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Series 10 > Chapter 3 - Primary and Secondary Markets > Flashcards

Chapter 3 - Primary and Secondary Markets Flashcards

1
Q

Securities Act of 1933

A

Regulates primary market/new issues
Must provide prospectus
New issues no longer marginable

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2
Q

Securities Act of 1934

A

Regulates secondary markets

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3
Q

Form S-1

A

Registration Statement to file a new issue

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4
Q

20-Day cooling off period

A

After S-1 is filed, SEC takes 20 days to review. No sales activities can occur.

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5
Q

Preliminary Prospectus

A

This can be circulated during cooling off period & interested customers can be recorded.

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6
Q

On Effective Date…

A

Issue can now be sold/solicited. Prospect must be deliver to each purchaser at or before completion of sale.
Prospectus must be delivered (electronically/access) for first 90 days if new issue,40 days for add-on, and 25 days if issue is on an exchange or NASDAQ

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7
Q

Misstatements and omissions

A

is fraud under 1933 Act for all involved - due diligence must be performed.

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8
Q

Exempt Issues

A

US Govt issues, Life/Annuities, Bank issues, Non-profit issues, ICC issues

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9
Q

Exempt Transactions

A

Rule 144, Rule 144A, Rule 147, Reg A, Reg D, Reg S

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10
Q

Rule 147 (intrastate offering)

A

Intrastate offering transactions are exempt. Issuer must legally be resident. Partnerships, all partners must be residents. cannot sell to non-resident (another state or another country)

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11
Q

Rule 147A

A

Exempt if only selling to the one state where business is principally located

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12
Q

Reg D (private placement)

A

can have max 25 non-accredited investors (but must ensure sophisticated)
no limit on dollar amount or units sold
must provide offering circular

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13
Q

Rule 506 offering advertising

A

If non-accredited investors are excluded, then the offering can be advertised.

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14
Q

Reg A

A

Two tiers to allow smaller companies to raise capital; 20 review period, offering circular
Tier 1: Under $20 million (no audited financial statements), subject to blue sky
Tier 2: $20-$75 million, (audited financial statements), federally covered

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15
Q

Reg A “test the waters”

A

can promote issue during 20-day review, solicitation materials must be provided in initial filing.

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16
Q

Tier 2 purchase limit

A

non-accredited investors cannot purchase tier 2 over 10% of annual income/net worth

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17
Q

Rule 144 (selling restricted/control stock)

A

Rules to sell restricted (or control) stock:
File form 144, max once/quarter
securities must be held fully paid for 6 months (unless control)
can sell greater of: 1% outstanding shares or preceding 4 weeks trading volume

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18
Q

Small sell Rule 144 exemption

A

if it is less than 5000 shares with less than $50,000 value then filing requirements are waived, still quarterly max

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19
Q

B/D & 144 trades

A

Must act as agent unless bona fide market maker
Cannot solicit, but can recontact an interested customer within 10 business days, or interested B/D within two months

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20
Q

Rule 144A

A

defined QIBs ($100 million of discretionary assets) and they can purchase unregistered securities directly from issuers & B/Ds. Minimum $500,000 blocks. Can only trade in PORTAL market

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21
Q

Reg S

A

For issues to non-US residents (foreigners or US citizens living abroad)

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22
Q

Rule 415

A

For securities an issuer expects to sell over next 3 years. No cooling off period, must be public for a year and have $75 million float

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23
Q

Rule 415 Seasoned vs unseasoned

A

Seasoned can do primary offerings. Unseasoned can do secondary offerings (PIPE)

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24
Q

Rule 405 (shelf reg for big issuers)

A

defines WKSIs: $700 million market cap or $1 billion non-convertible senior securities.
Lasts for 3 yrs & use of FWP permitted

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25
Q

Rule 134 (tombstone Ads)

A

The info that is allowed to be advertised by underwriters during cooling off period:
Issuer & business
Size & Type of security
Estimated POP
Names of Underwriters

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26
Q

Rule 135 (info that is allowed to be advertised by issuers during cooling off period)

A

Issuer
Size & Type of security
Anticipated time of offering
Purpose of offering
-it cannot name underwriters

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27
Q

Rule 137

A

Underwriter cannot recommend a convertible into what they’re underwriting during the process. But, other firms can.

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28
Q

Rule 138

A

Underwriter CAN recommend a non-convertible security of an issuer while underwriting an unrelated offering for them.

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29
Q

Rule 139 (only exception allowing recommendation during cooling off period)

A

if they regularly send out recommendations and they recommend it along with other similar products. Must not be given any special attention.

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30
Q

Rule 145 (reorgs)

A

Reorgs that result in a new security require filing a registration statement. Splits and Divs do not require registration

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31
Q

Willful vs unintentional misstatements

A

willful is criminal offense with $10,000 fine and 5 yrs prison. unintentional is civil.

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32
Q

Rule 5130 (in demand offerings)

A

Prevent member firms from taking all the shares for an “in demand” offering. Rule applies to all offerings & restricted persons cannot buy, nor be sold to.

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33
Q

Persons restricted from buying IPOs

A
  1. FINRA firm employees and immediate family
  2. Fiduciaries to member firms (lawyers, accountants, consultants)
  3. Portfolio Manager’s personal accounts
  4. Passive owners of B/D (over 10%)
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34
Q

accounts are prequalified for new issues if…

A

In prior 12 months:
-obtain letter confirming owner is eligible to purchase according to rule 5130
-if a conduit account, must obtain letter confirming all purchases will be in accordance with rule 5130

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35
Q

Selling Agreement Price

A

POP, or formula to determine, must be disclosed in selling agreement. as well as circumstances for concessions

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36
Q

Various New Issue rules

A
  1. “taken in trade” must be current MV
  2. cannot represent issue at “market price” (there is no market)
  3. Underwriter cannot pay someone to buy issue
  4. Non-members must buy at POP
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37
Q

IPO Cross

A

Used to transition IPO into Secondary Market. 15 minutes prior to trading, will start accepting quotes & displaying clearing price.

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38
Q

Issuers & Underwriters in aftermarket

A

not allowed to influence price in aftermarket except for stabilizing bids and accepting unsolicited orders.

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39
Q

All or none underwritings

A

cant tell customer than it is “all or none”. must use escrow

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40
Q

Tender offer restriction

A

The one who is making the offer cannot go purchase the shares in the market

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41
Q

Buying own shares

A

It cannot be considered manipulative:
must buy during quiet hours, cannot bid up price, or drive up trading volume

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42
Q

Reg M (low vol stocks)

A

To ensure less actively traded stocks are not manipulated

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43
Q

Rule 101 (Syndicate members but not market maker)

A

Tier 1- >1M vol, 150M float, no restriction
Tier 2- 100K-1M vol, 25M-150M float, 1 day restriction
Tier 3- under 100K vol, under 25M float, 5 day restriction

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44
Q

Rule 102

A

Same as rule 101, but for issuers and selling shareholders

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45
Q

Rule 103 (syndicate and market maker)

A

may ask to not participate in making market temporarily OR
be a passive market maker- always take highest independent bid

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46
Q

Rule 104 (stabilizing bids)

A

must be at or below POP.
only one allowed per market maker, notice of stabilization must be in prospectus.
*if independent market exists, bid can be equal to last reported trade if current ask is equal to or higher.

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47
Q

Rule 105 (shorting stock when offering)

A

discourages shorting outstanding stock when an offering is coming. B/Ds cannot purchase shares to cover shorts from previous 5 business days

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48
Q

13D/13G filing

A

If someone acquires more than 5% of a companies outstanding shares, must be filed with SEC within 10 days (copies also sent to FINRA and Issuer)
*13G is for passive ownership, has 45 days after each calendar year-end.

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49
Q

SuperDisplayBook

A

book of open orders that Designated MM and floor brokers can trade against.

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50
Q

NYSE

A

Has a traditional trading floor “NYSE Classic” and a computer order matching machine “Arca ECN”

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51
Q

Floor Brokers

A
  1. are employees of B/Ds & must act as agent
  2. cannot initiate trade as principal, for their own account, or any discretionary transactions
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52
Q

Market Order routed

A

directly to DMM but also accessible to floor brokers

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53
Q

Market Not Held order routed

A

to floor broker via SuperDisplayBook, not to DMM. Broker will “work” the order.

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54
Q

Limit order routed

A

to SuperDisplayBook and can be worked by either floor broker or DMM.

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55
Q

price improvement

A

the benefit of having human interaction is that the client can get “price improvement”

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56
Q

Arca ECN

A

Values speed and accuracy so might not get as good of price as a broker working a trade

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57
Q

DMM orders

A

Maintains orderly market with bid/ask. will organize limit orders, but they are day only and worked FIFO. GTC orders are maintained at firm and re-entered each day to DMM

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58
Q

shopping stock

A

if a floor broker doesnt like the quote he got from DMM, he can shop around momentarily for a better price.

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59
Q

odd lots

A

DMMs automatically buys/sells for these orders, does not place them on the book. gets an “odd lot differential” fee for these trades.

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60
Q

not held orders

A

cannot be done by DMM since it involves exercising limited discretion. must be worked by floor broker.

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61
Q

National Market System

A

Established in 1975 to erode NYSE monopoly. Trades can go to any market in the system, rather than just to the specialist or DMM

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62
Q

Consolidated Tape

A

Floor trades must be reported to the tape within 10 seconds

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63
Q

NYSE Trade Reporting Facility

A

These trades also must be reported within 10 seconds

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64
Q

Crossing orders

A

cannot be done within a firm, orders must be given to market. only if no offers can they then be crossed

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65
Q

Prohibited NYSE trading floor practices

A

bet on market, b/s divs, b/s privilege’s, b/s at the close, b/s stops away from market, no prearranged trades

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66
Q

customer vs firm orders

A

customer orders must go first, then firm can go

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67
Q

order records

A

must be kept for 3 years with preceding 2 readily available. order must have terms, time of transmission & execution, and cancelation if applicable

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68
Q

trades reported with errors

A

if just reported erroneously, customer must pay actual price.
if trade reported but never happened, trade is not binding.

69
Q

short against the box

A

net long position of zero, has equal amount of long and short of a stock. if positions are closed, it is still considered a short sale and reg SHO applies

70
Q

short sale circuit breaker

A

if stock falls 10% from previous day, short sales can only be entered above national best bid

71
Q

short exempt

A

exempt from circuit breaker, not “naked” shorts. low risk for fail to deliver, must be located and indicated prior to sale

72
Q

threshold list

A

securities that could be hard to borrow. if there is a short position over 10,000s and .5% of shares outstanding. list is updated everyday, but security must meet criteria for 5 consecutive days to be added. buy-in should occur after 13 consecutive days

73
Q

new buy-in rules

A

T3 for short sales, T5 for long sales. both rules can be tested.

74
Q

market wide circuit breakers

A

Level 1 or 2 drop before 3:25, market closes for 15 minutes. After 3:25, let the day finish.
Level 3 drop, market closes for remainder of day.

75
Q

MOC orders

A

Market on Close, will not go through if circuit breaker closes market. NYSE accepts MOC until 3:50 & NASDAQ 3:55

76
Q

LULD

A

circuit breakers for single stocks. 5% up or down from trailing 5 minute average, or 10% if not on major index. exceptions for open/close and penny stocks. breaker will trigger for 5 minutes if there are 15 seconds without orders within bands

77
Q

No unfiltered market access

A

any B/D or institutional trader with “direct access” must have a MPID and pre-trade controls to prevent any market crashing, erroneous trades, or uncompliant trades

78
Q

OTC Markets

A

Where stocks not listed on an exchange trade. Also, bonds, ADRs, bank/ins co issues, govt debt.

79
Q

Equity Markets

A

OTC Markets Group & NASDAQ

80
Q

NASDAQ

A

upper tier, NASDAQ Global Market with tougher standards
lower tier, NASDAQ Capital Market

81
Q

OTC Market Groups

A

OTCQX
OTCQB
Pink Open Market

82
Q

OTC Regulator

A

FINRA for equity and corp debt, but MSRB for muni’s

83
Q

Reason for Term from NASDAQ

A

Bankruptcy, disclaimer from independent auditor, or deemed to have engaged in fraud/manipulation

84
Q

NASDAQ halts

A

half hour halts for any news items. orders can be accepted, but must wait for halt to be lifted. Market maker cannot trade outside US during halt

85
Q

NASDAQ Level pricing

A

Level 1- summary of inside market
Level 2- lists all market makers and their quotes (with depth)
Level 3- same as 2, but ability to enter quotes

86
Q

Principal transaction on NASDAQ Issues

A

mark up must be disclosed to customer if traded on NASDAQ Issues (but not for non-NASDAQ OTC transactions)

87
Q

Becoming a Market Maker NASDAQ

A

Firms must register with FINRA & declare which securities, FINRA will notify NASDAQ, who will notify the firm. If this is not their first MM, registration will generally be in effect first day.

88
Q

market vs system hours

A

market hours include regarding trading hours, 930-4. system hours include premarket, 4am-930am and aftermarket, 4pm-8pm.

89
Q

maintaining quotes

A

not required to stay open pre/post market hours, but if so, must abide by normal hours quote rules: bona-fide, firm, two-sided, cannot lock/cross market

90
Q

NASDAQ trade reporting

A

must be reported within 10 seconds of execution (by the seller) during normal trading hours.

91
Q

withdrawing quotes

A

permissible if it is outside firm’s control for up to 5 days (does not include upcoming news, order influx or other competitive reasons)

92
Q

terminating MM registration

A

firm can voluntarily term, but must wait 20 business days to re-register. can be termed for not meeting eligibility standards.

93
Q

NASDAQ Market System

A

“System”. completely automated trading platform with built in compliance.

94
Q

Quote Attribution

A

in System, market makers can choose to be identified or not, shows as NSDQ if not.

95
Q

Adjust quote quantity

A

will keep their spot in line for original quantity, and new portion will get new time. “reserve size” when reduced to 0.

96
Q

STOP orders

A

cannot be entered into NASDAQ system, but firms will maintain them and send to NASDAQ once triggered.

97
Q

VWAP

A

typically for institutional orders, order fills at EOD based on average intraday price. firms cannot front run these orders.

98
Q

Alternate Display Facility

A

ADF, shows quotes for unlinked ECNs.

99
Q

opening cross

A

730- accept quotes from MM, including “on open” orders
925- quotes “go live”
928- accept orders if needed to cure imbalance
930- price declared to clear orders

100
Q

closing cross

A

350- “on close” orders are accepted
400- closing order made

101
Q

ACES Pass-Through System

A

This system allows limit orders to go to market maker who can earn a spread.

102
Q

Automated Confirmation of Transactions service

A

ACT, provides reporting and dissemination of last sale information on equity securities (and DPP) traded OTC. open 8am-8pm, submits “locked-in” trades to NSCC, provides various monitoring info to participants. trades must be reported within 10 seconds, will be fined if repeatedly late. Executing member reports trade, contra-party must confirm.

103
Q

Trade Reporting Facility

A

TRF, - executing member reports the trade within 10 seconds. TRF is for NASDAQ stocks and OTC exchange listed stocks.

104
Q

ORF

A

OTC Reporting Facility, reports trades for OTC Markets Group.

105
Q

Manning Rule

A

prohibits b/d’s from trading ahead of customer limit orders. doesn’t include “not held” orders, mark ups, or odd lots. Firms must have chinese wall between market making and non-market making desks to prevent this.

106
Q

Limit Order Display rule

A

If a market maker receives a limit order priced at or better that its current quote to immediately (w/ in 30 secs) display order. This forces OTC market makers to show best quote even though they dont have centralized books.

107
Q

Types of quotes

A

Firm (default), Subject, nominal, workout.

108
Q

types of principal transactions

A

long/short for inventory, mark-up/down for a customer, riskless trade, arbitrage

109
Q

types of agency transactions

A

crossing two customer orders (cannot be away from market), dual agency trades - sell and use proceeds to buy. agency trades earn commission

110
Q

OTC market due diligence

A

to be traded OTC, you now have to be current on financial information.

111
Q

Market Maker for Non-NASDAQ

A

file form 211 at least 3 business days prior, include issuers name and basis for price, general principal must sign. exemptions: piggyback (quotes in 12 of last 30 days with no gaps over 4 days), unsolicited orders, current market maker fails to meet maintenance.

112
Q

OTC Markets quotes

A

quotes can be be 1-sided, unfirm (subject to negotiation), or “bid/offer wanted”

113
Q

Interpositioning

A

prohibited - cannot use another firm to send to market maker, must go directly to market maker. exception is if this would result in better execution or for correspondent relationships

114
Q

layering and spoofing

A

spoofing is a fraudulent quote that moves the market, layering is a fraudulent quote that leads others to move the market.

115
Q

Cannot back away from quote unless

A

a revised quote is not showing due to system slowness. or, when effecting a trade that will update the quote from where it is currently displayed.

116
Q

Liability order

A

market maker must fill orders they accept even if the market moves and causes it to expire.

117
Q

Trading ahead of research

A

Market Makers cannot alter their inventory ahead of their firms upcoming research report on a company.

118
Q

5% policy

A

markups must be fair and reasonable, 5% is a guideline. this does not cover muni’s.

119
Q

markups

A

are based on current active market. the firm’s inventory is irrelevant to calculating the mark up. if market isnt active, use contemporaneous prices.

120
Q

determining whether markup is fair

A
  1. if more actively traded, then lower markup
  2. if high price, then lower markup
  3. stocks typically higher markup than bonds
  4. whether there was disclosure beforehand
  5. general patterns and nature of business
121
Q

commission/mark-up disclosures

A

must be disclosed except non-NASDAQ principal transaction

122
Q

exceptions for contemporaneous cost for debt trades

A

after b/d contemporaneous transaction:
1. material change in interest rates
2. material change in issuers credit rating
3. news event

123
Q

NASDAQ SWAT

A

Program that analyzes “profile” for every stock. tracks activity to detect any unusual behavior that could merit investigation.

124
Q

Trade Reporting and Compliance Engine

A

TRACE, captures corporate bonds, US govt bonds, and agency issues. NO EQUITIES
Unlike equity trades, both buyer and seller must report trades promptly but no later than 15 minutes during 8am-630pm.
TRACE disseminates reports immediately.

125
Q

Trade confirmations

A

must be sent no later than completion of transaction (settlement), but in practice they are sent business day after trade.

126
Q

Trade confirms must include

A

customer & firm name/address/phone
security, CUSIP, price, size, accrued int if bond
trade & settlement date
payment for order flow, commission if agency, mark up if nasdaq principal.
doesnt need solicited/unsolicited.

127
Q

regular way settlement

A

T+2 for stock, corp, muni
T+1 for options and US govt bonds

128
Q

Sellers/Buyers Option

A

gets an extra day to pay/deliver securities (or an extra 60 days for NYSE)

129
Q

When, As, If Issued - WAII

A

New securities but certificates are not available yet. Trade without settlement. Dont have to be paid in full until security is actually issued.

130
Q

Delivery and Settlement

A

If delivery occurs before settlement date, the buyer has the right to reject. If occurs on settlement, buyer must accept. Seller pays all delivery expenses.

131
Q

Comparison and DK

A

firm and contra firm compare trade records to make sure info matches. Must be done day before settlement.

132
Q

assignment

A

for good delivery, stock must be assigned to owner, usually with signature on stock power, must be exact match. if street name or fiduciary, custodian, etc. proper papers must be on file

133
Q

bond delivery

A

must have signature guarantee, unless bearer bonds which need all coupons attached.

134
Q

stock unit delivery

A

must add up to 100s in increments. 400s of 8 50s is ok, but not 10 of 40s.

135
Q

mutilated securities

A

are invalid unless validated by transfer agent or issuer. muni bonds need legal opinion or proof of insurance.

136
Q

Direct Registration System

A

DRS, instead of physical certificates, paperless registration. Holder is registered directly with transfer agent & receives statement of ownership.

137
Q

interest accrual bonds

A

buyer will receive the next interest payment, but will owe a portion back to the seller. govt bonds are actual day/actual year, corps are 30day/360yr. interest accrues up to the day before settlement. if pay date is 15th, the rest of that month is 16 days.

138
Q

types of bonds that trade flat

A

defaulted, income, zero-coupon, commercial paper, and regular bonds that settle on a pay date.

139
Q

due bill

A

trade takes place before ex-date and settlement after record date

140
Q

ex-date for dividend

A

as of that date, the stock of price reduces by amount of dividend, buyers will not receive the payout

141
Q

ex-date for splits

A

is the business day after “payment date”

142
Q

Uniform Reclamation Form

A

when securities are delivered and the recipient finds out later it was not good delivery. for minor issues, 15 days to reclaim, for major 30 months.

143
Q

Obvious Price Errors (NASDAQ)

A

has 30 minutes to notify NASDAQ MarketWatch, then they will investigate. Decision can be appealed to Market Operations Review Committee.

144
Q

Mutual fund market timing

A

Excessive buy/sell with mutual funds to exploit NAV computation.

145
Q

Accredited investor

A

Net worth $1M+
Annual income $200+
Insider
Institutions

146
Q

Orders reduced on ex-date

A

Buy Limit or Sell Stop - orders below current market

147
Q

Agency cross transactions are reported

A

As one trade (sell side) and excluding commissions, markups, fees, etc

148
Q

Determining if a trade was inside info

A

Size of transaction matters less than if it was for profit

149
Q

Customer IPO eligibility

A

Initial eligibility needs signed letter (positive), subsequent annual certifications are negative (member will remind customer of their status and customer must notify member if any changes in eligibility)

150
Q

NASDAQ Market maker is only obligated to accept

A

Market orders. Limit orders go to floor broker, stop orders are maintained at the firm

151
Q

Convertible securities and tender offers

A

Convertible securities can be tendered without being converted. Doesnt not count for options, they are not issuer-created.

152
Q

Counting days for bond trades

A

if payment date is 15th, then they are owed 16 days for corp bond.

153
Q

the price of offerings under Reg S are…

A

usually offered at a discount because they avoid the cost of registering with SEC.

154
Q

Rule 144 only applies to…

A

sales. So, insiders are under the rule when selling their shares, whether registered or unregistered.

155
Q

Fourth Market

A

direct trading of securities from institution to institution

156
Q

hedging or positioning with VWAP

A

must be disclosed to customer that firm could engage in hedging or positioning

157
Q

CQS

A

only provides quotes for equities. no options or debt quotes.

158
Q

MOC orders, FAST/HALT

A

MOC orders are still filled during a FAST market, but MOC orders are canceled if trading HALT (aka there is no close that day)

159
Q

If a RR hears a rumor about inside info

A

must be reported to FINRA

160
Q

b/d on debenture offering

A

cannot recommend common stock, solicit during 20-day cooling, cannot purchase common stock for firm account

161
Q

LP accredited?

A

each member of LP has to be individually accredited for the LP to be considered accredited

162
Q

IPOs

A

pay attention to “for themselves”. PM can buy it for the portfolio they manage, but they cannot buy it for themselves. Selling firm can buy it if undersold

163
Q

NASDAQ MM distributions

A

must withdraw as MM, cannot enter bid/ask, cannot solicit orders. But, they can accept unsolicited orders.

164
Q

access equals delivery permitted for

A

IPOs, Add-on offering, WKSIs, but NOT mutual fund shares - they get profile prospectus

165
Q

market - at the opening trades

A

if they dont make it to the floor until after opening, they are canceled - they dont just go through as regular market orders.

166
Q

“stopping” stock

A

courtesy when specialist/DMM guarantees price to a floor trader for a couple minutes

167
Q

warrants on restricted shares

A

must be exercised and stock held for 6 months. holding of warrants does not satisfy rule 144

168
Q

short sale of 144 securities & fail to deliver

A

must be closed out in 35 settlement days

169
Q

reverse stock splits

A

all open orders on specialist’s book are cancelled.

Series 10 (5 decks)

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