of corporate issuers 10k, 10Q, 8K
Restricted Persons
Member firms Employees of member firms Finders/fiduciaries acting on behalf of managing underwriter including attorneys, accountants, finan consultants Portfolio managers Any person owning 10% or more of member firm. Any immediate family member in 2-5 of the above
Proxy solicitation
Must be complete not misleading Filed w SEC 10 days before sent to customers
Investment Advisor Act 1940
Must register if wants to give advice to more than 15 people Register w SEC
Exchange and Member firm Registers with FNRA, SEC
NYSE - NASD Member firms and sales related employees must also register w FNRA and SEC
Accredited Investor
Net worth $1 million Annual Income $200,000 ($300,000 married) Officers and directors They must sign a letter stating he intends to hold the stock for investment purposes only (letter stock)
SEC
Oversees securities markets Does not regulate insurance products, futures, commodities
13D filing
Person who is 5% position in company with intent to exercise control File win 10 days becomes 5% so info can be made public
Spinning
Practice of allocating highly sought after IPO shares to individuals who are in a position to direct securities business to the firm.
Reg D - Exempt Private Placement Restricted Unregistered Letter Stock Legend Stock
Private Placements Accredited investors Max 35 individual non-accredited investors (must sign sophisticated investment letter(
Circular Offerings
Private placements 504 - $1,000,000 or less 505 - $5,000,000 or less 506 - Unlimited $ amount
Under SEC rules, filing of the Form 144, required when selling restricted stock, is the responsibility of the: A. issuer B. broker-dealer C. seller D. transfer agent
The best answer is C. Filing of the Form 144 to sell restricted stock is the responsibility of the seller.
Maximum sale under form 144
the greater of 1% of outstanding shares or weekly average for preceding 4 weeks
State Regulations
Blue Sky laws, new issues must be registered w state's securities commission Also applies to exempt
DNC List exceptions
Established business relationship Express written consent Personal relationship w rep making the call Act does not apply for not for profit organizations
Rule SHO
Every ticket order marked Long or Short Can only be sold on an up bid
Rule 147 - Exempt
Intrastate Issuer has principal office w 80% income in that state 80%/80% assets, offering proceeds in that state B/D must have office in that state All purchasers are residents of the state 9 month resale period
