Chapter 2

Question 1

According to FINRA Rule 5110, securities issued under SEC Rule 147 or Regulation A, while _______ from SEC registration, are still subject to the ________ under the Corporate Financing Rule.

Answer 1

exempt

filing requirements

Question 2

Restricted securities issued under Regulation D are _______ from filing as well as ______________________ of securities listed on the NYSE, AMEX, and the Nasdaq Global Market (not the Nasdaq Capital Market).

Answer 2

exempt

municipal securities, tender offers, and exchange offers

Question 3

A syndicate manager is considering stabilizing an offering that’s now trading in the secondary market and is being quoted at less than the public offering price. If the current ask price on the security is greater than the last reported transaction price, what’s the highest price at which stabilization could be initiated when the market is open?

Answer 3

The last transaction price

After the opening of quotations in a security’s principal market, stabilization may be initiated at a price that’s no higher than the last independent transaction in the principal market

if (1) the security has traded in its principal market (Nasdaq in this case) on the day stabilizing is initiated or on the preceding day,

and (2) the current asked price in the principal market is equal to or greater than the last independent transaction price

If either condition (1) or (2) is not satisfied, stabilizing may start after the opening of quotations at a price that’s no higher than the last independent bid for the security on Nasdaq. The maximum stabilizing bid is the public offering price; however, a lower ceiling may apply.

Question 4

For a fixed price offering, selling concessions and discounts may only be provided to an

Answer 4

underwriter, a syndicate member, or selling group member

the firm must be a FINRA member, but a member cannot receive a discount unless it’s a syndicate or selling group member.

Question 5

A penalty bid is an arrangement that permits the managing underwriter to

Answer 5

reclaim a selling concession from a syndicate member when securities that were originally sold are repurchased by the syndicate in stabilizing transactions

Question 6

When an underwriting syndicate is committing its own capital and agrees to purchase the entire issue and absorb any securities that are not sold,

Answer 6

it’s engaging in a firm-commitment underwriting.

In a firm-commitment offer, funds move directly from the syndicate to the issuer.

Question 7

A letter of intent (LOI) is signed between an investment banking firm and an issuer of securities. The LOI stipulates:

Answer 7

How much money the company intends to raise as well as the underwriter’s compensation.

The LOI is typically signed prior to the registration statement being filed and is non-binding. Conversely, the underwriting agreement (agreement among underwriters) is binding and is signed just before the effective date

Question 8

True or False:

A syndicate member may purchases the unsold shares to complete an all or none offering

Answer 8

False

Question 9

T/F

Cost of printing prospectuses is considered compensation to the underwriter

Answer 9

False

Question 10

t/f

Issuer reimbursing for underwriting expense is considered underwriting compensation

Answer 10

True

Question 11

T/F

Reg A offering must be filed under FINRA’s corporate financing rule

Answer 11

True

Question 12

T/F

Conflict of interest occurs if a member firm underwrites the stock of an affliate

Answer 12

True

Question 13

Qualified independent underwriter must be used to allow a firm with a conflict of interest to participate in the underwriting

Answer 13

False

Question 14

If personnel are hired from disciplined firms, what percentage would require the firm to tape all phone calls?

Answer 14

20%

Question 15

According to Regulation M, during the restricted period of a distribution:

Answer 15

Underwriting participants may purchase the subject security if it’s actively traded

Question 16

New issues are not generally allowed to be placed into accounts that are controlled by, or owned by, a restricted person, such as custodial accounts, IRAs or JTWROS accounts.

Answer 16

Under the de minimis exemption of the New Issue Rule, equity IPOs may be sold to an account if the beneficial owners are restricted persons and their ownership of the account doesn’t exceed 10%.

Custodial and other accounts that are owned by the RR’s immediate family members are restricted from purchasing IPOs even if the RR is not a named owner of the account.

Question 17

If a member of a syndicate (other than the manager) effects a stabilizing bid:

Answer 17

The firm is required to notify the manager within three business days of any stabilizing transaction

The syndicate manager typically places a stabilizing bid, or conducts the syndicate’s short covering transaction. However, if a syndicate member (other than the manager) effects such a transaction, the firm is required to notify the manager within three business days of effecting the transaction. The manager must maintain these records as part of its recordkeeping responsibilities

Question 18

A broker-dealer is participating as a syndicate member in a firm-commitment underwriting. The public offering price is $16.00, but the offering has not been well-received. In order to stimulate interest, the broker-dealer is considering lowering the price to $15.50. The offering price of $16.00 must remain firm:

Answer 18

Unless released by the syndicate manager

Syndicate members are required to maintain the public offering price and may not sell the issue at a lower price unless the syndicate manager releases them to do so. The syndicate remains in effect until the syndicate manager terminates it.

Question 19

A corporation is seeking to expand its equity cushion through a rights offering and has engaged a FINRA member firm to purchase any unsubscribed shares in the offering. This arrangement is referred to as a:

Answer 19

Standby

A type of underwriting in which the underwriter agrees to buy all of the shares that remain unsubscribed in a rights offering is a standby underwriting. The issuing corporation expects that many small stockholders will not participate in the rights offering. This would reduce the amount of funding received by the issuer. The issuer engages an underwriter to stand by and purchase all unsubscribed shares on a firm-commitment basis. For this guarantee, the underwriter will either buy the shares at a discount or receive a fee. (11283)

Question 20

When allocating shares of a new issue, a broker-dealer may take into consideration

Answer 20

whether the client is an institutional or retail investor

the size of the client’s order

or whether the client has quickly flipped previous allocations of IPOs.

Question 21

T/F

Broker-dealers may base the allocation decision on a client’s commitment to purchase additional shares in the secondary market.

Answer 21

FALSE!

Question 22

Under Regulation M, which of the following are the minimum standards for a stock to be classified as actively traded?

Answer 22

ADTV of at least $1 million and public float of at least $150 million

Question 23

The broker-dealer involved in an underwriting could disclose a control relationship to a customer over the telephone or in writing. If a broker-dealer involved in an underwriting discloses a control relationship to the client over the telephone, written notice should be made to the customer:

Answer 23

At or before the settlement date of the transaction

Question 24

What is the % haircut taken for FIXED assets or RESTRICTED stock?

Answer 24

100%

Question 25

When determining an asset’s carrying value for net capital purposes, on what is its haircut (reduction) based?

Answer 25

Liquidity