Additional Flashcards

Question

Types of research reports include each of the following, EXCEPT: A. Inititation reports B. Pre-termination reports C. Earnings analysis D. Topical reports

Answer 1

B. There is no such term as pre-termination report. However, there are reports that are published that notify customers of a firm of the termination of coverage. In a final research report a firm that terminates research provides a comparable research report that stipulates research will be terminated on the subject issuer or industry.

Answer 2

B. Regulation AC requires that all analysts who contributed to the content of the report, whether debt or equity, must certify the report.

Answer 3

C. FINRA requires a firm to create its own policies and procedures that would ensure that research analyst accounts, and supervisors of research analysts, as well as associated persons with the ability to influence the content of research reports do not benefit in their trading from knowledge of the content or that timing of a research report before the intended recipients of such research have had a reasonable opportunity to act on the information in the research report. The rule does not specify an exact time when the trades can be executed, but any trading prior to the proper dissemination of the information would be a conflict of interest. *There could also be a conflict if an analyst trades prior to publication even though the report was authored by a different analyst.*

Answer 4

C. The research analyst should remain silent and not give credibility to these statements, which might be of a manipulative nature. A report may be written and comments may be made on widely circulated rumors, but any attempt to influence the price of a stock would also be considered a manipulative act.

Answer 5

D. The research analyst should comment through a note or report based on any publicly available information. The analyst should not expect her compliance department to be more successful than she is in maintaining open communication with a subject company's management.

Answer 6

B. Non-GAAP measures either exclude amounts included in GAAP measures or are subject to adjustments that create the exclusion of an amount that's included with comparable GAAP measures. Issuers may use non-GAAP financial metrics, but must compare them with GAAP compliant numbers and provide a reconciliation for comparison purposes.

Answer 7

B. A tombstone ad is a communication that is not deemed to be a prospectus. Tombstone ads may contain the names of the underwriters, offering price, type of industry, and size of the offering. However, the ads cannot contain the risks or benefits of investing in the issue. These disclosures appear in the prospectus. Generally, forward looking information (i.e., projections) cannot be included in a prospectus.

Answer 8

A, the filmed version of a television or video advertisement must be filed with an SRO within 10 business days of first use or broadcast. It is assumed that the draft version or storyboard has already been filed with FINRA.

Answer 9

C, when a research analyst is interviewed by a member of the media, it is considered a public appearance. Regulation AC specifies that a firm must maintain internally prepared quarterly records indicating each public appearance in which an analyst expresses her personal views. The actual public appearance does not require certification and SRO rules do not require pre-approval. If the member firm received compensation, this must be disclosed; however, the specific amount of compensation the firm received for investment banking services is not required to be disclosed.

Answer 10

C. Retail communication is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30-calendar-day period. A retail investor is considered any person who does not meet the definition of an institutional investor. Correspondence is defined as any written or electronic message that is sent by a member firm to 25 or fewer retail investors within any 30-calendar-day period. These retail investors may be existing or prospective clients. If an independently prepared reprint is sent to more than 25 retail investors, it is considered retail communication. Since there is no exemption for independently prepared reprints, FINRA requires the preapproval of a registered principal.

Answer 11

A. ***Under the New Issue Rule, portfolio managers, broker-dealers, and registered representatives are not permitted to buy IPOs, even if they're not involved in the underwriting.*** However, there is an exemption for issuer-directed sales. Restricted persons may buy IPOs directly from the issuer, but only if they have an immediate family member who's an employee or director of the issuer.

Answer 12

C. A public appearance includes the writing of any print media article in where the analyst makes a recommendation or offers an opinion concerning any equity securities. It also includes any radio, television or print media interview.

Answer 13

B. The manufacturing company is an S-1 filer based on its brief history as a public company. Under Rule 139, research can be published as long as recommendations contain similar information about a substantial number of companies in the registrant's industry.

Answer 14

C. A public appearance is defined as "any conference call, seminar, or public speaking engagement to 15 or more persons, or with one or more representatives of the media in which a research analyst makes a recommendation or offers an opinion concerning an equity security." The definition also includes any print article in which the analyst makes a recommendation or offers an opinion concerning an equity security. Internal communication is not a public speaking engagement and therefore is not viewed as a public appearance.

Answer 15

D. FINRA permits a research analyst account to trade in a manner inconsistent with a research analyst's recommendation if the firm has instituted a policy that prohibits any research analyst from holding securities, or options on, or derivatives of, such securities, of the companies in the research analyst's coverage universe. The plan would detail the circumstances and the timing of the sell transaction relative to the buy or hold recommendation. (FINRA does not specify a time period.) The rule specifies that the member must establish a reasonable plan to liquidate such holdings so that the analyst is not able to benefit in trading from his knowledge of the content or the timing of a research report before the intended recipients of such research have had a reasonable opportunity to act on the information in the research report. This plan must be approved by the firm's legal or compliance department. If the firm permits the analyst to hold shares of the companies he covers, a buy recommendation would be consistent with owning shares of the company.

Answer 16

C. The analyst is making a public appearance. Although there are disclosure requirements relating to a brokerage firm that receives compensation from a subject company, the rule doesn't require the specific amount of compensation to be disclosed. PIPEs are private investments in public equity and are defined as investment banking services transactions. The analyst must indicate that his firm received investment banking compensation from GlobeNet in the past year.

Answer 17

B. The analyst is not obligated to sell the shares and is permitted to initiate coverage with a buy recommendation. A firm is permitted, but not required to institute a policy that prohibits a research analyst from holding securities, or options on, or derivatives of, such securities, of the companies in the research analyst's coverage universe. If the firm permits the analyst to hold shares of the companies he covers, the buy recommendation would be consistent with owning shares of the company.

Answer 18

C. When a member firm changes its rating or recommendation for a security, a new report is issued. The new report will stipulate the new rating or recommendation and provide information relative to the rationale that mitigated the change. There are times when a projected earnings estimate change would have an effect on the rating or recommendation of an issuer's securities and therefore would be included in this type of report.

Answer 19

C. Information supporting a recommendation must either be provided with the recommendation or offered. The offer must be prominently displayed in at least the same type as the body copy of the material, or in smaller type if it is a different color or a bolder face. It may not be buried in a hedge clause. A simple statement such as, "Additional information is available upon request" is acceptable.

Answer 20

B. One of the required disclosures in a research report is whether the research analyst or a member of the research analyst's household has a financial interest in the securities that are the subject of the report. The report must disclose the nature of the financial interest which may include being long or short the security, or having an option, right, or futures product related to the subject security. A household member is defined as any person whose principal residence is the same as the research analyst which normally includes a spouse and minor children. Excluded from the definition is a person who is not related to the research analyst (i.e., a roommate), provided the two are financially independent of one another. In this question, since the spouse owns shares of the subject company, this must be disclosed in the research report.

Answer 21

C. A price chart is a required element in a research report when the security has been assigned a rating and a price target for at least one year. The chart must indicate the points where the member assigned or changed a rating or price target.

Answer 22

C. If a communication requires disclosure of the firm market-making activities, the only acceptable disclosure is, "We make a market in the security."

Answer 23

D. Since the report was requested by XYZ Brokerage and the firms are affiliated, it's classified as third-party research and requires the inclusion of disclosures that are based on both of the member firms. Mixed-team research is a report by a member firm that's not globally branded and includes a contribution by a research analyst who's not considered an associated person. Typically, mixed-team reports are prepared by analysts who are registered in the U.S. and foreign affiliates.

Answer 24

A. Since there are five buy-rated companies being discussed in this report, the research report is required to include all of the disclosures that are required by the SRO research rules. In the research report, the firm is required to disclose whether the research analyst or a member of the research analyst's family serves as an officer, director, or advisory board member of a company that is the subject of a research report. The report must also disclose the meaning of each of its ratings. If the research report covers six or more companies (a compendium report), the member firm is permitted to use a different method to make the required disclosures. *In a compendium report, rather than making the required disclosures in the actual research report, the firm is permitted to direct the reader as to where he may obtain these disclosures. In an electronically delivered compendium report, the disclosures may include a hyperlink to the disclosures; while a paper-based report must provide a toll-free number to call or an address to which a written request may be sent for the required disclosures. The paper-based report may also include a web address which may be used to find the disclosures.*

Answer 25

B. One of the required disclosures in a research report is whether the research analyst or a member of the research analyst's household has a financial interest in the securities that are the subject of the report. A household member is defined as any person whose principal residence is the same as the research analyst, which normally includes a spouse and minor children. Since the spouse owns shares of the subject company, this must be disclosed in the research report. This would need to be disclosed whether or not the analyst was the beneficiary of the account. If other family members were employed at the firm this would only need to be disclosed if that represented a conflict of interest.

Answer 26

C. The three day quiet period for a secondary offering is waived if the security is considered actively traded under Regulation M. This applies to both public appearances and research reports.

Answer 27

The analysts do not need to be registered. This is an example of globally branded research. There must be a disclosure that the analysts are not registered.

Answer 28

B. Of the choices listed in this question the best course of action is not to disclose this information in advance to the traders of the firm. The downside of informing the traders is that they may be tempted to trade in advance of the analyst commentary. Although the analyst will probably reiterate his outlook, since this would be based on published information, if trades did occur out of the ordinary, regulators may accuse the firm of trading ahead. The analyst should inform the compliance department of the public appearance.

Answer 29

B. A broker-dealer participating in the underwriting of an IPO as a syndicate or selling group member is not permitted to publish a research report until 10 calendar days after the date of the offering. This quiet period also applies to a research analyst and the waiting time to make a public appearance.

Answer 30

A. If a research report covers six or more companies, it's referred to as a compendium report. Compendium reports may refer the reader to where the applicable disclosures may be obtained. If a report contains a price target, the firm is required to disclose the valuation methods used to determine the price target. Earnings estimates are not required and a price chart is only required to be included if a rating or price target has been assigned for at least one year. Therefore, an initiation report doesn't require the inclusion of price charts.

Answer 31

A. Communications with the public must be approved in advance by a qualified principal. Research reports may only be approved by a supervisory analyst.

Answer 32

D. Analyst experience is not a required disclosure. The other choices must be presented on the front page of the report or must refer the reader to the page on which the disclosures may be found. In electronic research reports, a firm may hyperlink to the disclosure.

Answer 33

C. By certifying a research report, the analyst has committed to an opinion, until modified. The analyst may not communicate one opinion internally to a trader and a different one to public investors. If the analyst agreed at that moment that the stock was not a buy, a changed opinion would have to be disseminated to all investors.

Answer 34

D. Research that is branded globally, and has been prepared by an individual outside the U.S., would not define the preparer as an associated person of the broker-dealer, even if the firm she worked for was affiliated with the distributing U.S. broker-dealer. As such, registration of the analyst is not required. ***Any research prepared outside the U.S. must be approved by a registered principal or supervisory analyst before distribution to clients in the U.S. is permitted.*** Additional disclosure requirements concerning globally branded research reports include the names of the affiliates that contributed to the report, the names of the foreign analysts who contributed to the report, and a statement that such analysts are not qualified by examination. There is no requirement to submit the reports to FINRA.

Answer 35

A. Since the analyst's broker-dealer is involved in selling the follow-on offering, the analyst may answer questions from clients, but cannot make public appearances (e.g., podcast) until after the quiet period. The analyst may also attend internal meetings regarding the offering as long as the meetings exclude the investment banking department. Research analysts are not permitted to attend road shows.

Answer 36

D. ***Since the report was prepared less than 15 days after the most recent calendar quarter (i.e., June 30th), it's not required to be current through June 30.*** Instead, the second most recent quarter (i.e., March 31) is sufficient. If the report was issued on July 16, an explanations of the ratings, time horizon, and benchmarks on which the ratings are based would need to be current through June 30.

Answer 37

B. As a manager or comanager, your firm must wait three calendar days after the effective date to publish a research report. This can be overridden by a significant news event. An earnings report by itself does not qualify for this exception. In this question, since five calendar days have elapsed, a research analyst may publish a research report immediately.

Answer 38

Members must clearly outline the rating system they use, including a description of what each rating means practically to investors. Members must also disclose the following: * The percentage of all securities the firm has rated in each category ("buy," "sell," and "hold" ) * The percentage of subject companies within each rating category that are investment banking clients of the firm or have been within the past twelve months * A price chart of actual past performance and the firm's recommendations on the security that is the subject of the research report (subject security) including an indication of instances where the member's rating or price target has changed, for any subject security the member has rated for one year or longer * A clear and complete explanation of the rating system it uses, and what each particular rating means * A rational basis for the recommendation and supporting analytical data

Answer 39

C. In the adopting release for Regulation FD, the SEC stated, "The regulation is designed to address the core problem of selective disclosure made to those who would reasonably be expected to trade securities on the basis of the information or provide others with advice about securities trading." The regulation does not only include sell-side analysts and, therefore, Reg. FD disclosure is required. The SEC lists four categories of persons to whom selective disclosure may not be made absent a specified exclusion. The first three are securities market professionals—(1) broker-dealers and their associated persons, (2) investment advisers, certain institutional investment managers and their associated persons, and (3) investment companies, hedge funds, and affiliated persons. These categories will include sell-side analysts, many buy-side analysts, large institutional investment managers, and other market professionals who may be likely to trade on the basis of selectively disclosed information. The fourth category of persons includes holders of the issuer's securities, under circumstances in which it is reasonably foreseeable that such persons would purchase or sell securities on the basis of the information.

Answer 40

A. All registered personnel are subject to the Firm Element of continuing education. In addition, all registered persons must annually participate in the Regulatory Element of continuing education.

Answer 41

D. A broker-dealer's compliance department must supervise communications between the research and investment banking departments of a broker-dealer and acts as an intermediary to verify the factual accuracy of a report. When the research department personnel contact an issuer to check on the factual accuracy of a research report, compliance must receive a complete draft of the report as well. The compliance department doesn't preapprove reports or file them with U.S. regulators.

Answer 42

C. Under Reg G, a reporting issuer that publicly discloses material info which includes a non-GAAP financial measure must accompany it with a presentation of the most directly comparable GAAP financial measure. In addition, the issuer must include a quantitative historical reconciliation for the non-GAAP and comparable GAAP measures provided.

Answer 43

B. A broker-dealer that's controled by a another company has a control relationship with that firm. As a result, the brokerage firm must disclose this relationship if it solicits orders for the shares of ABC Company. This written disclosure must be provided prior to the settlement date and will typically be documented on the customer's confirmation.

Answer 44

C. The disclosure of investment banking compensation must be presented in the next disseminated report. ***Had the firm joined the syndicate prior to the publication of the report, disclosure would be required immediately.***

Answer 45

C. ***FINRA permits a research analyst account to trade in a manner that's inconsistent with a research analyst's recommendation if the firm has instituted a policy that prohibits a research analyst from holding securities, or options on, or derivatives of, such securities, of the companies in the research analyst's coverage universe.*** The plan must detail the circumstances and the timing of the sell transaction relative to the buy or hold recommendation. (FINRA doesn't specify a period.) The rule specifies that the member must establish a reasonable plan to liquidate such holdings so that the analyst is not able to benefit in trading from her knowledge of the content or the timing of a research report before the intended recipients of such research have had a reasonable opportunity to act on the report's information. This plan must be approved by the firm's legal or compliance department.

Answer 46

B. The bank would not be required to compromise material, nonpublic information in a public communication regarding the hostile takeover. Share ownership by the analyst, the brokerage firm, or acting as manager or comanager in the last 12 months are disclosure items.

Answer 47

B. FINRA members may submit sections of a draft to a subject company only to verify factual information. The complete draft must be submitted to the legal department prior to submitting the sections to the subject company. The complete draft may not be submitted to the subject company. The subject company may receive the approved report when it is published.

Answer 48

D. A research analyst, when making a public appearance, must disclose if she or any member of her household has a financial interest in debt or equity securities of a company she covers. Since this is a public appearance, there is no requirement for prior written approval nor making the certifications under Regulation AC prior or during the interview. Market making is not a disclosure requirement in a public appearance.

Answer 49

D. The prohibition of IPO purchases by a restricted person includes the following people: * FINRA member firms and any associated person (i.e., an employee) of the member firm * An immediate family member of an employee of a member firm. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other person who is materially supported by an employee of a member firm. The aforementioned immediate family members would only be considered restricted persons if any one of the following three conditions apply: * The employee gives/receives material support to/from the immediate family member. Material support is defined as providing more than 25% of the person's income or living in the same household as the person associated with the member firm * The family member is employed by the member firm that is selling the new issue. * The family member has the ability to control the allocation of the new issue.

Answer 50

C. If a research report makes any recommendation, or has a rating or price target, it must have a reasonable basis and it must be accompanied by a clear explanation of any valuation method used together with a fair presentation of the risks that may impede achievement of the recommendation, rating, or price target. ***A valuation method is not required in the report if it has an earnings estimate.***

Answer 51

C. Certain websites and online interactive electronic forums, such as chat rooms, blogs, or social networking sites generally are considered retail communications, since retail investors will have access to these sites. This type of communication is not subject to principal preapproval and is not required to be filed with FINRA. However, a firm is required to monitor, supervise, and maintain a record of this type of activity in the same manner it handles correspondence.

Answer 52

D. A research analyst is permitted to participate in a pitch meeting with investment banking personnel, but only in connection with an initial public offering of an EGC. A research analyst is not permitted to solicit any investment banking business (underwriting).

Answer 53

A. There is no quiet period if the firm is acting as an underwriter for a secondary offering. If the firm managed or comanaged the secondary offering, the quiet period is three calendar days.

Answer 54

B. According to Regulation FD, issuers are barred from selectively providing nonpublic information to securities professionals. If a company official intentionally provides such information to a securities professional, a simultaneous disclosure to the public is required. If the disclosure was unintentional, the company has 24 hours to make a public announcement of the information. Fiduciary responsibilities exist for individuals such as the company's accountants, lawyers, and investment bankers. These individuals are required to keep material nonpublic information confidential. ***Fiduciary responsibilities do not extend to research analysts unless there are unique circumstances. For example, the analyst or his spouse is a member of the board of directors of the company.***

Answer 55

A. ***Although this is not considered a research, it still needs to be approved by a designated principal such as a Series 16 or Series 24 principal***

Answer 56

B. A covered investment fund is defined as an investment company or a company that has filed to be treated as a business development company. Also, a covered investment fund is registered with the SEC and trades on a U.S. exchange. Examples include an exchange-traded fund, closed-end investment company, and a business development company.The SEC passed the Fair Access to Investment Research (FAIR) Act of 2017 to expand Rule 139 of the Securities Act of 1933 and include covered investment fund research reports. The rule also eliminates the “quiet period” restrictions in FINRA Rule 2241 on publishing a report or making a public appearance relating to such funds. The quiet periods (e.g., three or 10 days), which restrict a research analyst's ability to publish a research report or make a public appearance concerning a securities offering, have been eliminated for covered investments funds.

Answer 57

B. The percentage of all securities in each category the firm has downgraded within the last 12 months is not a required to be disclosed in a research report or a public appearance. However, the other choices listed are all required disclosures in a research report.

Answer 58

D. The most practical thing for Jennifer to do would be to publish a research note containing the information with a revised EPS estimate. Research notes are issued when an issuer has released material information or there has been news in the media regarding an issuer.

Answer 59

C. The compensation committee of a broker-dealer may be comprised of any personnel within the firm, except for individuals who work within the firm's investment banking (corporate finance) department. No member of the investment banking department may have influence over a research analyst. The committee must report to the board of directors of the firm or a senior executive of the broker-dealer.

Answer 60

C. A research analyst may disseminate research reports using almost any method. However, internal memos are not to be circulated outside of a broker-dealer and are not an acceptable method of distributing research.

Answer 61

B. The projected balance sheet would not need to be removed from the research report draft sent to a subject company prior to publication. The investment summary, which includes the rating and/or price target, must be removed. Additionally, a redacted personal (revised) view by an analyst would be excluded, since this would be part of the investment summary.

Answer 62

D. A complete draft of the research report must be sent to legal or compliance personnel before sections of the report are submitted to the subject company. This is required regardless of whether the research department intends to change the price target or rating.

Answer 63

A. Sales and trading department personnel and other nonresearch professionals are permitted to review a research report prior to publication only to verify factual information or identify potential conflicts of interest. This communication must be made through legal or compliance or they must be copied. The price target, rating, and research summary must be removed if sections of the report are being sent in advance to the subject company. The investment banking department is prohibited from any prepublication review of a research report.

Answer 64

A. A research analyst is not permitted to discuss an investment banking transaction with a customer (portfolio manager) and either, any person from the investment banking department or company management. If the analyst did participate in a conversation between the two, she would be violating regulations prohibiting three-way communications even if she only discussed information that is currently available in her latest research report.

Answer 65

C. If a member firm or its affiliates own 1% or more of any class of common equity securities, disclosure is required within a subject company report.

Answer 66

C. An analyst may comment (verbally or in writing) on a rumor once the information has been circulated or made available by the media. The analyst may comment on unsubstantiated information as long as the source of the information is disclosed and the information is revealed to be unsubstantiated. ***The analyst does not need to wait until the company discloses the information***.

Answer 67

C. The company's shelf registration represents a potential investment banking transaction. A communication between an analyst, a client, and issuer personnel is called a three-way communication. Investment banking services transactions may not be discussed by the three people referenced in the question. Technically, the analyst could discuss an investment banking transaction with the money manager, just not in the presence of either company management or investment banking personnel.

Answer 68

B. FINRA requires a registered principal of a member firm to approve most of the firm's retail communications including a videotape display, a seminar text, advertising, sales literature, and independently prepared reprints (if sent to more than 25 retail investors). A chat room discussion, which FINRA also considers a retail communication, does not require principal approval since FINRA specifically exempts any retail communication which is posted on an online interactive electronic forum (social media).

Answer 69

A. SRO research rules prohibit communications between a member's Research and Investment Banking Departments for any reason other than to verify information or check conflicts. In these two cases, communications are permitted, but only if the communication is routed through the member's Legal or Compliance Department, or a representative from either department is present for the conversation. In this case, the conversation between the investment banker and the analyst would be a violation of these rules.

Answer 70

C. ***If a research report contains a rating or recommendation, the firm must show the percentage of all securities that the member recommends as "buy," "sell," or "hold." Within those three categories, the member must disclose the percentage of subject companies that are, or have been, investment banking services clients within the preceding 12-month period.***

Answer 71

B. Under certain circumstances, acceptable methods for a corporation to provide public disclosure include issuing another press release or updating its website. Many issuers make a press release as well as filing a Form 8-K. Since the question asked for the best course of action, filing a Form 8-K with the SEC is the most appropriate answer. In some cases, an issuer may provide advance notice of an earnings call by filing a Form 8-K with dial in numbers and/or provide transcripts of the call as part of its 8-K filing.

Answer 72

B. Restricted persons are not permitted to purchase shares of a new issue under the New Issue Rule. Immediate family members of a person associated with a member firm, portfolio managers and owners of a broker-dealer would be considered restricted persons. Aunts, uncles, and cousins are not defined under the rule as immediate family members and are therefore not considered restricted persons. A buy-side trader would have the ability to make trading decisions and would be defined as a portfolio manager, who are individuals considered restricted persons under the rule.