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Series 24 > Chapter 2 - Underwriting > Flashcards

Chapter 2 - Underwriting Flashcards

1
Q

In a firm commitment underwriting, unsold securities are retained by ________________.

A

The syndicate

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2
Q

In a best-efforts underwriting, unsold securities are retained by ______________.

A

The issuer

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3
Q

What type of underwriting is cancelled if the entire issue is not sold?

A

All-or-None

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4
Q

What type of underwriting is cancelled if a specified portion is not sold?

A

Mini-max

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5
Q

A ___________ underwriting is used for shares not purchased through a rights offering.

A

Stand-by

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6
Q

____________ is the only form of price manipulation allowed by the SEC.

A

Stabilization

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7
Q

True or False: Stabilization is designed to artificially raise the price of a new issue.

A

False. Stabilization is designed to support or keep a new issue’s price from falling.

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8
Q

Is there a maximum number of stabilizing bids that may be placed?

A

Yes, one. It is usually placed by the syndicate manager.

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9
Q

The highest price at which a stabilizing bid may be placed is the ________________________.

A

public offering price (POP)

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10
Q

The New Issue Rule covers what new issues?

A

All equity IPOs

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11
Q

True or False: BDs and their employees may buy shares of equity IPOs from the syndicate.

A

False

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12
Q

Besides BDs and their employees, who else is restricted from purchasing equity IPOs?

A

An employee’s immediate family if materially supported by, or sharing household with, the employee

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13
Q

The ___________ clause gives underwriters the ability to buy additional shares from the issuer to cover over-allotments.

A

Green Shoe

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14
Q

The Green Shoe Clause allows the issuer to expand the offering by a maximum of ____%.

A

15%

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15
Q

According to the Equity IPO Rule, firms must update the eligibility of purchasers ___________ .

A

annually

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16
Q

What is the maximum period that a stabilizing bid may remain open in the marketplace ?

A

Indefinite

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17
Q

An investor’s eligibility to purchase an equity new issue must be confirmed _______________.

A

annually

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18
Q

What stipulation in the registration statement relieves underwriters of their contractual obligations?

A

Market out clause

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19
Q

The final settlement of a syndicate account must occur within _________ of the syndicate closing.

A

90 days

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20
Q

If the syndicate manager anticipates a delay in the closing of the syndicate, who is notified?

A

FINRA

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21
Q

What regulation restricts activities that could be deemed manipulative during an offering?

A

Regulation M

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22
Q

According to Regulation M, the Restricted Period begins either ___ or ___ business days before pricing.

A

1 or 5 business days

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23
Q

During the Regulation M Restricted Period, underwriters may not_______________________________________.

A

purchase (bid) for the securities for their own account.

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24
Q

May a market maker acting as an underwriter for the issuer continue to make a market in the issuer’s securities?

A

Yes, according to Reg M, but only as a passive market maker.

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25
Q

As a passive market maker, you may not enter a bid _________ than the highest independent bid

A

higher

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26
Q

While engaging in passive market making, what is the daily purchase limit?

A

The greater of 30% of your ADTV in the stock, or 200 shares

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27
Q

True or False: If your daily purchase limit is exceeded, your firm is subject to disciplinary action.

A

False, after exceeding its daily purchase limit, the firm must withdraw as a market maker for the remainder of the day.

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28
Q

Investors may not purchase a new issue if those shares were sold short ____ business days prior to the offering.

A

5 business days

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29
Q

In addition to the spread, what other items may be considered part of the underwriter’s compensation?

A

Syndicate legal fees and finder’s fees

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30
Q

What is typically NOT considered compensation to an underwriter?

A

Issuer legal fees and registration fees

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31
Q

FINRA considers it unreasonable for a BD to receive shares in excess of ____% of the total offering

A

10%

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32
Q

How long are securities restricted that are received by a BD as compensation for an underwriting?

A

6 months

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33
Q

Booster shot research reports are prohibited for a certain period before and after the expiration of ______________.

A

lock-up period.

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34
Q

If a security is defined as _______________ under Regulation M, there is no Restricted Period.

A

actively traded

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35
Q

What is FINRA?

A

The Financial Industry Regulatory Authority; created by the merger of the NASD and NYSE regulatory authorities

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36
Q

To cover a short sale, investors may not use a new stock issue if the short sale occurred within ___ days of the offer.

A

5 days

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37
Q

What type of issuer may use a free writing prospectus before, or after, filing a registration statement with the SEC?

A

A well-known seasoned issuer (WKSI)

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38
Q

A seasoned issuer may use a free writing prospectus (FWP) ______ filing its registration statement with the SEC.

A

after

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39
Q

A well known seasoned issuer (WKSI) may use a free writing prospectus (FWP) ______ filing its registration statement with the SEC.

A

before or after

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40
Q

When may an unseasoned or non reporting issuer use a free writing prospectus (FWP)?

A

After filing its registration statement with the SEC, accompanied by its statutory prospectus

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41
Q

Define blank-check (or shell) company.

A

A company early in the development stage with no specific business purpose

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42
Q

List the types of issuers who are ineligible to use a free writing prospectus.

A

Penny stock issuers, issuers involved in a bankruptcy within the last three years, and blank-check (shell) companies

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43
Q

What type of issuer may use a free writing prospectus after filing its registration statement with the SEC?

A

A seasoned issuer

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44
Q

True or False: Written communications only encompass materials in written, physical form.

A

False. Written communication includes anything written, printed, or broadcast on TV or radio, and graphic communication.

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45
Q

Define graphic communication.

A

Communication made using electronic media (e.g., audio / videotapes, e-mail, CDs, text messages, and webcasts)

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46
Q

In what forms may road shows be delivered?

A

Live or electronic

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47
Q

Describe the purpose of a road show.

A

To acquaint investors and BDs with information on a prospective public offering

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48
Q

Recorded road shows meet the definition of ________ communication.

A

graphic communication

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49
Q

Live, electronic road shows retransmitted using graphic communication meet the definition of _____ communication.

A

oral communication

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50
Q

For what offerings may live, electronic road shows be retransmitted using graphic communication?

A

IPOs only

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51
Q

When may road shows be conducted?

A

After filing the registration statement (before the effective date)

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52
Q

True or False: Road shows may be delivered to a group of investors or one-on-one.

A

True

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53
Q

In what type of underwriting does the syndicate pledge to sell the entire issue or keep the unsold balance?

A

A firm-commitment underwriting

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54
Q

In what underwriting does the syndicate attempt to sell an entire issue with any unsold balance returned to the issuer?

A

Best-efforts underwriting

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55
Q

When participating in a firm-commitment underwriting, when is the underwriter required to set up an escrow account?

A

Never, an escrow account is only required for contingent best-efforts underwritings.

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56
Q

Which two of these underwriting types require an escrow account? Firm-Commitment, All-or-None, Standby, or Mini-Maxi

A

All-or-None and Mini-Maxi underwritings

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57
Q

True or False: In a mini-maxi underwriting, the syndicate may contribute needed funds to meet the minimum requirement.

A

False. Contributing funds would change the type of underwriting.

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58
Q

True or False: A standby underwriting is a form of best-efforts underwriting.

A

False. A standby underwriting is a form of firm-commitment underwriting used in conjunction with a rights offering.

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59
Q

True or False: Escrow funds are deposited with the issuer’s legal counsel until the deal becomes effective.

A

False. The escrow account is maintained at a bank that has agreed to hold the funds.

60
Q

True or False: Escrow funds are deposited with the issuer’s legal counsel until the deal becomes effective.

A

False. The escrow account is maintained at a bank that has agreed to hold the funds.

61
Q

In a best-efforts underwriting, when will the escrow agent (bank) release the funds?

A

When the offering is cancelled or when the contingency is met

62
Q

True or False: To assist in distributing a new issue, a syndicate may sell shares to institutional buyers at a discount.

A

False. Once the POP has been set, it must be maintained unless the syndicate manager authorizes sales at a discount.

63
Q

When must final settlement of a syndicate occur?

A

Within 90 days of the syndicate closing

64
Q

What provision in an underwriting agreement allows for the expansion of the offering?

A

The Green Shoe Clause or Overallotment Covenant

65
Q

Define the market-out clause.

A

A provision releasing an underwriter from liability if events occur that make the sale of the issue difficult/impossible

66
Q

True or False: Syndicates must file reports with FINRA if anticipating a delay in final settlement of the syndicate.

A

True

67
Q

When a selling group member sells shares of a new issue, it is entitled to only the ____________.

A

Concession

68
Q

What is the underwriting spread?

A

The difference between the amount paid by an investor and the amount received by the issuer

69
Q

True or False: The manager’s fee is generally the smallest component of the underwriting spread.

A

True

70
Q

To what is a syndicate manager entitled when selling shares of a new issue?

A

The entire spread

71
Q

When selling shares of a new issue, in what capacity are members of the selling group acting?

A

Since selling group members do not assume risk, they are acting in an agency capacity.

72
Q

True or False: When selling a new issue, a syndicate member is entitled to the entire spread less the U/W fee?

A

False. When a syndicate member sells a new issue, it is entitled to the entire spread minus the manager’s fee.

73
Q

For how long are securities restricted if received by the syndicate as compensation?

A

Six months

74
Q

When does FINRA consider it unreasonable for an underwriter to receive options or warrants from an issuer?

A

When the options/warrants have a duration exceeding five years with better terms than offered to the public

75
Q

Does FINRA consider it reasonable for an U/W to receive an unlimited number of shares from the issuer as compensation?

A

No. FINRA considers it unreasonable to receive an excessive number of shares as compensation.

76
Q

What is the role of FINRA’s Corporate Financing Department?

A

To evaluate the fairness of an underwriter’s compensation

77
Q

True or False: FINRA’s Corporate Financing Department evaluates the fairness of the POP (public offering price).

A

False. FINRA’s Corporate Financing Department evaluates the fairness of the underwriter’s compensation, not the POP.

78
Q

What items would be considered part of underwriting compensation if the syndicate is reimbursed by the issuer?

A

Finder’s fees, wholesaler’s fees, syndicate legal expenses, and salaries of investment banking personnel

79
Q

What securities are exempt from FINRA’s Corporate Financing Rule?

A

Reg. D securities and those listed on the NYSE, AMEX, or Nasdaq Global Market

80
Q

True or False: Under FINRA’s Corporate Financing Rule, only a managing underwriter may file the underwriting agreement.

A

False. The agreement may be filed by the managing underwriter, a syndicate member, or the issuer.

81
Q

Does issuer reimbursement to an U/W for printing expenses, SEC fees, and issuer legal fees constitute compensation?

A

No. Reimbursement of expenses normally incurred by an issuer, but paid by the syndicate, is not considered compensation.

82
Q

If a bona fide market exists for a BD’s security, may the BD underwrite the issue without a qualified independent U/W?

A

Yes. If a bona fide market exists, or managing U/W has no conflict, or issue is investment-grade, a QIU is unnecessary.

83
Q

A QIU is a firm that has acted as _______ or __________ in at least _____ similar offerings within the last _____ years.

A

A QIU is a firm that has acted as manager or comanager in at least three similar offerings within the last three years.

84
Q

A BD may publicly distribute its own securities or an affiliate’s securities. Define the term affiliate.

A

An entity that controls or is controlled by the BD (i.e., ownership of 10% or more of outstanding equity)

85
Q

If a BD is underwriting its own offering, what are the disclosure requirements prior to accepting client orders?

A

If disclosure is first made verbally, written disclosure is then required at, or before, settlement.

86
Q

If a BD underwrites its own offering, what is required to place the securities in a client’s discretionary account?

A

The client’s specific written consent is required.

87
Q

If a BD distributes its own securities, when is a qualified independent underwriter (QIU) not required?

A

When the managing U/W has no conflict, or the securities have a bona fide market, or the securities are investment-grade

88
Q

True or False: Under Reg M, a security’s restricted period is typically based on the issuer’s public float and ADTV.

A

True

89
Q

List the securities for which there is no restricted period as determined by Regulation M.

A

A public float of at least $150 MM and ADTV of $1 MM, municipal, government, or nonconvertible investment-grade

90
Q

What is the goal of Regulation M?

A

To limit the activities that could be used to manipulate the price of a security prior to, and during, an underwriting

91
Q

What are actively-traded securities as defined by Regulation M?

A

Those with a public float of at least $150 MM and ADTV of $1 MM

92
Q

True or False: During the restricted period, distribution participants may act as passive MMs for OTC equity securities.

A

False. Only Nasdaq securities are eligible for passive market making.

93
Q

Under Reg M, how many days prior to pricing does the restricted period for actively traded securities begin?

A

Actively traded securities have no restricted period.

94
Q

When does the restricted period begin for a security with a public float of $50 million and an ADTV of $125,000?

A

One business day prior to pricing

95
Q

From what are underwriting participants prohibited during the restricted period?

A

Purchasing or bidding for a covered security

96
Q

During the restricted period, what activities are permitted by underwriting participants?

A

Executing unsolicited customer orders and soliciting offers to buy the securities being distributed

97
Q

True or False: During the restricted period, underwriting participants may act as a PSMM for any type of security.

A

False. Passive market making is permitted for Nasdaq securities, but not for OTC equities.

98
Q

During the restricted period, what purchases are prohibited for issuers and selling shareholders?

A

Open-market purchases of the offered securities

99
Q

True or False: During the restricted period, passive market making is allowed for all Nasdaq and OTC equity securities.

A

False. Passive market making is not allowed for OTC equity securities.

100
Q

When does the syndicate manager send a passive market making notice to FINRA?

A

No later than one day prior to the beginning of the restricted period

101
Q

True or False: A PSMM is freely permitted to effect purchases at a price that exceeds the highest independent bid.

A

False. A PSMM is generally prohibited from effecting purchases at a price that exceeds the highest independent bid.

102
Q

For passive market making to occur for a stock, it must have how many independent market makers?

A

One

103
Q

How are passive market makers identified to FINRA?

A

They are identified in the underwriting activity report that is filed with FINRA by the syndicate manager.

104
Q

In a rising market, may a passive market maker set the market?

A

Yes, but only to display a customer’s buy order under the Limit Order Display Rule.

105
Q

When is a passive market maker temporarily permitted to maintain the highest bid?

A

When an independent market maker lowers its bid

106
Q

In a declining market, how long may a PSMM maintain the highest bid?

A

Until it purchases the lesser of two times the minimum quote size or reaches its daily purchase limit (DPL)

107
Q

Until it purchases the lesser of two times the minimum quote size or reaches its daily purchase limit (DPL)

A

In a declining market, how long may a PSMM maintain the highest bid?

108
Q

For how many trades is a PSMM permitted to exceed its daily purchase limit (DPL)?

A

For only one trade. After the trade, the PSMM must withdraw from the market for the remainder of the day.

109
Q

When is a passive market maker required to withdraw from the market for the remainder of a day?

A

When its net purchases exceed its DPL

110
Q

What is a passive market maker’s daily purchase limit (DPL)?

A

The greater of 30% of its average daily trading volume (ADTV) or 200 shares

111
Q

If its daily purchase limit (DPL) is exceeded, for how long must the passive market maker withdraw from the market?

A

For the remainder of the day

112
Q

May a passive market maker’s displayed size exceed its daily purchase limit?

A

No

113
Q

True or False: To stabilize an issue, the principal market on which the stock trades must be notified.

A

True

114
Q

What type of information must be contained in a file created by the stabilizing underwriter?

A

Names/addresses of syndicate members, their percentage of liability, and the date the bid was entered

115
Q

Under Regulation M, how many stabilizing underwriters are permitted for a specific offering?

A

Only one

116
Q

Is there a limit to the number of purchases able to be made at the stabilizing bid price?

A

No. While only one stabilizing bid is allowed, there may be an unlimited number of purchases.

117
Q

A stabilizing underwriter who lowers its bid may now bid no higher than the ________ bid of an ___________ market maker.

A

highest bid of an independent market maker

118
Q

Is a BD forced to drop its stabilizing bid because an independent market maker drops its bid below the stabilizing bid?

A

No. However, if it chooses to lower its bid, it must lower it to a price no higher than the highest independent bid.

119
Q

Is a stabilizing underwriter required to maintain the bid for a specific length of time?

A

No. There is no specific minimum or maximum length of time for maintaining a stabilizing bid.

120
Q

Related to short selling, Rule 105 of Regulation M prohibits investors from engaging in what practice?

A

Buying shares of a new issue if they had sold short the securities within five business days prior to pricing the issue

121
Q

Rule 105 of Regulation M is designed to minimize what possibility for a short seller?

A

He may benefit from an impending new issue at a set price and use those shares to cover a short position.

122
Q

Under Rule 105 of Regulation M, how does the bona fide purchase exception apply for an investor?

A

If unaware of a new issue, he may close the short sale at least one business day before pricing and then buy the issue.

123
Q

Under Rule 105 of Regulation M, how does the separate accounts exception apply for different trading desks?

A

If information barriers exist and trading is not coordinated, one desk may buy a new issue even if another sold it short

124
Q

Explain the exception provided to investment companies under Rule 105 of Regulation M.

A

One fund in the complex (family) may buy a new issue even if another fund in the complex had sold it short

125
Q

A new issue is priced on Friday, July 15. No violation occurs if a buyer of the new shares shorted them on what date?

A

Thursday, July 7 since the five-day-period prohibition of Rule 105 of Regulation M begins on Friday, July 8.

126
Q

Under the Equity IPO Rule, who is considered to be part of an associated person’s immediate family?

A

Parents, siblings, spouse, children, or in-laws

127
Q

Under the Equity IPO Rule, who is NOT considered to be part of an associated person’s immediate family?

A

Grandparents, aunts, uncles, or cousins

128
Q

True or False: Sharing a household with a person who is not immediate family does not constitute material support.

A

True

129
Q

Jim is an associated person. When is someone in his immediate family prohibited from buying an equity IPO?

A

Material support/household sharing exists, or purchase is made through his firm, or he controls IPO share allocation

130
Q

True or False: Portfolio managers may purchase equity IPOs for their own accounts if not excessive.

A

False. Portfolio managers may purchase for the fund they represent, but not for their own accounts.

131
Q

According to the Equity IPO Rule, member firms and their associated persons are considered ___________ persons.

A

restricted

132
Q

Are finders and fiduciaries (e.g., attorneys and accountants) restricted persons under the Equity IPO Rule?

A

Yes

133
Q

True or False: According to the Equity IPO Rule, all associated persons connected to a BD are restricted.

A

True. The associated persons of a BD include owners, officers, directors, and other employees.

134
Q

Explain the issuer-directed sale exemption under the Equity IPO Rule.

A

A BD employee may buy an equity IPO if an immediate family member is employed by the issuer who authorizes the sale.

135
Q

Under the Equity IPO Rule, how does the de minimis exemption apply?

A

An account that includes restricted persons may purchase the shares, provided their combined ownership is 10% or less.

136
Q

True or False: When determining a person’s eligibility to purchase an equity IPO, oral verification is acceptable.

A

False. Firms must obtain written or electronic verification of eligibility.

137
Q

An RR’s mother plans to buy equity IPO shares from a BD that does not employ the RR. Is she restricted from purchasing?

A

No. If she is not supported by her child and purchases from a BD that does not employ her child, she is NOT restricted.

138
Q

True or False: Under the Equity IPO Rule, personnel of a limited BD are included as restricted persons.

A

False. Employees of limited BDs are exempt (firm limits its business to investment company/variable contracts or DPPs)

139
Q

After offering a new IPO publicly as an underwriter, a BD places shares in its own account. Is this acceptable?

A

Yes, since a bona fide public offering had been made first.

140
Q

Related to penalty bids, when is a managing underwriter allowed to reclaim selling concessions from syndicate members?

A

When the securities originally sold by the syndicate member are repurchased by the syndicate in stabilizing transactions

141
Q

For new issues, how does the syndicate manager actually penalize another participant with the penalty bid?

A

By refusing to pay the underwriting participant whose client buys the issue and immediately sells back to the syndicate

142
Q

Is notification required when a member firm imposes a penalty bid or engages in syndicate covering transactions?

A

Yes. FINRA must be notified of these practices related to both Nasdaq and OTC securities.

143
Q

What must a BD forfeit if its client buys a new issue and then sells it back to the syndicate at the stabilizing price?

A

The selling concession

144
Q

A penalty bid allows the managing underwriter to reclaim a ___________________ from a syndicate member.

A

selling concession

145
Q

The manager or co-manager of an IPO must satisfy a quiet period of _____ calendar days prior to publishing research.

A

10 calendar days

146
Q

For dealers, other than managers or co-managers, the quiet period is _____ calendar days.

A

10 calendar days

147
Q

During the registration cooling-off period, what should an agent do if a client sends a check to purchase securities?

A

Return the check to the customer

Series 24 (2 decks)

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