Chapter 3 Primary/Secondary Markets (Self)

Question 1

Form 13D must be filed within:
A 5 business days
B 10 business days
C 15 business days
D 20 business days

Answer 1

B. A copy of the Form 13D must filed with the SEC, the Exchange where the security trades, and the Board of Directors of the company within 10 business days of crossing the 5% equity holding threshold.

Question 2

BD1 maintains a quote in the NASDAQ System for ABCD stock to sell 1,000 shares of ABCD at $50.10. BD2 places a market order to buy 1,000 shares of ABCD into the NASDAQ System for a customer, which is executed against BD1's quote. BD2 confirms to the customer, charging $50.25. The report to the TRF is made by:
A BD1 at $50.10
B BD2 at $50.10
C BD1 at $50.25
D BD2 at $50.25

Answer 2

A. Since BD1 is the executing party, it must report the trade. Trade reports exclude commissions or mark-ups.

Question 3

Access equals delivery is permitted for prospectus delivery for all of the following EXCEPT a(n):
A Initial Public Offering of common stock for an issuer that has never registered securities previously with the SEC
B Add-On Offering of common stock sold under a shelf-registration
C Mutual fund shares issued as a result of customer subscriptions
D Subordinated Debt Offering made by a WKSI under Rule 405

Answer 3

C. Access equal delivery permits delivery of an electronic prospectus (as opposed to paper) if the underwriter knows that the customer has internet access. However, this is not permitted for mutual fund offerings. Mutual fund purchasers get a paper “Profile prospectus.” If they want the full, detailed prospectus, this can be delivered either on paper or electronically.

Question 4

Which of the following are considered to be “accredited investors” under Regulation D?
I A financial institution
II A limited partnership formed by 10 investors with capitalization of $1,000,000
III An individual who consistently earns $250,000 per year
IV A director of the issuer who earns $100,000 per year
A I and II only
B III and IV only
C I, III, IV
D I, II, III, IV

Answer 4

C. Financial institutions; individuals who have earned $200,000 for at least the last 2 years and who expect to continue to earn that level of income; and officers and directors of the issuer are all accredited investors. Individuals who have a net worth of $1,000,000 or more are also accredited. However, individuals cannot be “grouped” together to take advantage of the $1,000,000 limit. The 10 purchasers that are forming the limited partnership count as 10 individual investors and are non accredited unless individually each has income of $200,000 or a net worth of $1,000,000.

Question 5

The 5% Policy applies to which of the following transactions?
I An agency trade of an OTC stock
II A principal transaction in an OTC stock
III A trade of an exchange-listed stock by a third market maker in the OTC market
IV A trade of an exchange-listed stock effected on the floor of the exchange
A I only
B III and IV only
C I, II, III
D I, II, III, IV

Answer 5

D. The 5% Policy applies to both secondary market trades effected OTC and to trades that take place on an exchange floor. It applies to both agency and principal trades effected OTC; and to third market trades since these are also effected OTC. The policy applies to all secondary market trades with the exception of municipal securities.

Question 6

Trades of U.S. Government bonds settle regular way on:
A T
B T+1
C T+2
D T+3

Answer 6

B. Trades of Treasury securities settle regular way next business day.

Question 7

The Consolidated Quotations Service (CQS) shows bid and ask quotes for stocks listed on the:
I	 	New York Stock Exchange
II	 	Midwest Stock Exchange
III	 	Boston Stock Exchange
IV	 	Philadelphia Stock Exchange
A I only
B I and II
C III and IV
D I, II, III, IV

Answer 7

D. CQS shows quotes for all stocks listed on the NYSE and dual listings of securities that are traded on the regional exchanges. CQS does not include NASDAQ listings.

Question 8

Which of the following satisfy Rule 144 holding period requirements?
I An affiliate selling control stock held for 3 months
II An affiliate selling restricted stock held 3 months
III A non-affiliate selling restricted stock held for 3 months
IV A non-affiliate selling restricted stock held over 6 months
A I and II
B III and IV
C I and IV
D I, II, III, IV

Answer 8

C. Rule 144 applies to holders of restricted and control shares, as well as any “affiliates” of those persons. An affiliate is a person who is controlled by the holder of 144 stock. For example, the wife of an officer who owns 144 shares is an “affiliate.” Under 144, no holding period is required for control stock; while restricted stock must be held, fully paid, for 6 months.

Question 9

All of the following holdings of restricted Rule 144 shares are subject to the 6-month holding period requirement EXCEPT securities:
A transferred to the estate of a person since deceased
B received as a gift from a donor
C donated to a trust for a beneficiary
D pledged to a lender and transferred to the lender after default on the loan

Answer 9

A. Under Rule 144, restricted securities held by an estate can be sold immediately - without dollar limit and without meeting the 6-month holding period rule. This makes sense, since it allows the executor to clean up the affairs of the estate without having to wait out 6 months and without having to “dribble” out the stock.

Securities held in a trust; received as a gift; or seized by a lender upon default of a loan must all meet the 6-month holding period rule and the “dribble” rule.

Question 10

A short sale of 144 securities that are included in the threshold list where there is a fail to deliver on settlement must be closed out in:
A 10 settlement days
B 17 settlement days
C 25 settlement days
D 35 settlement days

Answer 10

D. Regulation SHO requires that if a security on the threshold list is sold short, and there is a fail to deliver on settlement, then mandatory buy-in is required in 13 consecutive settlement days. This close out requirement is extended to 35 settlement days for Rule 144 restricted threshold securities, because of the additional processing steps needed by the transfer agent to “wash” the resale restriction off the shares.

Question 11

Quotes placed by market participants in unlinked ECNs can be accessed through:
A ATS
B ADF
C ACES
D ACT

Answer 11

B. An unlinked ECN is one that is not placing its quotes into the NASDAQ System. The SEC mandated that the FINRA provide an Alternate Display Facility (“ADF”) to publicly display these quotes.

Thus, to find the best market for a NASDAQ stock, both the NASDAQ System and the ADF must be checked.

Question 12

All of the following orders can be placed in the NASDAQ System EXCEPT:
A market order
B marketable limit order
C limit order
D not held order

Answer 12

D. The NASDAQ Center Market Execution System is the quotation and trading system for all NASDAQ issues - both Global Market and Capital Market. The system accepts market orders, marketable limit orders and limit orders. The system cannot accept orders that require human judgment for execution such as a market-not held order (where a trader uses his or her best judgment decide when to execute to get the best price). Finally, the system does not accept stop orders.

Question 13

The Consolidated Quotations Service is open from:
A 9:00 AM to 4:00 PM Eastern Standard Time
B 9:30 AM to 4:00 PM Eastern Standard Time
C 9:00 AM to 6:30 PM Eastern Standard Time
D 9:30 AM to 6:30 PM Eastern Standard Time

Answer 13

C. CQS is open longer hours than the NYSE and NASDAQ regular trading sessions to include “before hours” and “after hours” trading sessions. CQS hours are 9:00 AM to 6:30 PM EST.

Question 14

Which of the following are included in the Consolidated Quotations Service?
I Bid/Ask quotes for exchange- listed Stocks
II Bid/Ask Quotes for OTC securities with exchange trading privileges
III Bid/Ask Quotes for OTC stocks that do not have exchange trading privileges
A I only
B II and III only
C I and II only
D I, II, III

Answer 14

C. The Consolidated Quotations Service (CQS) gives bid and ask quotes for exchange-listed stocks (no matter where the quote is sourced) and for OTC stocks that are traded on some exchanges (a type of dual listing). CQS does not give quotes for OTC stocks that are not traded on exchanges - these are quoted through the NASDAQ system and the OTCBB.

Question 15

The NASDAQ System fills marketable orders based on:
A Price/Time Priority
B Price/Size Priority
C Time/Price Priority
D Size/Time Priority

Answer 15

A. The NASDAQ System arranges the orders on the book based on best price and then within each price level, the time that the order was entered. The size of the order is not a factor.

Question 16

The issuer of a private placement sold under Regulation D must ascertain that each “non-accredited” investor is:
I sophisticated, in that he is able to understand the merits of the issue
II financially capable to bear the economic risk of the investment
III purchasing the issue for investment - not for speculation
A I only
B II only
C I and III
D I, II, III

Answer 16

C. The private placement exemption requires that non-accredited investors be sophisticated - meaning that they understand the merits of the issue and realize that the securities are not registered and cannot be readily resold. Purchasers sign an “investment letter” attesting to this fact.

There is no requirement for the issuer to prove that a non-accredited investor is financially capable of bearing the economic risk of the investment.

Question 17

An issuer can direct shares of a "new" issue to all of the following EXCEPT:
A employees of the issuer
B officers of the issuer
C employees of the underwriter
D suppliers of the issuer

Answer 17

C. There is nothing prohibiting the issuer from reserving shares of a new equity issue for its key employees; its officers; or its suppliers; since they do not fall into the prohibited categories of FINRA Rule 5130.

However, officers and employees of the underwriter cannot be directed shares of a new issue by the issuer since they are prohibited. Note, however, that if an officer or employee of the underwriter also happens to be either an officer or employee of the issuer - that in this case only, the issuer can direct shares of the IPO to these individuals.

Question 18

Which of the following activities are allowed prior to the filing of the registration statement?
I Sending a customer a “red herring” preliminary prospectus
II Accepting an indication of interest from the customer
III Accepting a deposit from the customer
IV Accepting a firm order from the customer
A I and II
B III and IV
C II and IV
D None of the above

Answer 18

D. Prior to the filing of the registration statement, nothing can be done. Once the registration statement is filed, a preliminary prospectus may be used to obtain indications of interest. Once the registration is effective, the final prospectus can be used to offer and sell the issue.

Question 19

In a regular way trade not compared through ACT, the last time to send a "DK" notice is:
A 1 business day after trade date
B 2 business days after trade date
C 3 business days after trade date
D 4 business days after trade date.

Answer 19

A. The last time to “DK” a regular way trade, alerting the contra broker that there is a problem affecting settlement, is 1 business day after trade date. On the 2nd business day after trade date, settlement will occur. Note that this is an archaic rule that only applies in the rare instances where a transaction is not compared and reported through the ACT (Automated Confirmation of Transaction) system.

Trades reported though ACT are compared the same day, with DKs permitted only within 20 minutes of the ACT report.

Question 20

Rule 144A issues:
A can be traded in the public markets
B can only be traded in the PORTAL market
C can only be traded in the NASDAQ market
D can only be traded by ECNs

Answer 20

B. Rule 144A issues are private placement securities that can only be sold to QIBs - Qualified Institutional Buyers.

Normally, private placement securities cannot be traded, but Rule 144A issues can be traded from QIB to QIB. The market where 144A issues trade is called PORTAL.

Question 21

During a tender offer, which action is prohibited?
A Purchasing the stock in a cash account and tendering 2 business days after trade date
B Purchasing a call option in a cash account and tendering 2 business days after trade date
C Tendering unexercised warrants owned on the underlying shares
D Exercising a call option held in a cash account and issuing irrevocable instructions to deliver the acquired shares

Answer 21

B.
Do not confuse the requirements for tender offers with the requirements for marking order tickets to sell “long”! Tender offers very often have a contingency where a specified percentage of the shares must be tendered for the deal to go through; and another contingency where if there is an over-tender beyond the stated percentage, the issuer can either accept the overage or can return the overage.

Therefore, in a tender offer, not only can the common stock be tendered, but the convertible securities can be tendered without giving instructions to convert, and rights and warrants can be tendered without exercising. If the offer is not accepted, these are returned. If the offer is accepted, the maker of the offer will accept the convertibles and convert them (if there is an over-tender, the excess convertibles are returned unconverted) and rights and warrants will be exercised, with the maker of the offer paying the cash difference between the exercise price and the tender offer price to the person who tendered (if there is an over-tender, any unexercised rights or warrants are returned).

Note that call options cannot be accepted because they are not an issuer-created security - exercises go through the OCC - not through the transfer agent. However, if the holder of a call option exercises, the resulting shares received can be tendered!

Question 22

Which of the following actions are permitted by an underwriter handling an offering of convertible preferred stock of ABC Company?
I The execution of an unsolicited customer order to buy the common stock of ABC
II The execution of an order to buy ABC common stock for the firm’s account
III The execution of a solicited customer order to buy the common stock of ABC
A I only
B II only
C I and III only
D I, II, III

Answer 22

A. During a distribution of a security, firms involved in the underwriting are prohibited from placing orders to buy that security or from placing an order to buy a security that is convertible into the one being underwritten. In addition, the firm cannot solicit customers to buy the security (or convertible) during the underwriting period. It is permitted to execute unsolicited customer orders for the security, but the firm must be able to document that the order was unsolicited.

Question 23

Which information would be included on a When, As and If Issued trade confirmation for a bond trade?
A settlement date
B amount of accrued interest
C total transaction cost
D agent or principal transaction

Answer 23

D. A “When, As and If Issued” trade occurs without knowing the settlement date.

When the securities are finally issued, a settlement date is set by the FINRA Uniform Practice Code Committee. If the settlement date is unknown, the amount of accrued interest due is unknown (interest accrues up to, but not including, settlement).

If the amount of accrued interest is unknown, the total transaction cost is unknown.

The confirmation would state whether the trade was performed by the firm as agent or dealer.

Question 24

TRACE reports trades of:
A NYSE listed stocks
B NASDAQ listed stocks
C Corporate bonds
D Municipal bonds

Answer 24

C. TRACE is FINRA’s system for reports of trades of corporate, government, and agency bonds.

Municipal bond trades are not reported through TRACE. The MSRB has jurisdiction and runs a separate system called RTRS - the Real Time Reporting System - to report municipal bond trades.

Question 25

A covered security under Rule 101 of Regulation M can be subject to a restricted period of:
A 1 day
B 1 day or 5 days
C 5 days
D 10 days

Answer 25

B.
Rule 101 of Regulation M places restrictions on syndicate members who are not market makers in that stock during the 20-day cooling off period. They are subject to a restricted period for secondary offerings of either 1 business day or 5 business days prior to the effective date, where they are prohibited from purchasing, making a bid for, or inducing the purchase of, the underwritten security.

The rule states that:

If the security is actively traded (average daily trading volume of $1,000,000 or more and public float of at least $150,000,000), there are no restrictions placed on syndicate members who are not market makers trading the issue prior to the distribution. The idea here is that this issue is too big for the price to be manipulated. This is called a “Tier 1” issue.

If the security has an average daily trading volume of $100,000 and a public float of at least $25,000,000 the restricted period is the business day prior to the effective date. This is called a “Tier 2” issue.

Any other security not meeting these minimums is a “Tier 3” issue, subject to a restricted period of 5 business days prior to the effective date.

Question 26

Distribution of promotional materials in a Regulation A offering is:
A prohibited
B permitted only after the Form 1-A is filed with the SEC
C permitted only after the completion of the 20-day SEC review period
D permitted prior to the filing of the Form 1-A and all through the 20-day SEC review period

Answer 26

D. Unique to Regulation A is a “test the waters” provision. Issuers can distribute promotional materials to prospective purchasers prior to filing the offering statement with the SEC and all through the 20-day SEC review period. Note, in contrast, that regular registered offerings prohibit the use of any promotional material before filing the S-1 registration statement, or during the 20-day cooling off period, under the “Quiet Period” rules.

Question 27

The maximum dollar amount that may be offered within a 12 month period under Regulation A Tier 2 is:
A $20,000,000 for the issuer / $6,000,000 for affiliates
B $20,000,000 for the issuer / $10,00,000 for affiliates
C $50,000,000 for the issuer / $15,000,000 for affiliates
D $50,000,000 for the issuer / $20,000,000 for affiliates

Answer 27

C.
Regulation A has 2 Tiers.

Tier 1 limits an issuer to the sale $20,000,000 of its own securities within a 12-month period. In addition, selling security holders are limited to a maximum of $6,000,000 of securities under the exemption.

Tier 2 limits an issuer to the sale $50,000,000 of its own securities within a 12-month period. In addition, selling security holders are limited to a maximum of $15,000,000 of securities under the exemption. Tier 2 is sometimes referred to as “Regulation A+.”

Question 28

An issuer has filed a registration statement for the non-convertible preferred stock of ABC Company. During the underwriting period, a dealer in the underwriting group:
A may recommend the purchase of the common stock of ABC Company
B may recommend the purchase of the preferred stock of ABC Company being underwritten
C is prohibited from recommending the purchase of the common stock of ABC Company
D is prohibited from recommending any security that has, or will be, issued by ABC Company

Answer 28

A. Since this is a non-convertible security, there is no prohibition on recommending the purchase of the common stock of that company during the underwriting period.

If the security being underwritten were convertible, then recommendation of the common stock is prohibited. Of course, the underwriter cannot recommend the purchase of the security currently being underwritten - all offers of this security can only be made through the prospectus.

Question 29

To be a WKSI under SEC Rule 405, the issuer must have a market capitalization of at least:
A $75 Million
B $100 Million
C $700 Million
D $1 Billion

Answer 29

C. Under Rule 405, a WKSI (Well-Known Seasoned Issuer) is one with a market capitalization of $700 million
OR
one that has issued at least $1 billion in non-convertible senior securities registered with the SEC in the past 3 years.

Question 30

Under Rule 144, a customer wishing to sell must file the 144 “Notice of Sale” with the SEC:
A 10 business days prior to the placement of the sell order
B concurrent with the placement of the sell order
C 10 business days after the placement of the sell order
D 90 days after the placement of the sell order

Answer 30

B. The Form 144 is simply a notification to the SEC that stock will be sold in compliance with the Rule - the SEC does not need to approve the sale. The Form 144 must be filed concurrent with the placement of the sell order.

Question 31

The cost of registering a PIPE securities issue is paid:
I by the issuer
II by the private investor group
III before the issuer receives any proceeds of the sale
IV after the issuer receives any proceeds of the sale
A I and III
B I and IV
C II and III
D II and IV

Answer 31

B. “PIPE” is the acronym for Private Investment in Public Equity. PIPEs are most often used by small public companies (typically OTCBB) that need to raise additional capital. Filing a registration statement with the SEC for an “add-on registration” of new securities to raise capital takes time and is “public information” that often depresses the price of the outstanding stock (since additional shares are being issued).

Instead, the company can arrange with a private equity firm to give it a quick capital infusion (at a discount price) by doing a Regulation D private placement of restricted shares. This is conditioned on that company subsequently filing a “shelf” registration statement with the SEC to provide for public resale of those shares.

The private investors profit from the difference between the discounted price they paid for the private placement shares and the POP, while the issuer gets funds quickly and in advance of the registration statement filing.

As part of the agreement, the issuer will typically pay the expenses of the investors in connection with both the transaction and the subsequent registration.

Finally, remember that a PIPE only works for an “add-on” offering; it cannot be used for an IPO.

Question 32

All of the following actions are prohibited when handling a Rule 144 sale EXCEPT:
A placing a “bids wanted” listing by a firm that is not a regular market maker on a recognized inter- dealer quotations service
B purchasing the securities for its trading account by a firm that is not a regular market maker
C soliciting orders to buy the issue from customers of that firm
D recontacting a broker who has indicated interest in purchasing that issue within the prior 10 business days

Answer 32

D.
Rule 144 prohibits the solicitation of customer orders to buy 144 shares. However, your firm may recontact a broker who has expressed interest in the security within the past 60 days and it can recontact another customer who has expressed interest in the securities within the past 10 business days.

Your firm must act as an agent in the transaction unless it is a bona fide market maker in the security. Only firms that are bona fide market makers can buy 144 shares into their inventory or can place “bids wanted” for 144 shares in interdealer quotations services.