Additional Flashcards
Under the New Issue Rule, all of the following new issues may be purchased by an employee of a broker-dealer, EXCEPT:
A. A stock that’s sold under an exemption
B. An offering of PS
C. An offering of convertible debt
D. Stock that’s sold under an IPO
D. An employee of a broker-dealer is considered a restricted person and cannot purchase equity IPOs under the New Issue Rule. The New Issue Rule excludes securities that are sold under an exemption, debt offerings, investment company shares, and preferred stock.
A research analyst intends to issue a research report on an exchange-traded fund that has filed a registration statement for a follow-on offering. The company is eligible to file a Form S-3 and the analyst’s firm has not issued research reports on this company with reasonable regularity. If the analyst’s firm is acting as an underwriter for this company, which of the following statements is TRUE?
A. Since the issuer is an S-3 filer, research reports may be prepared and distributed.
B. Research reports may be prepared, but only distributed to institutional investors.
C. If an underwriter has not previously published research regarding an issue, it’s prohibited from publishing a report during the registration period.
D. If the analyst issues a buy recommendation, the report may be distributed.
C. According to Rule 139 of the Securities Act of 1933, since the analyst’s firm has not issued research reports with reasonable regularity, it may not issue a report on this company. This rule allows an underwriter to publish a research report if the issuer meets certain conditions (i.e., it’s a WKSI or is an S-3 or F-3 filer) and the report is published in the normal course of business. However, the research report may not be an initiation report.
The board of directors of Kent Toy Co. have just agreed to buy a majority interest in Instock Video Games Inc. Which of the following actions may Kent take?
A. Hold a special meeting with key industry people to reveal the takeover
B. Provide general public disclosure
C. Provide private disclosure to shareholders of Kent
D. Hold a special meeting with Instock shareholders to reveal the takeover
B. Under Reg FD, issuers that make disclosure of material nonpublic information must do so publicly. In the event that an issuer accidentally discloses material nonpublic information to someone who may trade the issuer securities based on that information, the issuer must publicly disclose the information promptly thereafter. Public disclosure may be provided by the issuer on a Form 8-K filing or in a way that is broad and does not exclude members of the public domain.
Darlene was a research analyst at Grushow Securities, but she resigned three months ago. Nick was given the majority of Darlene’s research responsibilities. In the upcoming month, he must write a research report on Compost Publishing Group, which was formerly prepared by Darlene for the previous four years. If Nick includes a price chart in the research report, how far back must the information on the chart show?
A. 3 months
B. 1 year
C. 3 years
D. 4 years
C. The information on the price chart in the research report prepared by Nick should show three years’ worth of information. The fact that a new research analyst is now providing coverage is irrelevant. The disclosure is based on the firm coverage of the company, not on a specific research analyst. A price chart is considered a form of disclosure in research reports. Price charts are used for securities that have been assigned a rating for at least one year, but need not show information more than three years prior to the date of the research report.
An analyst was quoted recently in an article in a financial magazine that is widely read by institutional investors. The head of a broker-dealer’s research department would like to distribute the article to clients. Which of the following statements is TRUE?
A. Since the article contains a quote from a research analyst, it is considered a research report and would have to be reviewed in the same manner as a report produced internally by the broker-dealer.
B. The article could be sent to clients without review or approval by the firm, since it was not written by the broker-dealer.
C. The article could only be sent if it was reviewed and approved in the same manner as internally prepared material and met the same standards as any other communication with the public.
D. The article would have to be reviewed and approved in the same manner as internally prepared material but does not have to meet the same standards as other communications with the public.
C. Material prepared by third parties can be sent by the broker-dealer, but must be reviewed and approved in the same manner as internally prepared material. The article must meet the same standards as the communications with the public prepared internally by the broker-dealer. This may require the firm to supplement the article with additional information, since such material might fail, for example, to balance statements of benefits with a discussion of risks
In which of the following meetings may a research analyst participate?
A. An internal meeting between the investment banking and legal departments of his member firm regarding due dilligence
B. A meeting between prospective high-net-worth clients and the issuer concerning a potential IPO
C. A meeting between the investment banking department and two current clients regarding a merger
D. A meeting with the head of research, the investment banking department, and prospective investment banking clients
A. Research analysts may participate in due diligence meetings after the firm has been selected as an underwriter. However, they may not participate in or attend meetings for the purpose of soliciting investment banking business (pitches). This rule is intended to separate the research department from the investment banking function of member firms.
A qualified independent underwriter is a member firm that has been actively engaged in the investment banking or securities business for the preceding:
A. One year
B. Two years
C. Three years
D. Four years
C. Industry regulations provide guidelines for the sale of a member’s own securities through a public distribution. A qualified independent underwriter must participate in the preparation of the offering documents and must have served as a manager or co-manager in at least three public offerings of a similar size and type during the three-year period preceding filing of the registration statement.
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If a member firm wants to refer to its previous recommendations, which disclosure requirement does NOT apply?
A. The member firm must show all of its recommendations made for the same type of securities made within the previous 12 months.
B. The date and price of the security must be indicated.
C. The amount of profit or loss that would have been realized had an individual acted on all of the recommendations must be shown.
D. The fact that the market was generally rising must be disclosed, if such was the case.
C. If a member firm wants to refer to its past recommendations, it must show all of the recommendations made for same type of security over the previous 12 months. For example, if the member firm wants to refer to a past recommendation of a common stock, it must refer to all recommendations of common stock made within the 12-month period, but is not required to refer to recommendations made for bonds. In addition, the member firm must indicate the date and price when the recommendation was initially made and must indicate the general market trend. Hypothetical profits and losses based on previous recommendations are not required to be provided.
If a broker-dealer fails to obtain certifications from an analyst regarding a public appearance:
A. The broker-dealers may not publish
B. The analyst may not publish
C. The analyst must state that certifications were not obtained
D. The broker-deal must notify the SEC
C. For a 120-day period, the specific analyst’s reports are subject to a special disclosure requirement.
The certification referred to here is a statement by the research analyst attesting that the views expressed by the research analyst in all public appearances during the calendar quarter accurately reflected the research analyst’s personal views at that time about any and all of the subject securities or issuers. A written statement by the research analyst certifying that no part of such research analyst’s compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed in any such public appearance. Since this was not complied with, the broker-dealer must promptly notify its examining authority, not the SEC, indicating that the analyst did not provide certification in connection with public appearances. In addition, for 120 days following such notification, the broker-dealer must disclose in any research report it distributes authored by that analyst that the analyst did not provide certification specified in Regulation AC.
A bank owns a broker-dealer that sells securities through its branch system. If the bank is conducting a public offering of its own securities, which of the following statements is TRUE?
A. The broker-dealer cannot participate in the offering under any circumstances.
B. The broker-dealer may participate in the offering if a qualified independent underwriter participated in the preparation of the offering documents.
C. If the offering consists of investment-grade debt, potential conflicts are not required to be disclosed.
D. The offering documents only need to include any conflicts of interest if a qualified independent underwriter is used.
B. If a member firm is participating in a distribution of a public offering of its own securities, or of a firm that controls the member firm, certain conditions must be met. A qualified independent underwriter must participate in the preparation of the offering documents (registration statement), and any conflicts of interest must be prominently disclosed in the prospectus. A qualified independent underwriter must have served as a manager or co-manager in at least three previous public offerings of a similar size and type during the three-year period preceding filing of the registration statement.
Which of the following is permitted to purchase an initial public offering of equity securities?
A. An account in which 8% of the owners are managing directors of a member firm
B. An account in which 12% of the owners are portfolio managers
C. A minor’s account set up for the son of an employee of a member firm
D. An account for a broker-dealer that only transacts business in mutual funds
A. One of the exemptions under the New Issue Rule allows an equity IPO to be sold to an account if the beneficial owners are restricted persons and their ownership of the account does not exceed 10%. The rule does not distinguish between the job titles of employees of a broker-dealer. The minor would be considered a restricted person since the child is supported by the employee of the member firm. Employees of a limited broker-dealer are exempt from the definition of a restricted person, but the broker-dealer is considered restricted.
An exception to the disclosure requirement in a research report of compensation received from subject issuers, may be given to firms for future transactions of a(n):
A. Investment banking nature
B. Non-investment banking nature
C. Research-related nature
D. Affiliate’s non-investment banking nature
A. Under regulations for communications with the public, member firms are required to identify services provided to subject companies within the 12 months prior to the publication of a research report and to disclose compensation a member firm has received in the past 12 months and intends to seek within the following three months after the publication of a research report. With the combination of these two requirements there is a possibility that a firm may disseminate material nonpublic information. Therefore, there is an exception for specific potential future transactions of an investment banking nature in relation to a particular issuer.
A research analyst is in Chicago visiting institutional customers at the same time that an investment banking roadshow is being conducted by her firm. A registered representative from the institutional sales department who attended the roadshow, asks the analyst to meet with a client to discuss the transaction. Which of the following statements is TRUE?
A. This activity would be prohibited and should be reported to compliance immediately.
B. This activity would be allowed if the analyst’s firm is not the manager of the offering.
C. This activity would be allowed provided someone from the investment banking department was present.
D. This activity would be allowed provided someone from the investment banking department was not present.
D
A broker-dealer sends a customer a communication that has statistical summaries of multiple companies’ financial data, including listings of current ratings. This type of communication is:
A. Defined as a research report and must be approved by a supervisory analyst
B. Defined as a research report, but is not required to be approved by a supervisory analyst
C. Not defined as a research report and not required to be approved by a supervisory analyst
D. Not defined as a research report, but must be approved by a supervisory analyst
D. Although these types of communication are not considered research reports, they still need to be approved by a designated principal such as a Series 16 supervisor analyst or a Series 24 General Securities Principal.
Which of the following provisions of the research analyst rules would NOT apply to a broker-dealer with limited investment banking activity?
A. The quiet period
B. Retaliation against research analysts
C. The compensation committee requirements
D. Compensating research analysts based on specific investment transactions
C. There are certain exceptions to FINRA’s research rules available to a broker-dealer with limited investment banking activity. These exceptions are available to firms that over the previous three years, on an average per year, have participated in ten or fewer investment banking services transactions as manager or comanager and have generated $5 million or less in gross investment banking services revenues from these transactions. This definition of investment banking services transactions includes underwriting of both corporate debt and equity, but excludes underwriting of municipal securities. The following provisions still apply:
- Prohibiting compensation based on specific IB servcies transactions
- The anti-retaliation policy
- The quiet periods
- Personal trading restrictions
- Establish, maintain, and enforce written policies and procedures reasonably designed to identify and effectively manage conflicts of interest related to the research department and other departments.
Promissory vs flamboyant
Promissory is promising something. Ex: you can’t lose. Flamboyant is just outrageous stuff.
Regarding ratings that are used in a published research report, all of the following information should be included, EXCEPT:
A. The meanings of ratings
B. The % of all securities rated in each category
C. An explanation as to why IB clients are in certain categories
D. An explanation of the rating system used
C. Members must clearly outline and explain the rating system used in a research report. Members must also disclose the percentage of all securities the firm has rated in each category (e.g., buy, hold, and sell). In addition, broker-dealers are required to disclose the percentage of subject companies within each rating category that are investment banking clients of the firm, but are not required to explain why investment banking clients are in certain categories.
All of the following statements would be valid in a research report, EXCEPT:
A. This stock had its IPO last year and is up more than 50%
B. This stock has increased by 20% over the last six months
C. This stock has increased more than 50% since we recommended it in October
D. This stock has moved up by 40% versus the DJIA, which has only risen by 25% during the same three-month period
C. The regulators have published guidance concerning the use of language in written communications with the public (research reports). One of the concerns is improperly promoting the successful performance of past research recommendations. It is permissible to provide the price history of a specific security, but it is not permissible to mention the fact that the broker-dealer recommended the security at a lower price. The choice which has language that includes when the firm recommended the security would not be a valid statement in a research report.
When a compendium report is issued by the firm, the price charts:
A. Are required to be included in the report
B. Can overlay one another
C. Must include a line graph for a period of longer than three years
D. Should list each company separately
D. If a research report covers six or more companies, it is called a compendium report. For purposes of the disclosures required, the report may refer the reader to where the applicable disclosures may be obtained. For electronic reports, a hyperlink may be included. The requirement to prepare and make entries to a price chart is triggered when a recommendation contains either a price target or rating change, and a rating or price target has been assigned for at least one year. In that case, separate price charts are required for each company and the period is no longer than the most recent three years.
An equity IPO may be purchased by which of the following individuals?
A. The wife of an employee of a broker-dealer who’s a director of the issuer
B. An employee of a member firm that’s not an underwriter of the IPO
C. A portfolio manager of a mutual fund who will purchase the securities for her own account
D. An attorney who’s hired by the issuer to assist in the IPO
A. Restricted persons are permitted to purchase IPOs under certain exemptions, including an issuer-directed sale. This exemption allows a registered representative to purchase shares of an equity IPO if the issuer is that person’s employing broker-dealer, or the parent or subsidiary of the broker-dealer. In addition to a registered representative, other restricted persons, such as immediate family members of employees of a broker-dealer and finders and fiduciaries involved in the offering, are allowed to purchase shares of a new issue as long as they’re employees or directors of the issuer. A portfolio manager of a mutual fund is only a restricted person if she’s purchasing an equity IPO for her personal account. However, there’s no restriction if she’s purchasing shares for the fund she manages.
May an analyst make remarks that an issuer does not cooperate with analysts?
A. No since the communications rules forbid this type of commentary, no matter how tactful
B. It is not relevant since information is publicly available anyway
C. Yes, but the information must be disclosed on the cover page
D. Yes since analysts have the leeway to address issuer cooperation with the analyst community
D. An analyst can make a statement that a particular issuer has become uncooperative or reticent about the underlying business. Such comments, however, should not take center stage in the report.
A research analyst owns .6% of the outstanding shares of one of the companies he covers. His employing firm owns .7% of the outstanding shares of the same company. Which of the following statements is TRUE regarding the disclosure requirements?
A. The analyst must disclose the number of shares owned.
B. The firm must disclose its long position in the stock.
C. The analyst must disclose that he’s long the stock.
D. The firm must disclose that the combined ownership is 1% or more of the stock.
C. Analysts are required to disclose any financial interest in the companies they cover. On the other hand, broker-dealers only have to disclose their ownership if they own 1% or more of the stock. The analyst’s account and the firm’s ownership levels are not combined; therefore, only the analyst’s interest is disclosed in this question.
An analyst engaged in an internet chatroom learns that America Online will be purchasing an upstart software development company. The analyst:
A. May relay this information to his customers as long as the source of this unsubstantiated information is revealed
B. May relay this information as long as the information itself is disclosed to be unsubstantiated
C. May not comment on this information as it is sensational in nature and can affect market conditions on the Exchange
D. May not comment on this information as it did not originate from a reputable source
C. Analysts may not comment on rumors of sensational character which might affect market conditions on the Exchange. An analyst may comment on unsubstantiated information as long as the source of the information is disclosed and the information itself is revealed to be unsubstantiated.
A member firm may compensate a person not associated with a member firm to influence stock prices:
A. When the market for that security is open
B. When the market for that security is closed
C. During group meetings only
D. At no time
D. Member firms are NOT permitted to directly or indirectly give, or permit to be given, anything of value to any person for the purpose of influencing or rewarding the action of that person in the connection with the publication or circulation of any electonic or other public media. The different circulation methods include websites, newspapers, and radio or television programs that are intended to have an effect on the market price of any security. This prohibition would not apply if the compensation is being paid to a person in connection with any of the following:
- A communication that is clearly distinguishable as paid advertising
- A communication that disclsoe the receipt and amount of compensation in accordance w/ Act of 1933
- A research report
Types of research reports include each of the following, EXCEPT:
A. Inititation reports
B. Pre-termination reports
C. Earnings analysis
D. Topical reports
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.
A team of three senior fixed-income analysts at BondsRUs writes a monthly report covering their favorite corporate bonds. Who is required to certify the report?
A. Any one of the team can certify the report on behalf of the team
B. All members of the team need to certify the report
C. BondsRUs, the BD, must certify the report
D. No analyst certification is required since it’s debt-related
B. Regulation AC requires that all analysts who contributed to the content of the report, whether debt or equity, must certify the report.
All of the following would represent a conflict of interest, EXCEPT:
A. A director of research trades on information in a research report prior to the time its hedge fund clients have had a reasonable opportunity to act on the information in the research report
B. A person in the research department with the ability to influence the content of research reports trades at the market open when the research report is released in the afternoon
C. A research analyst trades the day after a research report he wrote is published
D. A research analyst trades the day prior to a research report written by another analyst is published
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.
A research analyst is attending a conference and has a conversation concerning market chatter that a company she covers may be restructuring one of its divisions. This has not been reported in any news source and the information is unsubstantiated. What action can the research analyst take?
A. The analyst is permitted to publish a note to disclose the information and its unknown source
B. The analyst is permitted to comment on this information, but not in writing
C. The analyst is not permitted to comment since disclosing the information might be considered market manipulation
D. The analyst is not permitted to comment, but may instruct the trader to disclose the information to the firm’s clients
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.
Scrimshaw Manufacturing is refusing to speak about its business to an analyst that covers its stock. The research analyst should take which of the following actions?
A. Spread this information through typical media sources
B. Request that a compliance professional at her firm initiate contact
C. Terminate coverage on this company
D. Write a research note based on any available information
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.
Non-GAAP figures are:
A. Presented under the GAAP guidelines with inconsistencies
B. Amounts or adjustments which are excluded from the most comparable to the figures that are presented under GAAP in financial statements
C. Always prohibited
D. All amounts that are not presented under the GAAP guidelines, but are listed on financial statements
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.
What may be included in a communication that’s not deemed to be a prospectus?
A. Earnings projections
B. Name of the lead underwriter
C. Risks of investing in the stock
D. Benefits of investing in the stock
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.
The filmed version of a television or video advertisement must be filed with an SRO:
A. Within 10 business days of first use or broadcast
B. At least 10 business days prior to first use or broadcast
C. Within five business days of first use or broadcast
D. Only if the advertisement recommends a product or service of the broker-dealer
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.
What is required if a research analyst is interviewed by a financial journalist?
A. A statement made in accordance w/ Reg AC
B. Preapproval by a principal of the firm
C. An internally prepared quarterly report
D. Disclosure of the amount of compensation the firm received for IB services
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.
An independently prepared reprint that is sent to 50 existing retail customers is considered:
A. Correspondence and requires preapproval by a principal
B. Correspondence and does not require preapproval by a principal
C. Retail communication and requires preapproval by a principal
D. Retail communication and does not require preapproval by a principal
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.
When is a restricted person permitted buy shares of an equity IPO?
A. When the sale is directed by the issuer and the restricted person has an immediate family member who’s employed by the issuer.
B. When the sale is directed to a portfolio manager’s personal account.
C. When the purchase is made in the proprietary account of a broker-dealer that’s registered with both the SEC and FINRA.
D. When the purchase is made by a registered representative who’s not employed by the lead underwriter of the IPO.
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.
Which of the following statements is TRUE concerning a monthly magazine article regarding equity securities, written by a research analyst?
A. They are subject to a lesser standard of disclosure than other public appearances
B. They are exempt from disclosure requirements
C. They are subject to the same disclosure requirements as other public appearances
D. They are not addressed in SRO communications with the public rules
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.
Ten months ago, a manufacturing company went public by selling 5,000,000 shares of stock. The company’s stock is listed on the NYSE. Currently, the company is in the process of raising additional capital through a subsequent offering. The research analysts at XYZ Brokerage have been following the stock in bi-monthly reports since its IPO. Which of the following statements is TRUE regarding the issuance of research reports on the company by XYZ Brokerage if it’s also participating in the offering as comanager?
A. XYZ Brokerage may continue to publish research on the company without restrictions.
B. If XYZ Brokerage continues to publish research on the company, it must be accompanied by information about a substantial number of similar companies and must not be given greater prominence than other issuers.
C. XYZ Brokerage may publish research on the company only if the report contains no more information than is in the company’s latest registration statement.
D. XYZ Brokerage must suspend its coverage of the company during the time it’s participating in the distribution.
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.
True or false: Tombstone ads cannot contain valuation methods or underwriting spread?
True
Under SEC Rule 138, if a registration statement covers common stock or convertible securities, a broker-dealer participating in the distribution:
A. May not provide research on any securities of the issuer
B. May only provide research on the common stock
C. May only provide research on the convertible securities
D. May only provide research on the nonconvertible securities
D.
Which of the following meetings being conducted by a research analyst qualify as a public appearance?
A. An internal meeting attended by 50 members of the firm’s sales staff
B. A podcast only available to employees of the broker-dealer
C. A conference call to a group of 20 prospective institutional clients
D. A presentation to a group of 12 mutual fund clients
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.
