Additional (Part 2)

Question 1

A company has filed a registration statement with the SEC for an initial public offering. A broker-dealer that is an affiliate of a FINRA member firm owns 12% of the issuing company. Based on this situation, the FINRA member firm:
A. Is not permitted to be an underwriter
B. Is permitted to be an underwriter, but not the lead underwriter
C. Is permitted to be the lead underwriter
D. Is permitted to be an underwriter, but only the qualified independent underwriter

Answer 1

C. Member firms that participate in the distribution of securities will occasionally be faced with conflicts of interest. One such situation occurs when broker-dealers are involved in a public offering of their own stock or the stock of an affiliated company. The term affiliate is defined as any entity that controls, is controlled by, or is under the common control of the member firm. Any conflicts of interest must be prominently disclosed in the prospectus. Since the affiliate broker-dealer owns 10% or more of the issuing company and is controlled by the member firm, it’s deemed to be an affiliate firm and this conflict of interest must be disclosed. The same disclosure is required if the member firm or its parent company owned 10% or more of the issuing company’s equity securities. If the member firm hires a qualified independent underwriter (QIU), it’s permitted to act as the lead or managing underwriter of the offering. While the conflicted firm will still manage the IPO, the QIU will participate in the preparation of the offering documents to manage the conflict of interest.

Question 2

Three months ago, your firm initiated coverage of WCA Company with a buy. A month later, the price target was changed. Six weeks later, the recommendation was changed to sell. What information is found on the price chart?
A. The initial opinion, the price target change, and the current opinion
B. The initial opinion and the latest price change
C. The initial opinion and the current opinion
D. No information is required on a price chart

Answer 2

D. Because the shares have not been covered for one year, no price chart is required. After one year, if the shares are still followed, the price chart will reflect each price target and rating that was assigned to the shares.

Question 3

A broker who is participating in a primary or secondary distribution of a security may compensate another person to solicit orders for the purchase of the security on a national securities exchange:
A. Under no circumstances
B. Without restriction
C. Only if such payment is disclosed in a prospectus
D. Only if the amount of securities solicited is insubstantial

Answer 3

A. A broker-dealer who is participating in a primary or secondary distribution of securities may not pay any person for the purpose of soliciting another person to purchase the security.

Question 4

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A research report states the following:

“After having recommended Infrared Sensors just six weeks ago at $20, profits may be taken at $30 because we feel the issue is fully priced.” It would be more appropriate to say:
A. Because of the recent rise to $30, profits may be taken
B. Never pass up an opportunity to make 50% in a short period of time
C. We get you in at the bottom and out at the top; sell now
D. None of these comments are acceptable

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Answer 4

Investors want to know when they should sell, but the regulators feel it is inappropriate to mention the price of the security when it was recommended. The emphasis should be on where the stock is now.

Question 5

A research analyst publishes research on a garment company, but is on the advisory board for a retailing company. Twenty-five percent of the income of the garment company is derived from the retailing company. Is the analyst required to disclose her affiliation with the retailing company when she writes research reports on the garment company?
A. No, because the two companies are in different industries
B. Yes, because the two companies are in the same industry
C. Yes, because there is a conflict of interest
D. No, because a conflict of interest does not exist

Answer 5

C. In this question since the garment company derives a significant percentage of its income from the retailing company, disclosure would be required. This catch-all disclosure requirement extends further to research reports than to public appearances by adding to the requirement that any material conflict of interest by an associated person of the firm with the ability to influence the content of a research report must be disclosed.

Question 6

A restricted person owns shares of a private company that’s in the process of conducting an initial public offering. A broker-dealer may sell shares of the IPO to this person under which of the following conditions?
A. The restricted person is not involved with the offering
B. The restricted person’s broker-dealer is not an underwriter
C. The restricted person doesn’t sell the securities being purchased until 30 days from the effective date of the offering
D. The restricted person is purchasing shares to maintain her equity ownership percentage in the company

Answer 6

D. A restricted person (e.g., an employee of a broker-dealer) is not permitted to purchase shares of an equity IPO unless an exception applies. One of the exceptions is referred to as the anti-dilution provision, which allows the restricted person to maintain her equity ownership percentage, if certain conditions are met. The restricted person’s interest must have been held for a period of one year prior to the effective date of the offering, the amount being purchased doesn’t increase her equity ownership percentage, and the new issue being purchased is not sold, pledged, or transferred for a period of three months from the effective date. There’s no exception based on the restricted person not being involved in the offering or her firm not being an underwriter. In this scenario, the minimum holding period to sell is three months, not 30 days.

Question 7

All of the following persons are defined as restricted persons under the New Issue Rule, EXCEPT:
A. A portfolio manager employed by an insurance company
B. A registered representative employed by a general securities firm
C. A registered representative employed by a broker-dealer that only transacts business in mutual funds
D. The parents that reside in the same household as a registered representative employed by a member firm

Answer 7

C. All the choices listed, except the RR employed by a broker-dealer that sells only mutual funds, are considered restricted persons. An exemption exists from the definition of a restricted person for personnel of a limited broker-dealer. A limited broker-dealer restricts its business to investment company/variable contract securities or direct participation programs.

Question 8

A research analyst currently lives in the home of her grandparents. The grandparents own 10,000 shares of LRR Financial, which is covered by the analyst. If the analyst makes a public appearance concerning LRR, is this fact required to be disclosed?
A. Yes, since the analyst lives with them
B. No, since grandparents are not considered immediate family members
C. Yes, since the grandparents own 10,000 shares
D. No, since the grandparents are not providing financial support to the analyst

Answer 8

A. One of the required disclosures in a public appearance is whether the research analyst or a member of the analyst’s household has a financial interest in the debt or equity securities of the subject company. A household member is defined as any person whose principal residence is the same as that of the research analyst. Since the analyst lives with the grandparents, disclosure is required. The fact that the grandparents are not providing financial support to the analyst is not relevant. That issue would be relevant in the case of an unrelated person (roommate) whose principal address is the same as the analyst’s.

Question 9

Paul R. Nelson is an analyst at O&A Investments. His firm is the lead underwriter for the IPO of Section 218 Advisory Services, an affiliate of O&A. Prior to the end of the quiet period, Paul has received numerous phone calls from clients seeking his opinion of Section 218 Advisory. Which of the following responses is most appropriate?
A. Paul may verbally comment on the company to the extent disclosed in the prospectus and sales memos
B. Paul may comment both verbally and in writing on the company to the extent disclosed in the prospectus and sales memos
C. Paul may verbally comment on the company to noninstitutional investors, and in verbal or written form to institutional investors, to the extent disclosed in the prospectus and sales memos
D. No verbal or written comment may be made during the quiet period

Answer 9

A. An analyst may not publish research or make a public appearance during the quiet period; however, comments made verbally to clients are permitted, provided such comments are consistent with the disclosures made in the prospectus and sales memorandum. The content found within a sales memo has already been reviewed and approved by the legal and compliance department.

Question 10

A corporation has filed a registration statement and is in the process of offering securities to the public. If an analyst at a brokerage firm that’s not a part of the distribution group prepares a research report concerning this offering, the report may be distributed:
A. As long as it’s accompanied by a preliminary prospectus
B. To no more than 14 institutional investors
C. Under no circumstances
D. Without limitation

Answer 10

D. Under Rule 137 of the Securities Act of 1933, non-participants in a distribution are permitted to publish research without a time restriction or quiet period.

Question 11

S7 Securities is participating in the primary distribution of Marchand Soles Inc. If S7 acts as a broker or dealer to its customers for the Marchand IPO, it must provide disclosure about its participation in the distribution:
A. Before acting as a broker only
B. Before acting as a dealer only
C. At or before the completion of the transaction
D. With the confirmation for the transaction

Answer 11

C. A member firm that acts as a broker or dealer for its customers or advises its customers about securities during the primary or secondary distribution of such securities must provide the customers with written notification that it is participating in the distribution. This notification must be provided to customers at or before the completion of a transaction for the securities involved in the distribution.

Question 12

At a conference, a drug company announces a major breakthrough in the treatment of infectious diseases. If true, this is clearly a bullish development. What should the analyst do?
A. Read the clinical report
B. Upgrade the stock and raise the price target
C. Wait for an 8-K filing
D. Have a one-on-one session with corporate officers

Answer 12

A. The analyst should show enough initiative to read the report and draw his own conclusions. He should expect the issuer to present information within a bullish scenario. The analyst should take a tempered approach.

Question 13

Under FINRA’s research rules, the quiet period definition of the term “date of the offering”, is which of the following?
A. The earlier of, the effective date of the registration statement or the first date on which the securities were offered to the public
B. The later of, the effective date of the registration statement or the first date on which the securities were offered to the public
C. The earlier of, the date on which the final prospectus is available or the first date on which the securities are qualified to be listed on an exchange
D. The later of, the date on which the final prospectus is available or the first date on which the securities are qualified to be listed on an exchange

Answer 13

B

Question 14

A research analyst is preparing to discuss a company on her firms internal communication system (squawk) at 11:00 a. m. The analyst should:
A. Send a new price target to the traders in advance
B. Ensure that legal and compliance are recording the communication
C. Discuss the company on the internal system at the scheduled time
D. Adhere to public appearance standards

Answer 14

C. This is considered internal communication and not a public appearance. The analyst is not permitted to reveal opinion or price target changes to traders ahead of public dissemination. Legal and compliance departments are not required to record the communication.

Question 15

Which of the following statements regarding analyst communications with issuers is TRUE?
A. An analyst is required to notify an issuer of a ratings change
B. Prenotification of a ratings change prior to the public announcement is inappropriate
C. An analyst should white-out (remove) price targets or ratings when submitting research reports to the Legal Departments
D. The research summary, price target, and rating must be omitted when analysts submit information to an issuer for fact-checking purposes

Answer 15

D. Analysts may submit only those facts to an issuer that warrant checking. Critical aspects such as the research summary, price target, and rating must be omitted. There is no requirement to notify an issuer of a ratings change. Technically, prenotification is acceptable after the primary market closes. Analysts must provide the Legal Department with the full research report, not the subject company. The white-out reference would be more applicable to communications with the issuer, and is not relevant to the Legal Department.

Question 16

A research analyst wants to make a presentation at an industry conference. Portfolio managers from mutual fund companies and hedge funds will be attending as well as investment banking professionals from the same firm as the analyst. Is the analyst permitted to make this presentation at the conference?
A. No, since investment banking professionals from the same firm will be attending
B. Yes, provided proper disclosures are made during the analyst presentation
C. No, since both the institutional investors and investment banking personnel from the same firm as the analyst will be present
D. Yes, and since only institutional investors will be present, no disclosures are required

Answer 16

B. The prohibition of a three-way communication applies only if the discussion concerns the analyst opinion regarding an investment banking transaction.

Question 17

A broker-dealer owns shares of a mutual fund in the firm’s pension plan. The fund owns 3% of equity of the Russell Corp. Is there a disclosure requirement if the research department issues a report on the Russell Corp.?
A. Yes, only if the firm publishes the report with a buy recommendation
B. Yes, since the fund owns 3% of the equity of the company
C. No, since the fund, and not the broker-dealer, owns shares of the subject company
D. No, since the percentage is based on the funds ownership of the shares and the disclosure requirement is triggered at 5%

Answer 17

C. If the broker-dealer or its affiliate owns 1% or more of the equity of the company included in a research report, disclosure is required. Since the fund is not affiliated with the broker-dealer, no disclosure is required. If the mutual fund company and the broker-dealer were affiliated, disclosure would be required.

Question 18

Bob Analyst covers the technology sector for ABC Securities. Bob’s wife purchases shares in X Corp, a technology company, prior to its initial public offering. Bob has not prepared a research report on X Corp nor is the company an investment banking client of ABC Securities. Which of the following statements is TRUE regarding his wife’s conduct?
A. His wife’s purchase of X Corp prior to its IPO violates SRO rules
B. There is no rule violation, since Bob has not recommended shares of X Corp
C. There is no rule violation since X Corp is not an investment banking client in ABC Securities
D. There is no rule violation if the purchase is fully disclosed to the Legal or Compliance department of ABC Securities

Answer 18

A. No analyst, or member of an analyst’s household, may purchase shares in a company within that analyst’s sector prior to the company’s initial public offering. This rule is designed to prevent associated persons and their household members from being able to purchase stock at a discount and then selling it once the company goes public.

Question 19

In which of the following situations is a research analyst permitted to communicate with the investment banking department?
A. To discuss a time to meet with a prospective issuer concerning a potential investment banking transaction.
B. To discuss the due diligence requirements of a proposed transaction prior to selection of the underwriters.
C. To discuss the possibility of being compensated for favorable comments regarding an investment banking client.
D. To provide information and views on how a specific investment banking transaction will affect the valuation of an issuer.

Answer 19

D. When meeting with investment banking professionals, a research analyst is permitted to offer information that relates to an industry as well as valuation analysis. However, a research analyst is not permitted to solicit or pitch investment banking business to potential clients or to discuss the due diligence requirements of a proposed transaction prior to the selection of underwriters. After the selection of underwriters is made, the research analyst is permitted to participate in joint due diligence.

Question 20

A firm is a member of the selling syndicate for an initial public offering of securites. If a mutual fund is a customer of the firm and wants to purchase shares of the IPO, which of the following statements is TRUE?
A. If the firm provides research services to the mutual fund, the firm is only permitted to sell shares of the IPO to the fund if it receives the prior written approval of the managing underwriter.
B. If the firm provides research services to the mutual fund, it’s permitted to sell shares of the IPO to the fund.
C. If the firm provides research services to the mutual fund, it’s permitted to sell shares of the IPO to the fund, but only at a premium to the stated public offering price.
D. If the firm provides research services to the mutual fund, it’s only permitted to sell shares of the IPO to the fund if the fund signs an agreement to hold the shares for 180 days.

Answer 20

B. Regarding the sale of securities in a fixed price offering, FINRA rules prohibit the sales of an initial public offering at a price that’s below the stated public offering price unless the sale is made to a member of the selling syndicate or selling group. In addition, the rule permits the sale of shares of an IPO to any account in which the firm provides research as long as the account pay the stated public offering price. There’s no requirement to receive the approval of the managing underwriter or for the fund to hold the shares for a stated period.

Question 21

During a morning meeting, the managing directors of an investment banking firm comment on the recent publicly announced M&A transaction in which it is advising the target. Which of the following statements is TRUE regarding a research analyst’s participation in the meeting?
A. He may not comment on the M&A
B. He may comment on the M&A
C. He may comment on the M&A, but may not discuss the details
D. He may comment only on the M&A with the permission of the compliance department

Answer 21

B. The research analyst may comment on the M&A, even if his firm was the investment banker that handled the investment banking transaction. Since the information regarding the M&A has been released to the media, a research analyst who prepares research reports on the issuer may comment on the activities, however, the comments of the research analyst must be fair and balanced.

Question 22

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.

Answer 22

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.

Question 23

Broker-Dealer A has requested biotech industry reports from an analysis provider. These reports will be available upon request to customers of Broker-Dealer A. If Broker-Dealer A has no influence or editorial control over the content of the reports, which of the following statements is TRUE?
A. The reports are classified as independent third-party research.
B. The reports are classified as third-party research.
C. Approval by a supervisory analyst of Broker-Dealer A is required.
D. Broker-Dealer A’s investment banking relationship with any of the subject companies of the reports must be disclosed.

Answer 23

A. Independent third-party research is that which has been prepared by a person or firm unaffiliated with the broker-dealer that’s distributing the reports. The distributing broker-dealer cannot have editorial control over the content of independent third-party reports and approval by a supervisory analyst or a principal of the distributing broker-dealer is not required. The distributing broker-dealer is not required to disclose its conflicts of interest in independent third-party research; instead, disclosures are made by the firm that prepares the report.

Question 24

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

Answer 24

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.

Question 25

Your firm is participating in an IPO in which the last amendment was filed on October 7. If the initial offering date is October 10 and your firm is the comanager of the issue, what would the earliest date be that it could publish the report?
A. 10 calendar days following October 7
B. 10 calendar days following October 10
C. 3 calendar days following October 7
D. 3 calendar days following October 10

Answer 25

B. The earliest date on which the comanager of an IPO could publish a research report after the IPO 10 is days following October 10. SRO rules incorporate quiet periods that follow an initial public offering date during which time the investment banking client may not be the subject of a research report nor may a research analyst make a public appearance regarding securities that are covered by the quiet period. The quiet period that must be adhered to by all underwriters and selling group members for initial public offerings is 10 calendar days following the date of the offering.

Question 26

A manufacturing company has filed a registration statement with the SEC for an initial public offering. ABC Capital owns more than 10% of the manufacturing company. If ABC Capital is owned by a FINRA member firm, the member firm:
A. Is not permitted to be an underwriter
B. Is permitted to be an underwriter, but not the lead underwriter
C. Is permitted to be an underwriter with no required disclosures
D. Is permitted to be an underwriter, but must disclose the conflict of interest

Answer 26

D. In some cases, member firms that participate in a distribution of securities will find themselves facing conflicts of interest. One such situation occurs when broker-dealers are involved in a public offering of their own stock, or the stock of an affiliated company. The term “affiliate” is defined as any entity that controls, is controlled by, or is under the common control of the member firm. Any conflicts of interest must be disclosed prominently in the prospectus. Since ABC Capital owns 10% or more of the manufacturing company and is controlled by the member firm, it’s deemed an affiliate and this conflict of interest must be disclosed. The same disclosure is required if the member or its parent company owned 10% or more of the equity in the company that’s issuing the securities. However, there’s no restriction for being the manager of the offering.

Question 27

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.

Answer 27

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.