CH 2 Underwriters Flashcards
CH 2
In a best-efforts underwriting, unsold securities are retained by ______________.
the issuer.
The New Issue Rule covers what new issues?
All equity IPOs.
Related to penalty bids, when is a managing underwriter allowed to reclaim selling concessions from syndicate members?
When the securities originally sold by the syndicate member are repurchased by the syndicate in stabilizing transactions.
Jim is an associated person. When is someone in his immediate family prohibited from buying an equity IPO?
Material support/household sharing exists, or purchase is made through his firm, or he controls IPO share allocation.
What is the role of FINRA’s Corporate Financing Department?
To evaluate the fairness of an underwriter’s compensation.
What type of information must be contained in a file created by the stabilizing underwriter?
Names/addresses of syndicate members, their percentage of liability, and the date the bid was entered.
True or False: Sharing a household with a person who is not immediate family does not constitute material support.
TRUE.
How long are securities restricted that are received by a BD as compensation for an underwriting?
6 months.
During the restricted period, what purchases are prohibited for issuers and selling shareholders?
Open-market purchases of the offered securities.
Explain the issuer-directed sale exemption under the Equity IPO Rule.
A BD employee may buy an equity IPO if an immediate family member is employed by the issuer who authorizes the sale.
Does issuer reimbursement to an U/W for printing expenses, SEC fees, and issuer legal fees constitute compensation?
No. Reimbursement of expenses normally incurred by an issuer, but paid by the syndicate, is not considered compensation.
In what underwriting does the syndicate attempt to sell an entire issue with any unsold balance returned to the issuer?
Best-efforts underwriting.
What is typically NOT considered compensation to an underwriter?
Issuer legal fees and registration fees.
Under Rule 105 of Regulation M, how does the separate accounts exception apply for different trading desks?
If information barriers exist and trading is not coordinated, one desk may buy a new issue even if another sold it short.
True or False: According to the Equity IPO Rule, all associated persons connected to a BD are restricted.
True. The associated persons of a BD include owners, officers, directors, and other employees.
In a firm commitment underwriting, unsold securities are retained by ________________.
the syndicate.
__________ is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).
Pegging.
True or False: Nonmember firms are treated in the same manner as member firms.
False. Nonmember firms are treated in the same way as the public. They receive no preference (discounts).
If a BD is underwriting its own offering, what are the disclosure requirements prior to accepting client orders?
If disclosure is first made verbally, written disclosure is then required at, or before, settlement.
True or False: A standby underwriting is a form of best-efforts underwriting.
False. A standby underwriting is a form of firm-commitment underwriting used in conjunction with a rights offering.
A stabilizing underwriter who lowers its bid may now bid no higher than the ________ bid of an ___________ market maker.
highest bid of an independent market maker.
In a rising market, may a passive market maker set the market?
Yes, but only to display a customer’s buy order under the Limit Order Display Rule.
Is there a limit to the number of purchases able to be made at the stabilizing bid price?
No. While only one stabilizing bid is allowed, there may be an unlimited number of purchases.
Is there a maximum number of stabilizing bids that may be placed?
Yes, one. It is usually placed by the syndicate manager.
True or False: To assist in distributing a new issue, a syndicate may sell shares to institutional buyers at a discount.
False. Once the POP has been set, it must be maintained unless the syndicate manager authorizes sales at a discount.
As a passive market maker, you may not enter a bid _________ than the highest independent bid.
higher.
A non dilutive offering of previously issued shares, often by officers or directors, is called a __________ offering.
secondary offering.
Under the Equity IPO Rule, who is considered to be part of an associated person’s immediate family?
Parents, siblings, spouse, children, or in-laws.
What is the maximum period that a stabilizing bid may remain open in the marketplace?
Indefinite.
True or False: Under Reg M, a security’s restricted period is typically based on the issuer’s public float and ADTV.
TRUE.
According to the Equity IPO Rule, firms must update the eligibility of purchasers ___________.
annually.
True or False: Syndicates must file reports with FINRA if anticipating a delay in final settlement of the syndicate.
TRUE.
Is a BD forced to drop its stabilizing bid because an independent market maker drops its bid below the stabilizing bid?
No. However, if it chooses to lower its bid, it must lower it to a price no higher than the highest independent bid.
A new issue is priced on Friday, July 15. No violation occurs if a buyer of the new shares shorted them on what date?
Thursday, July 7 since the five-day-period prohibition of Rule 105 of Regulation M begins on Friday, July 8.
The final settlement of a syndicate account must occur within _________ of the syndicate closing.
90 days.
An investor’s eligibility to purchase an equity new issue must be confirmed ______________.
annually (called the pre-condition of sale).
When participating in a firm-commitment underwriting, when is the underwriter required to set up an escrow account?
Never, an escrow account is only required for contingent best-efforts underwritings.
Is a stabilizing underwriter required to maintain the bid for a specific length of time?
No. There is no specific minimum or maximum length of time for maintaining a stabilizing bid.
Under Regulation M, how many stabilizing underwriters are permitted for a specific offering?
Only one.
If a BD underwrites its own offering, what is required to place the securities in a client’s discretionary account?
The client’s specific written consent is required.
Under Rule 105 of Regulation M, how does the bona fide purchase exception apply for an investor?
If unaware of a new issue, he may close the short sale at least one business day before pricing and then buy the issue.
True or False: Under the Equity IPO Rule, personnel of a limited BD are included as restricted persons.
False. Employees of limited BDs are exempt (firm limits its business to investment company/variable contracts or DPPs).
In addition to the spread, what other items may be considered part of the underwriter’s compensation?
Syndicate legal fees and finder’s fees.
When must final settlement of a syndicate occur?
Within 90 days of the syndicate closing.
What securities are exempt from FINRA’s Corporate Financing Rule?
Reg. D securities and those listed on the NYSE, AMEX, or Nasdaq Global Market.
True or False: In a mini-maxi underwriting, the syndicate may contribute needed funds to meet the minimum requirement.
False. Contributing funds would change the type of underwriting.
When is a passive market maker required to withdraw from the market for the remainder of a day?
When its net purchases exceed its DPL.
Define the market-out clause.
A provision releasing an underwriter from liability if events occur that make the sale of the issue difficult/impossible.
Is notification required when a member firm imposes a penalty bid or engages in syndicate covering transactions?
Yes. FINRA must be notified of these practices related to both Nasdaq and OTC securities.
May a market maker acting as an underwriter for the issuer continue to make a market in the issuer’s securities?
Yes, according to Reg M, but only as a passive market maker.
FINRA considers it unreasonable for a BD to receive shares in excess of ____% of the total offering.
10%.
According to Regulation M, the Restricted Period begins either ___ or ___ business days before pricing.
1 or 5 business days.
For how long are securities restricted if received by the syndicate as compensation?
Six months.
To cover a short sale, investors may not use a new stock issue if the short sale occurred within ___ days of the offer.
5 days.
For passive market making to occur for a stock, it must have how many independent market makers?
One.
Related to short selling, Rule 105 of Regulation M prohibits investors from engaging in what practice?
Buying shares of a new issue if they had sold short the securities within five business days prior to pricing the issue.
Does FINRA consider it reasonable for an U/W to receive an unlimited number of shares from the issuer as compensation?
No. FINRA considers it unreasonable to receive an excessive number of shares as compensation.
True or False: Institutional clients may be offered a discount from the offering price of a new issue.
False. Clients, both institutional and retail, must pay the full public offering price for a new issue.
In a declining market, how long may a PSMM maintain the highest bid?
Until it purchases the lesser of two times the minimum quote size or reaches its daily purchase limit (DPL).
When does the restricted period begin for a security with a public float of $50 million and an ADTV of $125,000?
One business day prior to pricing.
While engaging in passive market making, what is the daily purchase limit?
The greater of 30% of your ADTV in the stock, or 200 shares.
True or False: During the restricted period, passive market making is allowed for all Nasdaq and OTC equity securities.
False. Passive market making is not allowed for OTC equity securities.
What is a passive market maker’s daily purchase limit (DPL)?
The greater of 30% of its average daily trading volume (ADTV) or 200 shares.
Under FINRA rules, who may be offered underwriting discounts?
Only FINRA member firms or foreign BDs who intend to sell outside the U.S.
How are passive market makers identified to FINRA?
They are identified in the underwriting activity report that is filed with FINRA by the syndicate manager.
During the Regulation M Restricted Period, underwriters may not_______________________________________.
purchase (bid) for the securities for their own account.
The Green Shoe Clause allows the issuer to expand the offering by a maximum of ____%.
15%.
True or False: Portfolio managers may purchase equity IPOs for their own accounts if not excessive.
False. Portfolio managers may purchase for the fund they represent, but not for their own accounts.
____________ is the only form of price manipulation allowed by the SEC.
Stabilization.
What are actively-traded securities as defined by Regulation M?
Those with a public float of at least $150 MM and ADTV of $1 MM.
What regulation restricts activities that could be deemed manipulative during an offering?
Regulation M.
Rule 105 of Regulation M is designed to minimize what possibility for a short seller?
He may benefit from an impending new issue at a set price and use those shares to cover a short position.
For new issues, how does the syndicate manager actually penalize another participant with the penalty bid?
By refusing to pay the underwriting participant whose client buys the issue and immediately sells back to the syndicate.
List the securities for which there is no restricted period as determined by Regulation M.
A public float of at least $150 MM and ADTV of $1 MM, municipal, government, or nonconvertible investment-grade.
What provision in an underwriting agreement allows for the expansion of the offering?
The Green Shoe Clause or Overallotment Covenant.
A QIU is a firm that has acted as _______ or __________ in at least _____ similar offerings within the last _____ years.
manager or comanager in at least three similar offerings within the last three years.
What type of underwriting is cancelled if the entire issue is not sold?
All-or-None.
True or False: Stabilization is designed to artificially raise the price of a new issue.
False. Stabilization is designed to support or keep a new issue’s price from falling.
A BD may publicly distribute its own securities or an affiliate’s securities. Define the term affiliate.
An entity that controls or is controlled by the BD (i.e., ownership of 10% or more of outstanding equity).
In a best-efforts underwriting, when will the escrow agent (bank) release the funds?
When the offering is cancelled or when the contingency is met.
True or False: FINRA’s Corporate Financing Department evaluates the fairness of the POP (public offering price).
False. FINRA’s Corporate Financing Department evaluates the fairness of the underwriter’s compensation, not the POP.
What type of underwriting is cancelled if a specified portion is not sold?
Mini-max.
In a best-efforts underwriting, when will the escrow agent (bank) release the funds?
When the offering is cancelled or when the contingency is met
What type of underwriting is cancelled if a specified portion is not sold?
Mini-max
Under the Equity IPO Rule, how does the de minimis exemption apply?
An account that includes restricted persons may purchase the shares, provided their combined ownership is 10% or less.
If its daily purchase limit (DPL) is exceeded, for how long must the passive market maker withdraw from the market?
For the remainder of the day
If a security is defined as _______________ under Regulation M, there is no Restricted Period.
If a security is defined as actively traded under Regulation M, there is no Restricted Period.
What is the goal of Regulation M?
To limit the activities that could be used to manipulate the price of a security prior to, and during, an underwriting
Investors may not purchase a new issue if those shares were sold short ____ business days prior to the offering.
Investors may not purchase a new issue if those shares were sold short 5 business days prior to the offering.
When is a passive market maker temporarily permitted to maintain the highest bid?
When an independent market maker lowers its bid
The highest price at which a stabilizing bid may be placed is the ________________________.
The highest price at which a stabilizing bid may be placed is the public offering price (POP).
When does FINRA consider it unreasonable for an underwriter to receive options or warrants from an issuer?
When the options/warrants have a duration exceeding five years with better terms than offered to the public
During the restricted period, what activities are permitted by underwriting participants?
Executing unsolicited customer orders and soliciting offers to buy the securities being distributed
True or False: If your daily purchase limit is exceeded, your firm is subject to disciplinary action.
False, after exceeding its daily purchase limit, the firm must withdraw as a market maker for the remainder of the day.
True or False: A suspended firm may still be invited by existing members to participate in an underwriting.
FALSE
Under Reg M, how many days prior to pricing does the restricted period for actively traded securities begin?
Actively traded securities have no restricted period.
The ___________ clause gives underwriters the ability to buy additional shares from the issuer to cover over-allotments.
The Green Shoe clause gives underwriters the ability to buy additional shares from the issuer to cover over-allotments.
From what are underwriting participants prohibited during the restricted period?
Purchasing or bidding for a covered security
May a passive market maker’s displayed size exceed its daily purchase limit?
No
According to the Equity IPO Rule, member firms and their associated persons are considered ___________ persons.
According to the Equity IPO Rule, member firms and their associated persons are considered restricted persons.
After offering a new IPO publicly as an underwriter, a BD places shares in its own account. Is this acceptable?
Yes, since a bona fide public offering had been made first.
True or False: During the restricted period, distribution participants may act as passive MMs for OTC equity securities.
False. Only Nasdaq securities are eligible for passive market making.
If a bona fide market exists for a BD’s security, may the BD underwrite the issue without a qualified independent U/W?
Yes. If a bona fide market exists, or managing U/W has no conflict, or issue is investment-grade, a QIU is unnecessary.
For how many trades is a PSMM permitted to exceed its daily purchase limit (DPL)?
For only one trade. After the trade, the PSMM must withdraw from the market for the remainder of the day.
When does the syndicate manager send a passive market making notice to FINRA?
No later than one day prior to the beginning of the restricted period
A penalty bid allows the managing underwriter to reclaim a ___________________ from a syndicate member.
A penalty bid allows the managing underwriter to reclaim a selling concession from a syndicate member.
Which two of these underwriting types require an escrow account? Firm-Commitment, All-or-None, Standby, or Mini-Maxi
All-or-None and Mini-Maxi underwritings
True or False: Escrow funds are deposited with the issuer’s legal counsel until the deal becomes effective.
False. The escrow account is maintained at a bank that has agreed to hold the funds.
If the syndicate manager anticipates a delay in the closing of the syndicate, who is notified?
FINRA
Under the Green Shoe Clause, the maximum overallotment is ____% of the offering.
Under the Green Shoe Clause, the maximum overallotment is 15% of the offering.
Besides BDs and their employees, who else is restricted from purchasing equity IPOs?
An employee’s immediate family if materially supported by, or sharing household with, the employee
Explain the exception provided to investment companies under Rule 105 of Regulation M.
One fund in the complex (family) may buy a new issue even if another fund in the complex had sold it short
True or False: During the restricted period, underwriting participants may act as a PSMM for any type of security.
False. Passive market making is permitted for Nasdaq securities, but not for OTC equities.
An RR’s mother plans to buy equity IPO shares from a BD that does not employ the RR. Is she restricted from purchasing?
No. If she is not supported by her child and purchases from a BD that does not employ her child, she is NOT restricted.
Are finders and fiduciaries (e.g., attorneys and accountants) restricted persons under the Equity IPO Rule?
Yes
True or False: Under FINRA’s Corporate Financing Rule, only a managing underwriter may file the underwriting agreement.
False. The agreement may be filed by the managing underwriter, a syndicate member, or the issuer.
In what type of underwriting does the syndicate pledge to sell the entire issue or keep the unsold balance?
A firm-commitment underwriting
What items would be considered part of underwriting compensation if the syndicate is reimbursed by the issuer?
Finder’s fees, wholesaler’s fees, syndicate legal expenses, and salaries of investment banking personnel
True or False: To stabilize an issue, the principal market on which the stock trades must be notified.
TRUE
What must a BD forfeit if its client buys a new issue and then sells it back to the syndicate at the stabilizing price?
The selling concession
If a BD distributes its own securities, when is a qualified independent underwriter (QIU) not required?
When the managing U/W has no conflict, or the securities have a bona fide market, or the securities are investment-grade
True or False: BDs and their employees may buy shares of equity IPOs from the syndicate.
False. They are considered restricted.
True or False: A PSMM is freely permitted to effect purchases at a price that exceeds the highest independent bid.
False. A PSMM is generally prohibited from effecting purchases at a price that exceeds the highest independent bid.
True or False: When determining a person’s eligibility to purchase an equity IPO, oral verification is acceptable.
False. Firms must obtain written or electronic verification of eligibility.
A ___________ underwriting is used for shares not purchased through a rights offering.
A Stand-by underwriting is used for shares not purchased through a rights offering.
Under the Equity IPO Rule, who is NOT considered to be part of an associated person’s immediate family?
