Chapter 6.5

Question 1

SEC Rule 10b-18: Conditions for issuers to repurchase stock.

Answer 1

Corporations can buy back their own common stock in the secondary market provided they follow the provisions of Rule 10b-18:

• An issuer must use a single B/D per day to bid for or purchase the issuer’s common stock. This is required to avoid the appearance that there is widespread demand for the security.
• Timing: The issuer may not repurchase their own shares at the market opening and during the last half-hour of trading each day.
• Pricing condition: The purchase price may be no higher than the highest bid shown by a dealer or the last sale in the security, whichever is greater.
• Purchases may not exceed 25% of the ADTV(average daily trading volume) for the security(block purchases are NOT included in calculating the ADTV).

Question 2

Regulation SHO

Answer 2

A SEC regulation implemented to address concerns regarding short sale practices. It establishes “locate” and “close-out” standards that are meant to ensure the proper execution of short sales and to prevent naked short selling practices

Question 3

Price test requirements on short sales under normal market conditions

Answer 3

There are no price test requirements on short sales in a normal market. They can be executed on upticks or downticks.

Question 4

Rule 201 includes the following circuit breakers in a falling market:

Answer 4

• Short Sale-Related circuit breaker: The circuit breaker would be triggered for a security any day in which the price declines by 10% or more from the prior day’s closing price.
• Duration of price test restriction: Once the circuit breaker has been triggered, the alternative uptick rule(short sales may only be made above the current best national bid) would apply to short sale orders in that security for the remainder of the day as well as the following day.

Question 5

An affirmative determination or “Locate”

Answer 5

Requires member firms to confirm and document that the security that they are shorting, whether for their own account or for customers, is available to borrow and will be delivered by settlement date.

**Exception: If a customer wishes to short a security which the customer also “owns”(is long) the long security must be delivered within 35 days of the trade date of the short sale to qualify for the “locate” exemption.

Question 6

List of securities available for short sale purposes

Answer 6

Must be updated daily and cannot be more than 24 hours old. This would include common stock(class A & B) and REIT’s.

Question 7

Affirmative Determination is NOT required for:

Answer 7

• Corporate debt securities
• bona fide market making transactions by a member in securities in which it is registered as a NASDAQ market maker
• bona fide market making transactions by a member in Non-NASDAQ securities in which the market maker publishes a 2-sided quotation
• transactions which result in a fully hedged position

**Affirmative determination would be required for non-NASDAQ securities publishing one-sided quotes.

Question 8

Member firms record keeping of short positions

Answer 8

Each member must maintain a record of “total” short positions in all customer and proprietary firm accounts in all equity securities.

**Reports shall be received by FINRA no later than the 2nd business day after the reporting settlement date

Question 9

Mandatory Close-out for short sales

Answer 9

This requirement is applied when it appears that there may not be enough stock available to buy in the market to cover the short interest in a security. The rule requires B/D’s to “close-out” failure-to-deliver positions in threshold securities that have persisted for 13 consecutive settlement days by purchasing securities of “like kind and quantity”

Question 10

The Threshold List

Answer 10

A daily list of equity securities that have failed to deliver for 5 consecutive settlement days, and meet the following criteria:

• There are aggregate fails to deliver at a registered clearing agency of 10,000 shares or more per security
• The level of fails is equal to at least one-half of one percent of the issuer’s total shares outstanding
• The security is included on a list published by a self-regulatory organization

**A security ceases to be a threshold security if it does not exceed the specified level of fails for 5 consecutive settlement days.

Question 11

What happens if a B/D sends an order for a short sale to one of it’s branch offices outside of the U.S. for execution

Answer 11

The order would still be subject to the “locate” requirements.

Question 12

Regulation S-P - Privacy Rules

Answer 12

Requires financial institutions to provide notice to consumers about the institution’s privacy policy and practice. It restricts the ability of a financial institution to share nonpublic personal information about consumers with non-affiliated 3rd parties; and allows consumers to prevent such information sharing by “opting out”. It also requires the safeguarding of customer information. Information about consumers can be shared with affiliates of the B/D.

• The regulation requires firms to deliver an initial privacy notice to new customers no later than when the relationship is established with the customer and to provide an annual privacy notice to all customers.
• The term “personally identifiable financial information” in the regulation means any information a consumer provides to obtain a financial product or service or information about that consumer that results from any transaction involving a financial product or service with that consumer.

Question 13

Examples of “Personally identifiable financial information”

Answer 13

• Information a consumer provides to a financial institution on an application to obtain a loan, credit card, or other financial product or service
• Information that results from financial transactions between the consumer and the financial institution
• Any information you collect through an Internet “cookie”
• Information from a consumer report

**Personally identifiable financial information does NOT include information that is aggregated and has no identifiable data that pertains to consumers.

Question 14

Providing reasonable means of “Opting out” of their information being shared includes:

Answer 14

• Providing customers with a check-off box on a reply form
• Provide an electronic means to “opt out” if the customer has agreed to electronic delivery of information.
• Provide a toll-free telephone number that consumers can call to “opt out”

**It is not considered to be a “reasonable means” to “opt out” if the customer is require to write a letter of notification to exercise the “opt out” right.

Question 15

The Sarbanes-Oxley Act of 2002

Answer 15

Also known as the corporate responsibility act. It requires that corporate CEO’s and CFO’s certify financial reports. CEO’s and CFO’s would also be required to forfeit profits and bonuses from corporate earnings due to securities fraud. It also

• Prohibits executives from selling company stock during blackout periods.
• Requires that insiders report company stock trades within 2 days
• Prohibits company loans to executives or directors
• Requires immediate disclosure of material changes in the company’s financial condition

Question 16

Reg X

Answer 16

A federal reserve board regulation that covers US persons who obtain credit to purchase or carry US Securities outside of the United States

**Reg T applies within the U.S.

Question 17

Hart Scott Rodino Act of 1976

Answer 17

Established the federal pre-merger notification program, which provides the Federal Trade Commission and the Department of Justice with information about large mergers and acquisitions before they occur. It gives the FTC and the DOJ the opportunity to review the potential effects on competition of certain mergers, acquisitions or other consolidations that meet the Act’s size and other tests before such transactions are completed. Some of the provisions of the ACT are:

• 30 day wait period: After the parties complete their filings, they must wait 30 days while the government agencies review the information. The government has the option of extending the waiting period. The waiting period may also be terminated prior to the end of the 30 days if the parties request early termination at the time of filing and if the government elects in its discretion to do so. It is unlawful to close the transaction until the waiting period has been satisfied.
• The filing requirement is required only if the size of the transaction exceeds a certain dollar threshold provision in the Act. These thresholds are updated periodically.

**The size of the transasction threshold is $63.4 MIllion

Question 18

Regulation FD

Answer 18

Attempts to halt the selective disclosure of material nonpublic information by issuers to analysts and institutional investors. Requires that whenever an issuer or anyone acting on behalf of an issuer intentionally discloses material nonpublic information, the issuer must simultaneously make public disclosure of that same information. Public disclosure can be satisfied by filing form 8-k with the SEC or by disseminating the information through another acceptable method such as public conference calls and press releases. If the disclosure was non-intentional, the issuer must make public disclosure promptly.

Question 19

Trust indenture Act of 1939

Answer 19

Regulates corporate bonds and requires an indenture or deed of trust, which specifies the rights and duties of the issuer, underwriter, and investor. The ‘39 Act does not regulate:

• Government issues
• Municipal issues
• Private placements
• unit investment trusts

**The act also provides for the appointment of a trustee to protect the corporate bondholders in the event of a conflict of interest

Question 20

Exemption of Foreign B/D’s

Answer 20

The SEC permits foreign B/D’s to conduct a securities business with U.S. customers and does not require that they register with the SEC. If the foreign B/D chooses not to register with the SEC their activities are restricted. Some of the restrictions on foreign B/D’s include:

• They can visit U.S. clients but they must be accompanied by a U.S. registered person
• They can effect securities transactions with U.S. institutional clients but they must go through a U.S. registered B/D and records of trading activity must be maintained
• Their securities business is not subject to SEC restrictions if it is conducted outside the United States
• Foreign B/D’s can send research reports directly to major U.S. institutional clients provided they do not follow-up with those clients to discuss the report. If these clients want to place an order as a result of a recommendation in the report, the order must go through a U.S. registered B/D.

**Before the U.S B/D establishes a business relationship with the foreign B/D, it must determine that the foreign B/D is not subject to statutory disqualification.