Series 7 Unit 20

Selling Concession and Additional Takedown

A syndicate member can buy bonds from the manager for $991.25, sell them to the public for $1,000, and earn the takedown of 7/8 point ($8.75). If the firm chooses instead to sell bonds to a member of the selling group, it does so at a price less than $1,000, in this case $995.00. The discount the selling group receives from the syndicate member is called the "selling concession" This $5 is equal to 1/2 point. Selling group members buy bonds from syndicate members at the concession. The syndicate member keeps the remainder of the total takedown, called the "additional takedown". The additional takedown in this example is 3/8 point ($3.75). *The syndicate manager may notify other firms who are not syndicate or selling group members of the new issue through The Bond Buyer. Interested firms may buy the bonds from the syndicate at a small discount from the reoffer price. This discount is termed a "reallowance", which is generally one-half of the concession amount.

The Syndicate Bid

A syndicate will present a bid to the issuer to win the right to represent the new issue in the primary market. If a syndicate wins the bid they will be selling the bonds to the public in the IPO.

Allocation Priorities

A syndicate's Allocation Priorities become especially important when a bond issue is oversubscribed. The normal priority follows.

Western Account

A western account is a divided account. Each underwriter is responsible only for its own underwriting allocation.

Types of Underwriting Agreements

An agreement among underwriters details each underwriter's commitment and liability, particularly for any shares that remain unsold at the underwriting syndicate's termination. The agreement designates the syndicate manager to act on behalf of the syndicate members. The manager's authority to manage the underwriting, which includes establishing the offering price with the issuer, deciding the timing of the offering, controlling advertising, and making all required filings, comes via this agreement.

FINRA on Size of the Spread

FINRA reviews underwritings to determine if the compensation earned by the underwriter(s) is fair and reasonable. There are a number of factors considered. The amount of the spread varies by issue and can be influenced by any of the following: -TYPE OF COMMITMENT: a firm commitment earns a larger spread than a best efforts agreement b/c of the risks the underwriter assumes -SECURITY'S MARKETABILITY: a bond rated AAA has a smaller spread than a speculative stock. -ISSUER'S BUSINESS:a stable utility stock has a smaller spread than a more volatile stock. -OFFERING SIZE: in a very large offering, the underwriter can spread costs over a larger number of shares, thus, the per share cost may be lower.

Shelf Registration (Rule 415)

Rule 415 of Regulation C of the Securities Act of 1933 permits issuers to quickly raise money in the capital markets when needed or when market conditions are just right. The FIRNA exam outline refers to this as a "delayed or continuous offering and sale of securities". For example, if a company files a shelf registration statement with the SEC, there is no intention to immediately sell securities. However, when the right time arrives, such as interest rates are at a low point, or funds are needed to complete the final phase of a large factory, the company can take down the securities from the shelf without the delay of an SEC review.

Syndicate Management fee.

Syndicate managers receive a per-bond fee for their work in bringing the new issue to market. Take Note: The manager might receive 1/8 ($1.25) as a management fee from the total spread of 1 point ($10).

Order Period

The MSRB has established a timeline for muni underwritings. The order period is the time set by the manger during which the syndicate solicits customers for the issue and all orders are allocated without regard to the sequence in which they were received. The order period usually runs for an hour on the day following the award of the bid.

Types of Syndicate Accounts

The financial liability to which each underwriter is exposed depends on the type of syndicate account. Underwriting syndicates use two arrangements: Western Accounts Eastern Accounts

Participants in a New Issue

The main participants in a new issue are the entity selling the securities and the BD acting as the underwriter (investment banker). The exam will focus on both corporate and muni underwritings. Most of the industry participants play similar roles for both. Where there is an important difference, we will note it.

A typical Official Statement includes

-the offering terms -the summary statement -the purpose of the issue -a description of the basic legal documents, such as the authorizing resolution, indenture, and trust agreement -the security backing the bonds -a description of the bonds -a description of the issuer, including organization and management, area economy, and a financial summary -the construction program -the project feasibility -any regulatory matters -any specific provisions of the indenture or resolution, including funds and accounts, investment of funds, additional bonds, insurance, and events of default -any accompanying legal proceedings -the tax status -any appropriate appendices, including consultant reports, the legal opinion, and financial statements -any credit enhancements With competitive bid underwritings, a municipality publishes an invitation to bid. Investment bankers respond in writing to the issuer's attorney or other designated official requesting information on the offering. How do the potential underwriters know about the new issue? Through an official notice of sale.

Underwriter

A business (or muni government) that plans to issue securities usually works with an underwriter, a BD specializing in investment banking-the process of underwriting new issues. An investment bank's functions may include -advising corporations on the best ways to raise long-term capital -raising capital for issuers by distributing new securities -buying securities from issues and reselling them to the public -distributing large blocks of stock to the public and to institutions -helping issuers comply with securities laws The investment banker who negotiates with the issuer is known as the underwriting manager or syndicate manager. The underwriting manger directs the entire underwriting process, including signing the underwriting agreement with the issuer and directing the due diligence meeting and distribution process. A syndicate may have more than one manager. Take Note**Investment bankers help issuers raise money through the sale of securities. They do NOT loan money. They are also called underwriters. All underwriters of corporate securities must be FINRA member firms. Underwriters of muni securities must be members of the MSRB.

Regulation A+: small and medium offerings

A capital formation scheme designed to ease the requirements for small and medium sized companies to raise capital. Regulation A+ provides two offering tiers for small and medium sized companies that will allow the companies to raise capital in amounts substantially more than the $5 million previously allowed under Regulation A: -TIER 1: securities offerings up to $20 million in a 12 month period will be allowed. Of the $20 million, no more than $6 million can be sold on behalf of existing selling shareholders. The offering would be subject to a coordinated review by individual states and the SEC. TIER 2: securities offerings up to $50 million in a 12 month period will be allowed .Of the $50 million, no more than $15 million can be sold on behalf of existing selling shareholders. These offerings are subject to SEC review only and none at the state level. Tier 2 offerings are still subject to rigorous disclosure requirements to the SEC, including audited financial statements, annual, semiannual, and current reports. Offerings under both tiers are open to the public and general solicitation is permitted for both tiers. However, Tier 2 investors must be qualified investors, there are two ways to qualify: -Be an accredited investor as defined in Rule 501 of Regulation D -Limit the investment to a maximum of the greater of 10% of the investor's net worth or 10% of the investor's net income per offering. Note that self-certification for Tier 2 as to net worth and income is all that is required with no burdensome filings. Tier 1 has no investment limits. Regulation A+ is intended for small and medium sized companies, the regulation specifically excludes investment companies. In a Regulation A+ offering, the issuer files an abbreviated NOTICE OF SALE, or OFFERING CIRCULAR, with the regional SEC office. Investors are provided with this offering circular rather than a full prospectus. The cooling-off period is 20 days between the filing date and effective date, and the issuer need not provide audited financial information. Individuals buying securities in a Regulation A+ offering must receive a final offering circular at least 48 hours before confirmation of sale.

Group Net Order

A group order is placed after the bid is awarded. A syndicate member that wants a customer's order to receive priority enters the order as a group net order. The takedown on a group net order is deposited in the syndicate account, and upon completion of the underwriting, it is split among all syndicate members according to participation.

Mini-Max

A mini-max offering is a best efforts underwriting setting a floor or minimum, which is the least amount the issuer needs to raise to move forward with the underwriting, and a ceiling or maximum on the dollar amount of securities the issuer is willing to sell. The underwriter must locate enough interested buyers to support the minimum (floor) issuance requirement. Once the minimum is met, the underwriter can expand the offering up to the maximum (ceiling) amount of shares the issuer has specified. Mini-max underwriting terms are most frequently found in limited partnership program offerings, and funds collected from investors during the offering period must be held in escrow pending final disposition of the underwriting. TTA** Be prepared for a question that requires an understanding of underwriter risk in firm commitment and best efforts underwriting

Presale Order

A presale order is entered before the date that the syndicate wins the bid, which means that a customer is willing to place an order without knowing the final price or whether the syndicate will even win the bid. A presale order takes priority over other types of orders, and individual syndicate members are not credited with any takedown on presale orders. The takedown is split among all syndicate members according to participation.

Awarding the Issue

After the issuing municipality meets with the municipality's attorneys and accountants to analyze each bid, it awards the municipal bond issue to the syndicate that offers to underwrite the bonds at the lowest NIC or TIC to the issuer. When the issuer makes its choice, it announces the successful bidder and returns the good faith deposits to the remaining syndicates. The successful syndicate has a firm commitment to purchase the bonds from the issuer and reoffer them to the public at the agreed on offering price. The issuer keeps the successful bidder's good-faith deposit to ensure that the syndicate carries out its commitment. Take Note: while the amount of the good-faith deposit can differ from one issue to another, it is usually 1%-2% of the total par value of the offering.

Statement of Additional Information (SAI)

Although a prospectus is always sufficient for the purpose of selling shares, some investors may wish to have additional information not found in the prospectus. This additional information is not necessarily needed to make an informed investment decision but may be useful to the investor. An SAI must be available to investors upon request without charge. Investors can obtain a copy by calling or writing to the investment company via a company website, contacting a broker that sells the investment company shares, or contacting the SEC. If requested, a paper copy must be sent within 3 days of the request. The SAI affords the fund an opportunity to have expanded discussions on matters such as the fund's history and policies. It will also typically contain the fund's consolidated financial statements. Take Note: The SAI must be available for open-end and closed-end companies. Exchange-traded funds (ETFs) also have SAIs, but UITs do not.

Selling Group Formation

Although the members of an underwriting syndicate agree to underwrite an entire offering, they frequently enlist other firms to help distribute the securities as members of the selling group. SELLING GROUP members act as agents with no commitment to buy securities. The managing underwriter is normally responsible for determining whether to use a selling group and, if so, which firms to include. If the securities to be issued are attractive, broker dealers will want to participate. If the securities are not attractive, the manager may have to persuade broker-dealers to join. Selling group members sign a SELLING GROUP AGREEMENT with the underwriters, which typically contains: -a statement that the manager acts for all of the underwriters -the amount of securities each selling group member will be allotted and the tentative public offering price (POP) at which the securities will be sold (this price is firmed up just before the offering date) -the portion of the underwriting spread (called the concession) to be received on sales made by selling group members (this is usually the largest portion of the spread) -Provisions as to how and when payment for shares is to be made to the managing underwriter, and -Legal provisions limiting each selling group member's liability in conjunction with the underwriting TTA*** Syndicate members take on financial liability and act in a principal capacity. Selling group members have no financial liability and act as agents b/c they have no commitment to buy securities from the issuer.

The Registration Process

Although we tend to thin of new issues when discussing registration, that is not the only time registration is required. There could be a registered SECONDARY DISTRIBUTION. This is a distribution, with a prospectus, that involves securities owned by major stockholders (typically founders or principal owners of a corporation). The sale proceeds go to the sellers of the stock, not the issuer. There could also be a combined or SPLIT OFFERING. This is a public offering of securities combining both a primary and a secondary offering. A portion of the issue is a primary offering, the proceeds of which go to the issuing corporation. The remainder of the issue is a secondary offering, the proceeds of which go to the selling stockholders. After an issuer files a registration statement with the SEC, a 20-day COOLING-OFF PERIOD begins. During the cooling-off period, the SEC reviews the security's registration statement and can issue a stop order if the statement does not contain all of the required information.

Eastern Account

An eastern account is an undivided account. Each underwriter is allocated a portion of the issue. After the issue has been substantially distributed, each underwriter is allocated additional bonds representing its proportionate share of any unsold bonds. Thus, an underwriter's financial liability might not end when it has distributed its initial allocation. Take note: when remembering the difference between Western and Eastern, divided and undivided accounts, try this phrase "The continental divide is in the West" It helps remind you that western accounts are divided accounts are the same. As are eastern accounts and undivided accounts.

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 506(b). B) Rule 498. C) Rule 135A. D) Rule 156.

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

Answer is A E: 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) Rule 144 B) Regulation D C) Regulation A D) Rule 147

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

Gentry is the chief operating officer (CFO) of RMBM, a NYSE-listed corporation. Gentry has an account at your firm, and five months ago, Gentry purchased 1,000 shares of RMBM common stock at $50 per share. The RMBM shares are now $125 per share, and Gentry exits the position at that price. Which of the following statements presents the view of the SEC? A) Gentry has violated the short-swing profits rule. B) Gentry has violated the volume requirements of Rule 144. C) Gentry has done nothing wrong because the stock was purchased in the open market. D) Gentry has violated the holding period requirements of Rule 144.

Answer is A E: Section 16 of the Securities Exchange Act of 1934 contains the short-swing profits rule. This rule states that any insider of a publicly traded corporation (the CFO would certainly be included in the definition of insider or affiliate) is prohibited from profiting from any purchase or sale (or sale and purchase) of the company's equity securities within a period of less than six months. This rule authorizes the corporation to recover from such statutory insider any so-called "short swing" profits. The term used in industry circles is that the profit must be disgorged (given back). There is nothing illegal here—no fines or penalties. However, we investors might consider returning a $75,000 profit to be a penalty. This stock was purchased in the secondary market, so the Rule 144 holding period does not apply. Rule 144 permits affiliates (like Gentry) to sell up to 1% of the outstanding shares over a 90-day period. RMBM is listed on the NYSE, and 1,000 shares is certainly much less than 1% of the shares outstanding. You do not need to know the listing requirements, but listing on the NYSE requires a minimum of 1.1 million shares outstanding.

What is the profit to a syndicate member if a syndicate is offering an 8.5% bond at 100, the syndicate manager is giving a 0.75 concession and a 1-point total takedown, and the syndicate member sells 1,000 bonds? A) $10,000 B) $7,500 C) $1,000 D) $17,500

Answer is A E: When a member of the syndicate sells a bond, the member is 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.

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

Answer is B E: A member of the board of directors of a publicly traded corporation is considered a control person. These individuals come under the provisions of Rule 144 when they wish to sell their stock in the company. In this question, there are two factors to consider. The first is that the stock is not restricted. How do we know that? Because it was purchased on the Nasdaq Stock Market in a secondary transaction. Therefore, there is no time limitation before she can sell. The second is that the sale meets the de minimis level (no more than 5,000 shares and less than $50,000). That means there is no need to file a Form 144 with its size limitations (the greater of 1% of the total outstanding shares of the same class at the time of sale, or the average weekly trading volume in the stock over the past four weeks on all exchanges or as reported through Nasdaq.) Be careful to answer the question being asked, because there is another issue for this director to consider. Section 16(b) of the Securities Exchange Act of 1934 prohibits control persons from taking short-swing profits, defined as those realized within a period of less than six months. You can read more about that in your LEM at LO 20.e.

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

Answer is B E: If the registration is just with one state, the registration will be done through qualification. Qualification means that the state will collect all the information and decide whether or not to clear the offering for sale in the state.

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

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

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

Answer is B E: The Securities and Exchange Commission was created by the Securities Exchange Act of 1934 as a federal commission with the power to enforce the Securities Act of 1933 and all subsequent federal securities acts. If a security is being offered in a single state and solely to residents of that state, it will generally qualify for the Rule 147 exemption from registration. However, it will likely have to register in that state before the offering may take place.

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

Answer is B E: The firm commitment is the most commonly used type of underwriting contract. Under its terms the underwriter commits to buy the securities from the issuer, and as such is acting in a dealer capacity.

If a registered 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) II and IV B) III and IV C) I and III D) I and II

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

Which of the following best describes how a syndicate determines the amount to bid for a new municipal issue? A) The gross spread minus the takedown B) The average sales price divided by the interest cost C) The average reoffering price minus the spread D) The average reoffering price plus the takedown

Answer is C E: A spread is analogous to the gross profit margin in other businesses. A syndicate's bid is based on the average reoffering price (the price the public will pay) less the syndicate's spread (the amount the syndicate will charge for bringing the issue to market).

A new issue of bonds is offered to the public at a price of 100¾. What is the most likely reason for the issue being priced at a premium? A) The issuer has increased the underwriter's compensation. B) The issue's rating increased from A to Aa. C) Market interest rates have gone down since the underwriting commitment was signed. D) The bonds are trading "plus accrued interest."

Answer is C E: Bond prices and interest rates move inversely. It is likely that interest rates have fallen in the time lag between the syndicate's commitment being finalized and the issue actually taking place. That will benefit the syndicate rather than the issuer. If interest rates had increased during that time, the syndicate members would likely have had to price the issue at a discount. That would have had a negative effect on their earnings.

Which of the following competitive bids on a new municipal issue is most likely to be awarded the bid? A) Seven percent coupon with no premiums over par B) Six percent coupon with no premiums over par C) Eight percent coupon with premiums over par D) Six percent coupon with premiums over par

Answer is D E: In a competitive bid bond sale, the winning bid is the one that provides the issuer with the lowest net interest cost. If the syndicate pays the issuer more than par for the bonds, the issuer is taking in more money than it must pay out at maturity. Therefore, its net interest cost is lower than the 6% coupon on the bonds.

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) I and IV B) II and IV C) I and III D) II and III

Answer is D E: 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.

When describing a new offering of municipal bonds, which statement is true regarding presale orders? A) The takedown on presale orders is credited to the account of the syndicate member making the sale. B) The takedown on presale orders is credited to the account of the syndicate manager. C) There is no takedown on a presale order; the buyers purchase at a discounted price. D) The takedown on presale orders is split among the syndicate members based on their participation.

Answer is D E: Unlike registered corporate issues, investors may place orders for a new municipal bond issue before the issue has even been awarded to the syndicate. These presale orders have the highest priority in terms of allocation, and all syndicate members share proportionately in the takedown (their underwriting compensation).

In a municipal underwriting, the scale is used by the syndicate to determine the bid on a new issue. a list of the yield or prices at which the bonds will be offered to the public. used by the syndicate to determine the allocation priority of orders. only used when underwriting term bonds. A) I and IV B) III and IV C) II and III D) I and II

Answer is D The scale, or reoffering scale, represents the prices and/or yields at which new issue securities are offered for sale to the public by the underwriter. The syndicate uses this scale to determine its bid on the issue.

Formation of the Municipal Underwriting Syndicate

As we know, a syndicate is an account that helps spread the risk of underwriting an issue among a number of underwriters. Although the bidding process for muni bonds is competitive, successive offerings of a particular municipality are often handled by the same syndicate, which is composed of the same members. A firm makes the decision to participate as a syndicate member after it considers: -the potential demand for the security -the existence of presale orders -the determination and extend of liability -the scale and spread -the ability to sell the issue Participants formalize their relationship by signing a SYNDICATE LETTER, or syndicate agreement, in a competitive bid or a syndicate contract, or agreement among underwriters in a negotiated underwriting. About two weeks before the issue is awarded, the syndicate manager sends the syndicate letter or contract to each participating firm for an authorized signature. The member's signature indicates that the member agrees with the offering terms. Syndicate letters include: -each member firm's level of participation or commitment -priority of order allocation -duration of the syndicate account -appointment of the manager(s) as agent(s) for the account -fee for the managing underwriter and breakdown of the spread -other obligations, such as member expenses, good-faith deposits, observance of offering terms, and liability for unsold bonds. Take Note: Syndicate letters are not legally binding until the syndicate's submission of the bid. Firms may drop from the group until this point.

TTA******

Can assets in an account or property held jointly with another person who is not the purchaser's spouse be included in determining whether the purchaser satisfies the net worth in Rule 501? YES. Assets in an account or property held jointly with a person who is not the purchaser's spouse may be included in the calculation for the net worth test, but only to the extent of her percentage ownership of the account or property. Purchasers must have access to the same type of information they would receive if the securities were being sold under prospectus in a registered offering. The amount of capital that can be raised is unlimited. A private placement investor must sign a letter stating that she intends to hold the stock for investment purposes only. PRIVATE PLACEMENT STOCK is called LETTERED STOCK b/c of this investment letter. The certificate may bear a legend indicating that it can't be transferred without registration or exemption, therefore, private placement stock is also called LEGEND STOCK. ***What is FORM D and when does it have to be filed? Under Rule 503 of Regulation D, an issuer that is issuing securities in reliance on Regulation D must file Form D electronically with the SEC no later than 15 days after the first sale of securities in the offering.*** The SEC also specifies instances when an amended Form D should be field, such as to correct a mistake of fact or error or to reflect a change in information.

Tombstone Advertisement

During the cooling-off period, sales of the security and related activities are prohibited. Nonbinding indications of interest may be gathered with a preliminary prospectus. In addition, tombstone advertisements are allowed to be published. These announcements typically published after the offering has been cleared for sale, offer information to investors. However, they do not offer the securities for sale. Issuers are not required to publish tombstones, but they may appear either before or after the effective date of the sale. *The term tombstone advertisement comes from the "bare-bones" minimum information that they provide. Info found in a tombstone advertisement published on or after the effective date includes: -name of issuer -type of security -underwriter -price -effective date of sale

Pricing the New Issue of Publicly Traded Securities

During the cooling-off period, the underwriter advises the issuing corporation on the best price at which to offer securities to the public. The following variables may be considered when pricing new issues. -Indications of interest from the underwriter's book -Prevailing market conditions, including recent offerings and the prices of similar new issues -Price that the syndicate members will accept -Price-to-earnings (P/E) ratios of similar companies and the company's most recent earnings report (at what price the shares must be offered so that the P/E ratio is in line with the P/E ratios of other similar publicly traded stocks) -The company's dividend payment record and financial health -The company's debt ratio An issue's price or yield must be determined by the effective date of the registration. The effective date is when the security begins to trade.

Protecting the Public and Restricted Persons Prohibitions (FINRA RULE 5130)

FINRA Rule 5130 is designed to protect the integrity of the public offering process by ensuring that -members make a bona fide public offering of securities at the POP -members do not withhold securities in a public offering for their own benefit or use such securities to reward persons who are in a position to direct future business to the member -industry insiders, such as members and their associate persons, do not take advantage of their insider status to gain access to new issues for their own benefit at the expense of public customers The rule applies only to a new issue, which is defined to mean any IPO of equity securities. The rule does not apply to additional issue offerings, debt securities, restricted or exempt securities, convertible securities, preferred stock, investment company securities, offerings of business development companies, direct participation companies, and REITs. Essentially, the rule applies to IPOs of common stock. The rule prohibits member firms from selling a new issue to any account where restricted persons are beneficial owners. Restricted persons are defined as follows: -member firms -employees of member firms -finders and fiduciaries acting on behalf of the managing underwriter, including attorneys, accountants, financial consultants, and so forth -portfolio managers, including any person who has the authority to buy or sell securities for a bank, savings and loan association, insurance company, or investment company. -any person owning 10% or more of a member firm

Disclosure of Fees

Fees to be paid to a clearing agency and the syndicate manager must be disclosed to syndicate members in advance. Normally, this disclosure is part of the syndicate letter or the agreement among underwriters. Management fees include any amount in the gross spread that is paid to the manager alone and not shared with syndicate members.

Continued...

Furthermore, any immediate family member of any person in bullet points 2 through 5 is also restricted. Immediate family members includes parents, in-laws, spouses, siblings, children, or any other individual to whom the person provides material support. Unlike control stock, residence is not a requirement. Giving or receiving support is a requirement, and living in the same home generally would make a family member restricted. There is an important exemption. The prohibitions on the purchase and sale of new issues must not apply to securities that are specifically directed by the issuer. When a company goes public, it is good business practice to make shares available to employees, many of who would not normally be able to purchase new issues. However, these shares may not be directed to restricted persons. Finally, there is a de minimis exemption. If the beneficial interests of restricted persons does not exceed 10% of an account, the account may purchase a new equity issue. In other words, restricted persons will be able to have an interest in an account that purchases new equity issues as long as no more than 10% of the account's beneficial owners are restricted persons. SPINNING is the practice of allocating highly sought after IPO shares to individuals who are in a position to direct securities business to the firm. This is why portfolio managers are categorized as restricted persons. These individuals are in a position to direct business to a firm and may be willing to do so on the basis of the size of their allocation. Before selling an IPO to any account, reps are required to obtain a written representation from the account owner(s) that the account is eligible to purchase a new common stock issue at the POP. All representations must be obtained within the 12 month period before the sale of the new issue and must be retained for at least 3 years following the new issue sale.

Best Efforts

In a best efforts arrangement, the underwriter acts as an agent for the issuing corporation. The deal is contingent on the underwriter's ability to sell shares to the public. in a best efforts underwriting, the underwriter sells as much as possible, without financial liability for what remains unsold. The underwriter is actin gin an agency capacity with no financial risk.

All-or-None

In an all-or-none (AON) underwriting, the issuing corporation has determined that it wants an agreement outlining that the underwriter must either sell all of the shares or cancel the underwriting. B/c of the uncertainty over the outcome of an AON offering, any funds collected from investors during the offering period must be held in escrow pending final disposition of the underwriting. BDs engaged in an AON distribution are prohibited from deceiving investors by stating that all the securities in the underwriting have been sold if it is not the case.

The Securities Act of 1933

Investigation of the conditions that led to the stock market crash of 1929 determined that investors had little protection from fraud in the sale of new issues of securities. Rumors, exaggerations, and unsubstantiated claims led to excessive speculation in newly issued stock. Congress passed the Securities Act of 1933 to require issuers of new securities to file registration statements with the SEC to provide investors with complete and accurate information in the form of a prospectus when soliciting sales. Think of the Securities Act of 1933 as the PAPER ACT b/c of the registration statement and prospectus. It will remind you of the paperwork requirements for full and fair disclosure. New securities that are subject to the act's requirements are called nonexempt issues. Exempt securities are not subject to these requirements.

Order Allocation

Muni bond orders are allocated according to priorities the syndicate sets in advance. The MSRB requires syndicates to establish PRIORITY ALLOCATION PROVISIONS for orders. The managing underwriter must submit these provisions to all syndicate members in writing. Normally, the manager includes allocation priorities and confirmation procedures in the syndicate agreement. The syndicate must establish a definite sequence in which orders will be accepted and can't simply state that the order priority will be left to the manager's discretion. Syndicate members must signify in writing their acceptance of the allocation priorities. In addition, the manager must notify the members in writing of any change to the set priorities.

TTA*

Municipal spread questions are generally asked in terms of points, not dollars. One bond point equals $10. Be ready for a question that asks you to rank parts of the spread in order of their size. Remember that the manager's fee is typically the smallest, and the total takedown is the largest. The additional takedown is a part of the total takedown amount. You may see a question that asks you under what circumstances a syndicate member can receive the full spread when a bond is sold. The answer is that the syndicate member receives the full spread if the member is also the syndicate manager. Also, be ready to define total takedown as the concession plus the additional takedown.

Regulation S

Offers and sales made outside the US by both US and foreign issuers are excluded from the registration provisions. B/c securities distributed offshore by issuers need not be registered with the SEC, they are therefore restricted for the purpose of rule 144. To avoid registration under Regulation S: -the offer and sale must be made in an offshore transaction, and -there can be no directed selling efforts in the US in connection with the offering. To be an offshore transaction, offers and sales can't be made to any person or entity in the US. However, US citizens residing outside the US could purchase these securities. All sales made under Regulation S must be reported to the SEC on Form 8-K. Take Note: Regulation S addresses the sale of unregistered securities by US based issuers to non US residents. A holding period on Regulation S securities is necessary to prevent flow back to the US. THere is a holding period of either 6 months or one year depending on the reporting status of the issuer. However, sales may be made immediately to any SEC-designated offshore securities market. Take Note: Regulation S applies to US issuers. Foreign issuers are not subject to this regulation if certain requirements are met. TO be a foreign issuer, no more than 50% of its voting securities and no more than 20% of its debt securities can be owned by persons with a US address. If a foreign issuer does not meet these requirements, it will be subject to the provisions of Regulation S (no sales to entities in the US)

The Secondary Market

Once a new issue has been distributed, all further buying and selling takes place in the secondary market. As pointed out much earlier, these are the exchanges, Nasdaq, and the OTC market. Transactions in the secondary market are largely nonissuer transactions. That is, the proceeds of the sale do not go to the issuer, they go to the selling shareholder (or bondholder)

Rule 144

Rule 144 regulates the sale of control and restricted securities, stipulating the holding period, quantity limitations, manner of sale, and filing procedures. For purposes of Rule 144, CONTROL SECURITIES are those owned by directors, officers or persons who own or control at least 10% of the issuer's voting stock. These are commonly referred to as insiders. Take Note: If an unaffiliated individual owns 7% of the voting stock and that persons spouse also owns 4%, they they would BOTH be considered a control persons since together they total 10% or more. RESTRICTED SECURITIES are those acquired through some means other than a registered public offering. A security purchased in a private placement is restricted. Restricted securities may not be sold until they have been fully paid for 6 months. According to Rule 144, after holding restricted stock fully paid for 6 months, an affiliate may begin selling shares by submitting form 144 but is subject to volume restriction rules as enumerated as follows. In any 90 day period, an investor may sell the greater of: -1% of the total outstanding shares of the same class at the time of the sale -the average weekly trading volume in the stock over the past four weeks on all exchanges or as reported through nasdaq. There is a de minimis exemption 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. The de minimis rule also applies to sales in any 90-day period. After the 6 month holding period, affiliated persons are subject to the volume restrictions for as long as they are affiliates. For unaffiliated investors, the stock may be sold completely unrestricted after the 6 month holding period has been satisfied. Selling shares under Rule 144 effectively registers the shares.

Rule 144A

Rule 144A allows nonregistered foreign and domestic securities to be sold to certain institutional investors in the US without holding period requirements. To qualify for this exemption, the buyer must be a QUALIFIED INSTITUTIONAL BUYER (QIB). A QIB must have a minimum of $100 million invested on a discretionary basis and can't have any affiliation with the entity selling the securities.

SEC Disclaimer

SEC Disclaimer. The SEC reviews the prospectus to ensure that it contains the necessary material facts, but it does not guarantee the disclosure's accuracy. Furthermore, the SEC does not approve the issue but simply clears it for distribution. Implying that the SEC has approved the issue violates federal law. Finally, the SEC does not pass judgment on the issue's investment merit. The front of every prospectus must contain a clearly printed SEC DISCLAIMER specifying the limits of the SEC's review procedures. The information supplied to the SEC becomes public once a registration statement is filed. If, at any time, the SEC believes that the registration statement is incomplete or has other problems, it may issue a STOP ORDER. This is not to be confused with the buy stop and sell stop orders. This stop order "Stops" the registration process. Typically a deficiency letter is sent, and if the deficiency letter is not cured by the stated deadline, the issue may be permanently halted. TTA: anything that says the SEC approves or disapproves an issue of securities is wrong. The SEC does not approve or disapprove--it clears or releases issues of securities for sale. When the SEC has completed its review, the registration becomes effective. Issuers and underwriters are responsible for the information found in the prospectus and will conduct due diligence meetings to ensure that the prospectus is true and accurate.

SEC Rule 501 Accredited Investors

SEC RULE 501 classifies an accredited investor for the purposes of Regulation D into several categories. Investors are considered to be accredited under the rule only if the issuer or any person acting on the issuer's behalf has reasonable grounds to believe, and does believe after reasonable inquiry, that the investors are included in one of the categories in the definition. The separate categories of accredited investors under Regulation D include: -a bank, insurance company, or registered investment company -an employee benefit plan if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million -a charitable organization, corporation, or partnership with assets exceeding $5 million -directors, executive officers, and GPs of the issuer -any natural person whose individual net worth, or joint net worth with that person's spouse, excluding the net equity in his primary residence, exceeds $1 million at the time of his purchase -any natural person who had an individual income in excess of $200,000 in each of the most recent 2 years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in he current year -entities made up of accredited investors The term ACCREDITED INVESTOR applies only to private placements. A favorite phrase of the regulators is "eligibility does not equal suitability". Therefore, just b/c one meets the financial requirements of an accredited investor does not mean that suitability standards are ignored.

Regulation D: Private Placements

Securities offered and sold in compliance with Regulation D are exempt from registration with the SEC and are considered federal covered securities exempt from registration on the state level as well. Our primary concern is with SEC Rule 506, a private placement where there is no dollar limit on the amount sold. The jumpstart our business act of 2012, or JOBS Act, made several important changes to Rule 506 of Regulation D. Rule 506 consists of two sections, 506b and 506c. A company seeking to raise capital through a private placement under rule 506b can sell the offering to an unlimited number of accredited investors and up to 35 nonaccredited investors. In addition, no advertising may be done on behalf of the offering. On the other hand, section 506c permits the offering to be advertised. There are 2 primary (and interrelated) requirements to do this: -all purchasers are accredited investors, or the issuer reasonably believes they are accredited investors. -the issuer takes reasonable steps to verify that all purchaser are accredited investors, which could include reviewing documentation, such as W-2s, tax returns, banks and brokerage statements, credit reports and so forth. An issuer can elect to make a typical Rule 506 offering without general solicitation or advertising under Section 506b to include up to 35 nonaccredited investors in the offering or to avoid the heightened verification process. The JOBS Act also included a provision that an issuer is disquialified from using Rule 506 under their BAD ACTOR provisions. Simply, if the issuer or other relevant persons (such as underwriters, directors, officers, or significant shareholders of the issuer), have been convicted of securities fraud or certain other securities violations, an offering under Rule 506 may not take place.

Exempt Transations

Securities offered by corporations may qualify for exemption from the registration statement and prospectus requirements of the Securities Act of 1933 under one of the following exclusionary provisions: -Regulation A+: small and medium corporate offerings -Regulation D: private placements -Rule 147: Securities offered and sold exclusively interstate -Regulation S: Offers and sales made outside the US by US issuers -Other exempt transactions, including Rule 144, Rule 144A, and Rule 145

TTA**

Sometimes it is difficult to identify private placement stock in a question b/c of the many terms that can be used to describe it. Recognize all of the following terms as being synonymous with private placement stock: -Restricted (b/c it must be held for a 6 month period) -Unregistered (no registration statement on file with the SEC) -Letter Stock (investor agreed to terms by signing an investment letter) -Legend Stock (bear a restrictive legend on the certificate)

Standby

Standby is a form of firm commitment unique to corporate rights offerings. When a company's current stockholders do not exercise their preemptive rights in an additional offering, a corporation has an underwriter STANDING BY to purchase whatever shares remain unsold as a result of rights expiring. B/c the standby underwriter unconditionally agrees to buy all shares that current stockholders do not subscribe to at the subscription price, the offering is a firm commitment. Take Note* By engaging a standby underwriter, an issuer is assured of selling all the shares being offered, even if the shareholders do not exercise their rights.

State Registration

State securities laws, also called BLUE-SKY LAWS, also require registration of securities, BDs, and registered representatives. An issuer or investment banker may blue-sky an issue by one of the following methods: -QUALIFICATION: The issuer registers only with the state. There is no federal registration b/c the issue is sold strictly intrastate. The requirements are those of the specific state. -COORDINATION: The issuer registers simultaneously with the state and the SEC. Both registrations become effective on the same date. -NOTICE FILING: securities listed on the major stock exchanges and on Nasdaq, as well as investment companies registered under the Investment Company Act of 1940, are known as federal covered securities. State registration is not required, but most states require the filing of a notice that the issuer intends to offer its securities for sale in that state and the state may assess a filing fee.

Official Statement (OS)

The MSRB defines an OS as: "A document prepared by or on behalf of the issuer of municipal securities in connection with a primary offering that discloses material information on the offering of such securities. Official statements typically include information regarding the purpose of the issue, how the securities will be repaid, and the financial and economic characteristics of the issuer, conduit borrower or other obligated person with respect to the offered securities. Investors and market intermediaries may use this information to evaluate the credit quality of the securities and potential risks of the primary offering." Municipal securities are exempt from the filing requirements of the Securities Act of 1933. However, like all other securities, they are subject tot he anti-fraud provisions of the Securities Exchange Act of 1934. Therefore, a full and fair disclosure of material facts of the offering is still required. The full and fair disclosure document for municipal securities is called the OFFICIAL STATEMENT (OS). There is no preliminary prospectus wither for muni securities, but there is a PRELIMINARY OFFICIAL STATEMENT. Just as with the red herring for an equity issue, underwriters use a preliminary OS to determine investors' and dealers' interest in the issue. Prepared by the issuer, the OS identifies the issue's purpose, the source from which the interest and principal will be repaid, and the issuer's and communicty's financial and economic backgrounds. The OS also has information relating to the issue's creditworthiness.

Forming a Syndicate

The MSRB defines the syndicate as "a group of underwriters formed to purchase (underwrite) a new issue of muni securities from the issuer and offer it for resale to the public. The syndicate is organized for the purpose of sharing the risks of underwritings the issuer, obtaining sufficient capital to purchase and issue and broadening the distribution channels to the investing public. Underwriting syndicate members make a financial commitment to help bring the securities public. In a firm commitment offering, all syndicate members commit to purchase from the issuer and then distribute an agree-on amount of the issue (their participation or bracket). Syndicate members sign a syndicate agreement, or syndicate letter, that descries the participants' responsibilities and allocation of syndicate profits, if any. Syndicate and selling groups may be assembled either before or after the issue is awarded to the underwriter. In a NEGOTIATED Underwriting, the issuer and the investment banker negotiate the offering terms, including the amount of securities to be offered, offering price or yield, and underwriting fees. Negotiated underwritings are standard in underwriting corporate securities b/c of close business relationships between issuing corporations and investment banking firms. COMPETITIVE BID UNDERWRITING arrangements are the standard for underwriting most muni securities and are often required by state law. In a competitive bit, a state or muni government invited investment bankers to bid for a new issue of bonds. The issuer awards the securities to the underwriter(s) whose bid results in the lower net interest cots to the issuer. After the issuing muni meets with the municipality's attorneys and accountants to analyze each bid, it awards the muni bond issue to the syndicate that offers to underwrite the bonds at the lowest net interest cost or true interest cost to the issuer. Net Interest Cost (NIC) is a common calculation used for comparing bids and awarding the bond issue. It combines the amount of proceeds the issuer receives with the total coupon interest it pays. True Interest Cost (TIC) provides the same type of cost comparison adjusted for the time value of money. Take note** NIC is a straight mathematical interest-rate calculation. The lowest NIC is the winner. TIC weights early interest payments more heavily to give greater value to dollars of today over dollars to be paid in the future, consistent with present value calculations.

Red Herring

The RED HERRING (preliminary prospectus) is used to gauge investor reactions and gather indications of interest for corporate securities. A registered rep may discuss the issue with prospects during the cooling-off period and provide them with preliminary information through the red herring. It must carry a legend, printed in red, that declares that a registration statement has been filed with the SEC but is not yet effective. The final offering price and underwriting spread are not included in the red herring. SEC Rules prohibit the sale of public offering securities without a prospectus, which means no sales are allowed until the final prospectus is available.

Exempt Issuers and Securities

The Securities Act of 1933 provides specific exemptions from federal registration provisions. Among the exemptions are the following issuers: -The US Government -US Municipalities and territories -Nonprofit religious, educational, and charitable organizations -Banks and savings and loans -Public utilities and common carriers whose activities are regulated as to rates and other items by a state or federal regulatory body (eg, railroad equipment trust certificate The following securities are exempt from the Securities Act of 1933: -Commercial paper--maturity less than 270 days -Bankers' acceptances--maturity less than 270 days -Securities acquired in private placements--Regulation D When a security is exempt from federal registration, there is no registration statement, no prospectus. In some cases, a security might have to register solely with the state or with the state as well as the SEC.

Firm Commitment

The firm commitment is the most commonly used type of underwriting contract. Under its terms, the underwriter(s) [investment bank(s)] commit to buy the securities from the issuer and resell them to the public. The underwriters assume the financial risk of incurring losses in the event they are unable to distribute all the shares to the public. A firm commitment underwriting can be either a negotiated underwriting contract or a competitive bid arrangement .Negotiated underwriting contracts are used in most corporate issues. The issuer selects an underwriter and negotiates the conditions of the underwriting contract. A competitive bid arrangement is the standard for new issuer offering in the municipal securities market. Sales begin on the effective date of the offering. Take Note: In a firm commitment underwriting, the managing underwriter takes on the financial risk b/c he purchases the securities from the issuer. B/c he purchases and resells the shares, he is acting in a principal (dealer) capacity. TTA**Syndicates are usually formed to spread the risk of an offering among several underwriters instead of one underwriter taking all the risk.

Member Order and Member-Related Order

The lowest priority for orders goes to member and member-related orders. A member firm enters such an order for its own inventory or related accounts, such as for a dealer-sponsored "unit investment trust" (UIT). The easiest way to remember the priority of the various types of orders is that the highest priority is given to those orders that benefit the most members. The lowest priority is given to orders that benefit a single member. Under MSRB rules, a syndicate member placing an order for a related account must disclose this fact to the syndicate manager when the order is placed. Therefore, the manager knows to accord these orders the lowest priority. Within two business days of the sale date, the syndicate manager must send a written summary of how orders were allocated to the other syndicate members. **A simple way to remember the normal order allocation priority found in the syndicate letter is PRO GOLFERS DON'T MISS. PGDM stands for presale, group designated and member.

Designated Order

The next highest priority for orders received during the order period is assigned to DESIGNATED ORDERS. These orders are usually from institutions that wish to allocate the takedown to certain syndicate members.

Official Notice of Sale

The official notice of sale to solicit bids for the bonds is usually published in The Bond Buyer and local newspapers and includes: -date, time, and place of sale -name and description of issuer -type of bond -bidding restrictions (usually requiring a sealed bid) -interest payment dates -dated date (interest accrual date) and first coupon payment date -maturity structure -call provisions (if any) -denominations and registration provisions -expenses to be borne by purchaser or issuer -amount of good-faith deposit that must accompany bid -paying agent or trustees -name of the firm (the BOND COUNSEL) providing the legal opinion -details of delivery -issuer's right of rejection of all bids -criteria for awarding the issue -issuer's obligation to prepare the final OS and deliver copies to the successful bidder The bond's rating and the underwriter's name are not included in a notice of sale b/c they have yet to be determined. The investment bankers prepare bids for the securities based on information in the notice of sale, comparable new issue supply and demand, and general market conditions. As we have discussed, the winner is the underwriter whose bid represents the lowest cost to the issues (either NIC or TIC)

Total Takedown

The portion of the spread that remains after subtracting the management fee is called the TOTAL TAKEDOWN. Members buy the bonds from the syndicate manager at the takedown. For a 1 point spread with a management fee of 1/8 point, the takedown is 7/8 point ($8.75). A syndicate member that has purchased bonds at the takedown can sell its bonds either to customers at the offering price or to a dealer in the selling group below the offering price. Unlike syndicate members ,firms that are part of the selling group do not assume financial risk. They are engaged to help the syndicate members sell the new issue. Their compensation for each bond sold is termed the SELLING CONCESSION.

Breakdown of the Spread

The price at which the bonds are sold to the public is known as the reoffering price. The syndicate's compensation for underwriting the new issue is the spread, or the difference between the price the syndicate pays for the issue and the reoffering price. Each participant in the syndicate is entitled to a portion of the spread, depending on the role each member plays in the underwriting. TTA* Just as with MFs, the offering price, or public price, is the price paid by investors and includes the spread. The term PRODUCTION refers to the total dollars sales earned from a muni issue. The production less the amount bid for the issue results in the spread.

Syndicate Account

The syndicate account is created when the issue is awarded. The SYNDICATE MANAGER is responsible for keeping the books and managing the account. All sale proceeds are deposited to the syndicate account, and all expenses are paid out of the account. All sale proceeds are deposited to the syndicate account, and all expenses are paid out of the account. Settlement of syndicate accounts is 30 calendar days after the issuer delivers the securities to the syndicate. Therefore, the maximum length of time for the syndicate to exist is 30 calendar days from the time the issuer delivers the securities to the syndicate.

The Primary Market

The term primary market does not refer to a market place such as an exchange or the OTC market. The primary market describes the sale of securities to the investing public in what are known as issuer transactions. The ISSUER receives the proceeds generated by the sale of those securities. In all cases, these are shares that have never been issued to the public before. The most common example is the IPO. Those shares represent the first time any shares have been issued to raise new capital for the issuer. Can an issuer have more than one primary offering? Yes, it happens with MFs every day. Open-end investment companies are constantly issuing new shares. They have a primary every day. However, they, like any other issuer, can only have one IPO. Whenever a corporation wishes to raise additional equity capital, it can issue additional new shares. These shares generally come from the authorized but unissued shares we discussed in unit 3. There are several terms used for these APOs, such as follow-on offering or APO. The easiest way to identify a primary offering is to "follow the money." If the funds wind up in the coffers of the issuer, it is a primary offering or a primary distribution. ***TTA*** There is one case where the issuer receives the proceeds and it is not a primary offering. When a company resells treasury stock, it receives the proceeds. B/c those shares were previously owned, it cannot be called a primary offer.

Underwriting Municipal Securities

There are a number of testable procedures and terms relating to municipal securities. Although, similar in concept to corporate securities, the exam will relate these to muni securities. One significant difference between corporate and muni underwritings to note is the NEED for a LEGAL OPINION.

Establishing the Bid

They syndicate arrives at its competitive bid over a series of meetings during which member dealers discuss the proposed reoffering scale and spread for the underwriters. Their goal is to arrive at the best price to the issuer while still making a profit. At a preliminary meeting, the manager seeks a tentative agreement from members on the prices or yields of all maturities in the issue as well as the gross profit or underwriting spread (the difference between what the public pays and what the issuer receives. A findal bid price for the bond is set at a meeting conducted just before the bid is due. If the member dealers can't all agree on a final bid, the syndicate can go ahead with its bid as long as the syndicate members agree to abide by the majority's decision. Take Note: to win the bid, the syndicate must resolve this question: what is the lowest interest rate that can win the bid and provide a competitive investment to public buyers as well as provide a profit for the underwriter? The process of establishing the reoffering yield (or price) for each maturity is called WRITING THE SCALE. A scale is a list of the bond issue's different maturities. If the coupon rate has already been determined, each maturity listed is assigned a yield. If the rate has not been set, each maturity is assigned a coupon. A normal scale has higher yields for long-term bonds. Once the underwriters have written a scale that allows them to resell the bonds, they prepare the final bid. Put another way, writing the scale involves first determining what prices (yields) are necessary to be able to sell the various serial maturities and then backing off a little to arrive at a bid .Before they submit, the underwriters must ensure that they have met any unique specifications the issuer has set. Competitive bids are submitted as firm commitments. THis means that the underwriters are committing to selling al the bonds. If any are left unsold, the underwriters must take them for their own accounts. Therefore, bids must be carefully written to be competitive yet profitable. Underwriters receive no profit guarantee. Not that syndicates bidding on the proposed issue must bid on the entire amount being offered for sale.

New Issue Worksheet

To acquire relevant details about a new issue, the syndicate manager typically orders the New Issue Worksheet from The Bond Buyer. This worksheet provides--in an organized format--all information presented in the official notice of sale. It shows a schedule of year-by-year maturities and their corresponding dollar amounts and a computation of bond years.

The Issuer

Unless the issue is exempt from registration, the issuer, selling the securities to raise money, must file a registration statement with the SEC. This document requires that the issuer supply sufficient information about the security and the corporation and its officers to allow an investor to make a sound investment decision. When the SEC reviews this document, during what is known as the 20-day cooling off period, it looks for sufficiency of investment information rather than accuracy, though upon completion of the review, it does not guarantee adequacy of the prospectus. Near the end of the cooling-off period, the underwriter holds a due diligence meeting. The preliminary studies, investigations, research, meetings, and compilation of information about a corporation and a proposed new issue that go on during an underwriting are known collectively as DUE DILIGENCE. The underwriter must conduct a formal due diligence meeting to provide information about the issuer, the issuer's financial background, and the intended use of the proceeds. Representatives of the issuer and the underwriter attend these meetings and answer questions from BDs, securities analysts, and institutions. When underwriting muni revenue bonds, this due diligence investigation relies on a feasibility study. This study focuses on the projected revenues and costs associated with the project and an analysis of competing facilities. As part of the due diligence process, investment bankers must: -examine the use of the proceeds -perform financial analysis and feasibility studies -determine the company's stability -determine whether the risk is reasonable

Summary Prospectus-- SEC Rule 498

When it comes to open-end investment companies, the physical delivery requirements can be met by delivery of a summary prospectus. A MF can provide a SUMMARY PROSPECTUS to investors that may include an application investors can use to buy the fund's shares. The summary prospectus is a standardized summary of key information found in the fund's statutory (full) prospectus. Investors who receive the summary have the option of either purchasing fund shares using the application found therein or requesting a statutory prospectus. An investor who purchases share funds on the basis of the summary prospectus must be able to access a statutory prospectus online. Remember, customers can always request and receive a paper copy. If requested, the statutory prospectus must e sent within 3 business days of receipt of the written request. The summary must provide specific information in a particular sequence. Following is a list of required disclosures: -Risk/return summary: investments, risks, and performance -Risk/return summary: fee table -Investment objectives, principal investment strategies related risks, and disclosure of portfolio holdings -Management, organization, and capital structure -Shareholder information -Distribution arrangements -Financial highlights information

The Final Prospectus (effective, statutory prospectus)

When the registration statement for corporate securities becomes effective, the issuer amends the preliminary prospectus and adds information, including the final offering price and the underwriting spread for the final prospectus. Registered Reps may then take orders from those customers who indicated interest in buying during the cooling-off period. A copy of the final prospectus must precede or accompany all purchase confirmations. However, if the prospectus has not yet been filed with the SEC and is available through its website, access to the prospectus equals delivery of prospectus. The prospectus must include: -a description of the offering -the offering price -selling discounts -the offering date -use of the proceeds -a description of the underwriting, but not the actual contracts -a statement of the possibility that the issue's price may be stabilized -a history of the business -risks to the purchasers -a description of management -material financial information -the SEC disclaimer

TTA

When you encounter a Rule 144 question, always look for 2 things: -What kind of stock is being sold? (Restricted or control) -Who is selling it? (insider or noninsider) Only restricted stock has a holding period. Control stock, unless it is restricted, can be sold immediately, but volume limits always apply. Take Note: If an affiliate sells control stock for a profit without holding it at least 6 months, this is called a SHORT SWING PROFIT. If a short swing profit occurs, the affiliate must disgorge the profit. This is an SEC rule that is not related to Rule 144, but applies to those people who are control persons and sell unrestricted stock. The term DISGORGED can certainly show up on an exam question. In this case, it means the profit is returned to the issuer.

Trust Indenture Act of 1939

applies to corporate bonds (nonexempt) with the following characteristics: -issue size of more than $50 million within 12 months -maturity of 9 months or more -offered interstate This act was passed to protect bondholders and requires that issuers of these bonds appoint a trustee to ensure that promises (covenants) between the issuer and the trustee who acts solely for the benefit of the bondholders are carried out. The document is filed at the office of a custodian so that investors may review it if they choose.

Rule 147: Intrastate Offerings

offerings that take place in entirely one state are exempt from registration when: -the issuer has its principal office and receives at least 80% of its income in the state -at least 80% of the issuer's assets are located within the state -at least 80% of the offering proceeds are used within the state -the B/D acting as underwriter is a resident of the state and has an office in the state -all purchasers are residents of the state Take Note: to qualify under the RULE 147 exemption, only one of the three 80% tests or the majority of employees test noted earlier must be met, HOWEVER, the 100% residents rule always applies. TTA: Purchasers of an intrastate issue may not resell the stock to any resident of another state for at least 6 months after purchase.