Chapter 11 Flashcards
What issuers should register with the SEC? What are their filing obligations?
issuer with > 2000 shareholders or > $10M assets must register, file proxy with SEC, 10K/10Q
How long can the SEC suspend trading for?
Can suspend trading in a security for max 10 biz days, or in a whole market for 90 days (if POTUS agrees)
What are the regulations surrounding the re-purchase of shares by the issuer? (timing, intermediaries used, price, form if going private)
issuer can’t buy on opening print or < 30mn prior of close (or < 10mn for actively traded secs w/ ADTV >$1M or float >$150M)
issuer limited to 1 BD or MM in a day
issuer can’t enter bid or buy at price > best independent bid
Nasdaq Capital Market & OTC: issuer can’t enter bid or buy at price > worst independent bid
Form 13e-3: going private
What forms should be filed in the context of a tender offer? And large investment?
Offeror files form TO prior
If > 5% of shares purchased, form 13D is filed too (<10d of reaching 5%)
13G: IC that acquires >5% of issuer
13F: RIA >$100M AUM must disclose all assets < 45 d of EoQ
13H : Large Trader must file form 13H < 45 d EoY
How long does the tender offer period last? What happens if the terms are changed?
Must be open for 20 biz days (+10 biz days if terms are changed)
What are the purchasing limitations for the offeror during the tender term?
Offeror can’t purchase stock or convertible securities during tender term
What needs to happen if the tender term is extended?
If Duration extended, announcement before market open (or 9am if unlisted) on biz day following old expiration date
What conditions must the shareholders fulfill to tender?
Shareholders can only tender if they
- own shares
- entered in unconditional contract to acquire shares
- own a convertible bond, preferred stock or warrant
- are long call options & issued exercise instructions
What is a Dutch auction?
Dutch auction: issuer announces range to repurchase their own shares. Issuer then sets final price. All shares tendered at or below final price are purchased by issuer
What is a large trader? What are the regulations surrounding large traders?
- executes trades in sec >2M shares or >$20M in single day
- > 20M, $200M in single quarter
- options whose underlying shares meet above limits
Executing BD required to record all transactions executed for large traders, the LTID number and time.
Form 13H
What are Forms 3 & 4?
Form 3: D&Os initial purchase or reception of shares
Form 4: subsequent purchases. < 2 d
What are FINRA’s four major bylaws?
Rules of Fair Practice
-commissions, markups, communications, recommendations, claims
Uniform Practice Code
-settlements, delivery, confirmations
Code of Procedure
-complaints, violations
Code of Arbitration
What are the different components to becoming a member of Finra?
Inspection: FINRA inspects each BD < 6m of SEC registration (SEC rules), then again <12m (other rules)
Requirements: meet NC requirement, 2 principals, BP, interview
Fees: basic, RR & Principal, based on gross income, branch fee
failure to pay => membership canceled 15 d notice
What are the requirements surrounding foreign broker dealers?
if execute unsolicited orders or research reports distributed by US BD => no need to register
if no US office and deal with institutional clients => no need to register
employee in US to speak to clients & prospects => chaperoned by US RR
What are the requirements surrounding compensation pay to unregistered persons?
No commissions, concessions, discounts, fees to unregistered person or entity
Can pay foreign entity or person a finders fee for intro of foreign entities or persons. Contract must be made available for FINRA
Who must be fingerprinted?
anyone selling securities
access to cash & securities
access or preparation of records of original entry
supervision of aforementioned
Can a retired registered representative receive compensation?
can receive fees on old business if pre-retirement contract
beneficiary can receive if dead
What is considered retail communication?
> 25 retail investors < 30 d
What are the requirements surrounding retail communications? (approval, maintenance, filing, exemptions, tools)
approved by principal, maintained 3y, 2y readily accessible
if BD < 1 y o, retail coms filed w/ FINRA < 10 d before first use ; > 1 y o, < 10 d after
free writing prospectus is included in retail coms procedures
Exempt: if no investment advice, simple list of products, template previously filed, MIC profiles, press releases, correspondence
Software tool to investors provided by BD: must be reviewed by FINRA < 10 d of first use
What are the requirements surrounding institutional communication? What is an institutional investor?
-marked “for institutional use only”
-no principal approval or filing requirement
-II: BDs, RIAs, banks, insurance, ICs, govs, entities/persons >$50M, employment benefit plan > 100 participants
What are the requirements surrounding correspondence?
member reviews sample
What are the requirements surrounding the website?
any new content needs Principal approval
What are tombstone ads?
only ads that can be run while secs are still in registration
Description of secs, biz, transaction + disclaimers + time & place of shareholder meetings
cooling off: The SEC’s regulation refers to the time in between the day the preliminary prospectus is filed with the SEC and the day when the new security is actually available for sale or trade.
What are the requirements surrounding testimonials?
fact that individual received comp must be disclosed if >$100.
What is the SIPC?
Government sponsored corporation that protects customers if the broker dealer fails.
All SEC BDs are required to be SPIC members and pay annual dues to insurance fund
What happens if Firm < NC requirements?
insolvent. SPIC will petition in court to appoint trustee to liquidite firm.
How high is the SIPC coverage?
$500k customer coverage ($250k in cash)
What happens if a firm purchases additional insurance and they subsequently reduce the additional coverage?
If firm purchases additional insurance, and then reduces that excess coverage, 30 days notice must be given to customers before change date
Are directors and officers of the firm covered by SIPC? How about registered representatives?
D&O of BD not covered. RR are.
Are margin accounts covered by SIPC?
Margin accounts covered if equity < $500k
How high can insider trading fines be?
fine up to 300% of gain made / loss avoided or $1M, whichever greater (latter is for both divulger and trader)
insiders: also accountants, attorneys, IBs
What happens if a broker dealer has an investment banking and retail trading department?
Firewall
What is a trust indenture? When should one be issued?
Corporate bonds >$10M w/ repayment term > 1y sold interstate => must issue TI
TI is contract between issuer and trustee. Trustee ensures issuer is in compliance with promises and covenants
What are the requirements surrounding telemarketing? (times, calls, disclosures, exemptions)
8 am - 9 pm in customer time zone
maintain do-not-call list (5y term for each number)
solicitor must give firm name, address and number
if customer is on do-not-call list, he/she can only be called to verify account information
exempt: person who called BD < 3m
What are penny stocks? What is the penny stock cold call rule?
Penny stock: < $5 and issuer doesn’t meet exchange listing requirements
Agent must ensure suitability, supply current quote, disclose commission
Customer must sign suitability agreement
Established customers (3-3-3 or < 12m) are exempt
Who can originate complaints? What is the procedure following a complaint? What happens if Finra deems that the complaint has merit?
Finra, other BD, customer
BD has 25 +14 d to provide info
If FINRA deems that the V/C has merit => minor rule violation procedure or formal hearing
Acceptance Waiver And Consent may be signed (BD doesn’t admit to wrongdoing, but doesn’t contest it)
What happens if there is a minor rule violation? How long to accept ruling?
max. penalty is censure and $2.5k fine
10 biz days to accept
MRV letter signature => doesn’t admit wrongdoing
What is the mediation process?
Attempt to solve the matter before going to arbitration
What conditions must be met in order to go to arbitration? What if the customer is a public co.?
Not a harassment & discrimination matter
Public customer must agree in writing to settle via arb
What are the various steps of the arbitration process? How long do respondents have to reply? How long does one have to comply with a decision?
Claimant files statement of claim and submission agreement and payment of FINRA arb fee
Respondent must reply < 45d
Simplified arb: < $50k. No hearing.
Larger disputes: hearing. Panel. 1 or 3 arbitrators from industry + same number from public.
30d to comply with decision
What are the requirements surrounding political contributions? What disclosures need to be made and when?
Municipal Finance Professionals are limited to contribute $250 per candidate in local elections in which they can vote
Otherwise => MFP banned for 2y from dealing with municipal issuer in question
Disclosures to MSRB at EoQ if BD uses consultant to get muni business
What are the investment advisor state and registration exemptions? Federal registration requirements?
Investment Advisor State registration exemptions if:
-federally registered
-manage portfolios for ICs or >$110M (“federally covered IA”)
-no office and work only with institutions or < 5 clients
$100-110M: IA registered either w/ State or SEC
AUM falls < $90M: IA withdraws federal registration and registers with State < 180d
What are the net capital requirements for a registered investment advisor?
NC > $35k. If not => surety bond
Limited discretionary authority (can’t withdraw cash & securities): NC > $10k
What are the requirements surrounding communications by RIAs? (safekeeping, testimonials, brochure)
Advertising, recommendations, sales lit, statements etc. => kept 5 y
RIAs can’t use client testimonials
Brochure given to client 2d prior to signing or same day if 5d withdrawal grace period
How does an investment advisor become registered? What needs to be provided?
Form ADV
Filing fee
Audited BS < 90 d EoY
What are soft dollars and the requirements surrounding them?
BD services beyond execution and research to RIAs in exchange for commission => soft dollars
must be in RIA clients interest, must disclose comp
What are the obligations under Sarbanes Oxley?
Mgmt of listed companies must affirm accuracy of audits in writing
Details on off BS transactions, liabilities, obligations
Co. can’t make loans to D&Os
D&Os + >10% owners disclose holdings & transactions on co.’s secs
Annual report on internal controls
What is Reg S-K? What transactions must be reported?
Regulates form & layout of information sent by issuer to SEC
Standards for financial projections
GAAP. Can use non-GAAP but must disclose why and must compare to GAAP
Transactions with related persons (family, promoters, control people) >$120k must be reported
Board of Directors: list that attended >75% of meetings
What is the main obligation under Reg M-A?
Plain English sheet to describe to shareholders the terms of an M&A transaction (tender offer etc.)
What are the requirements surrounding audit committees?
Members of AC must serve as intependent members of BoD.
One member must be financial expert
What is the Hart-Scott-Rondino Act?
Certain M&A deals must be reported to FTC & DOJ
30d closing period delay. 15d for all-cash
What needs to be disclosed in the context of a fairness opinion?
Does BD writing FO have connection with issuer? Comp? Approved by fairness committee?
