Chapters 1/2 Flashcards

Question

True or false: A blind trust that’s controlled by a person other than the research analyst or by a member of the research analyst’s household for which neither the research analyst nor a member of the research analyst’s household knows of the account’s investments or investment transactions is considered a research analyst account?

Answer 1

Any participation in a conference call, seminar, forum, or public speaking engagement to 15 or more persons OR with at least 1 representative of the media where the RA makes a recommendation or offers an opinion. | A forum can be in-person OR virtual ## Footnote * During the event, the research analyst who appears at the event must correct and update any disclosures in the research report that are inaccurate, misleading, or no longer applicable.

Answer 2

- A password protected webcast - Conference call - Event w/ 15 or more existing customers, provided that all of the event participants previously received the most current research report that contains the required disclosures.

Answer 3

True. A member’s written policies and procedures must be reasonably designed to promote objective and reliable research that reflects the truly held opinions of research analysts and to prevent the use of research reports or research analysts from manipulating or conditioning the market, or favoring the interests of the member or a current or prospective customer or class of customers.

Answer 4

Acting as an underwriter (debt or equity), participating in a selling group in an offering for the issuer, acting as an adviser in M&A, providing venture capital or equity lines of credit, or servicng as a placement agent for the issuer or otherwirse acting in furtherance of a public offering of the issuer. PIPE- public investment in PE is considered IB services.

Answer 5

Any department of a BD that provides IB services.

Answer 6

Persons who perform any sales or trading on behalf of a member firm. Persons who work in the institutional equities division are considered S&T personnel.

Answer 7

FINRA Rule 2241 prohibits joint due dilligence meetings between research departments and other departments (ex: IB or S&T) *prior to the selection of underwriters for IB services transaction*. The concern is that bankers may pressure researchers to produce favorable research to increase the chances of the firm getting to become an underwriter for an offering. Once an underwriter has been selected, joint due diligence is permitted *provided there is a compliance analyst there as well.*

Answer 8

Written procedures must be designed to: * The prepublication, clearance, or approval of research reports by persons engaged in IB activities is prohibited. LEGAL and COMPLIANCE ARE PERMITTED TO REVIEW IT. * Any input from other departments w/ regards to research coverage decisions MUST be restricted or limited. IB PERSONNEL MUST BE PROHIBITED. * Prohibit persons engaged in IB activities from supervision or control of research analysts, including influence or control over research analyst compensation, evaluation, and determination * IB personnel CANNOT be involved in determining the research department's budget * Safeguards MUST be in place to ensure that research professionals are not pressured by IB professionals. * Any promise of positive research in exchange for business is prohibited. ## Footnote * IB personnel can review research reports after or concurrent to publishing. Just not before. * **Procedures must indicate the circumstances in which prepublication review by other non-research personnel is appropriate.**

Answer 9

False, member firms may not submit research reports to the subject company unless the sole purpose is for fact verification. Even then, only relevant sections made be submitted.

Answer 10

- A complete draft is submitted to legal or compliance before any relevant sections are sent to the subject firm or IB personnel. - The sections of the report submitted to the subject firm or IB personnel DO NOT contain the research summary, research rating, or price target. - If after submitting the relevant sections, the research department intends to change the proposed rating or price target, it must first provide written jutification and receive authorization from the legal or compliance personnel.

Answer 11

False, research analysts are prohibited. Research analysts ARE permitted to solicit non-IB business (ex: S&T).

Answer 12

IB meetings w/ prospective clients and brokers that is generally held prior to a securities offering. Research analysts ARE NOT allowed to sit in on road shows.

Answer 13

False, this is prohibited. ## Footnote * This restrictions DOES NOT apply to non-IB personnel

Answer 14

False, this is allowed. Just as long as it's not IB personnel.

Answer 15

A road show that's not related to IB services transactions. Research analysts are allowed to attend these.

Answer 16

When research professionals communicate w/ clients or prospective clients in the presence of IB personnel or personnel from the issuing company. These are prohibited by FINRA since it's believed a research analyst may feel pressured to give a positive report.

Answer 17

If: 1. Any oral or written communication is fair and not misleading 2. No personnel from IB or company mgmt is present

Answer 18

A period where an IB client MAY NOT be the subject of a research report or public appearance. Quiet periods apply to IPOs AND secondary offerings. During this period, no research reports may be filed AND analysts may not make any public appearances about the offering or issuer. | Individual firms may have longer periods. ## Footnote * The quiet period for secondary offerings doesn’t apply to issuers whose securities are actively traded as defined under Regulation M of the Securities Exchange Act of 1934. This applies to both research reports and public appearances. The quiet period following secondary offerings doesn’t apply to unregistered offerings. Therefore, there’s no quiet period regarding private placements of Rule 144A securities and securities offerings conducted outside the of the U.S. under Regulation S

Answer 19

For managers in an IPO: 10 calendar days For participating firms in an IPO: 10 calendar days For manager/comanager in a secondary offering: 3 calendar days For participating firms in a secondary offering: no restriction | Memorize that it's calendar days, not business days ## Footnote * If a firm is not involved in the IB process of an offering, a research report or public appearance may happen right away

Answer 20

Securities that have an average daily trading volume (ADTV) of >= $1MM, which is issued by an entity whose CE securities have a public float >= $150MM.

Answer 21

True ## Footnote * Significant news items or events are those that make a material impact or material change in a company’s financial condition, operations, or earnings, and require the filing of SEC Form 8-K.

Answer 22

An Act created in 2012 that created a new category of issuer that's referred to as an emerging growth company (EGC). An EGC is a firm that has total annual revenues < $1.07B during the most recently completed fiscal year. With EGCs, no quiet period exists after issuance. RAs may attend pitch meetings in connection with an EGC IPO, as long as they do not engage in IB solicitations.

Answer 23

Implemented by the SEC in 2019 to extend the safe harbor provisions to covered investment funds. This Act also states that SROs ARE NOT permitted to prohibit the publishing of covered investment funds.

Answer 24

An investment company that is registered w/ the SEC and trading on a national exchange. Ex: ETF, closed-end investment firm, and a business development company. Reports on mutual funds ARE NOT a type of research report, however reports on ETFs, closed-end investment firms, and a business development companies ARE considered research reports Business development companies (BDCs) are considered covered investment funds as well.

Answer 25

True. Deal-related bonsues are similarly prohibited. If an analyst's compensation is in any way based on the member firm's IB revenue, this fact MUST be disclosed in any research reports authored by the analyst.

Answer 26

Member firms must have a compensation committee that is responisble for reviewing and approving the compensation for research analysts at least annually. This committe must also report to the board and document the reasoning behind an analyst's compenstion. The committee IS NOT allowed to be comprised of any member of IB.

Answer 27

- Individual performance of the analyst - Correlation between analyst recommendations and performance of securities - A review of a spectrum of ratings from clients, the sales force, and other internal or external professionals.

Answer 28

True. Ex: An analyst cannot recommend longing a security and then sell it themselves in their own accounts. There is an exception is the analyst can claim financial hardship- meaning that they need to sell the stock for immediate money.

Answer 29

FINRA requires that firms have their own policy.

Answer 30

Either on the front page of the publication or a reference must be provided to indicate the page where they appear. The disclosures MAY NOT be written in fine print. Firms are permitted to use a hyperlink in electronic formats.

Answer 31

1. Whether the RA or a member of the analyst's household has ANY financial interest in the subject company. 2. Whether the firm or its affiliates has an ownership interest in the subject security of 1% or greater of the outstanding CE of the subject firm. 3. Whether the firm is making a market in the subject security (always ready to buy/sell) at the time of publication or distribution of the research report. 4. Whether the member firm or any affiliates have received compensation for or expect to receive compensation (within the next 3 months) from IB activity from the subject company in the last 12 months. 5. Whether the member firm or any affiliates have managed or co-managed a public offering for the subject company in the preceding 12 months. 6. Whether, as of the end of the month immediately preceding the date of publication or distribution of a research report (or the end of the second most recent month if the publication or distribution date is less than 30 calendar days after the end of the most recent month), the member or its affiliates have received any compensation for products or services from the subject company other than IB services in the previous 12 months 7. Whether the research analyst's compensation is based on the member firm's IB revenues 8. Whether the research analyst received compensation from the subject company in the previous 12 months 9. Whether the subject firm has been a client of the member firm in any way in the preceeding 12 months. If so, details must be described. 10. If a price target is included, the valuation method used. 11. A clear outline of the rating system. 12. The % of all securities the firm has rated in each category. 13. If a research report contains a rating or price target for AT LEAST ONE YEAR, the report must include a price chart lf the cubject firm's actual performance for the past 3 years. 14. Any other material conflict of interest. ## Footnote * The front page must contain these disclosures or provide a reference to the pages where the disclosures are.

Answer 32

True. The explanation should include the time horizon and any benchmarks on which the rating is based. This info must be current as of the end of the most recent calendar quarter, or the second most recent calendar quarter if the publication date of the report is less than 15 calendar days after the most recent calendar quarter. Remember, firms must disclose the % of companies in each ratings category (buy, hold, sell). Additionally, research reports must disclose the % of subject companies within each ratings category that the firm has provided IB services to in the last 12 months.

Answer 33

If an analyst has a rating or price target on a firm for at least a year, the report must include a line graph for the period that the member has assigned the price target/rating OR for 3 years, whichever is shorter. The graph must indicate any dates that ratings were changed.

Answer 34

True, they're considered misleading

Answer 35

A research report that covers 6 or more companies. In compendium reports, firms are allowed to direct readers to where they can find disclosures versus making the disclosures within the report. In an electronic format, a hyperlink is permitted and in a paper report, a toll-free number to call, a website, or an address where a letter may be sent when requesting the required disclosures is permitted.

Answer 36

A single identity that encompasses a member firm and an foreign affiliate(s). Additional disclosure requirements concerning globally branded research reports include the name of the affiliates that contributed to the report, the names of the foreign analysts who contributed to the report, and a statement that such analysts are not qualified by examination in the U.S. *If the research is gloablly branded, non US analysts who prepare the research ARE NOT required to be registrered in the US*

Answer 37

- Each affiliate that contributed to the report. - The names of the foreign analysts who contributed to the report. - A statement that such analysts are not qualified by the exam

Answer 38

Any research report by a member firm that is not globally branded and includes a contribution by a research analyst who IS NOT considered an associated person by the member firm. *For a report prepared by a mixed team that includes US and non-US analysts, each analyst must be registered in the US.*

Answer 39

A research report that has been prepared by an affiliate of a BD or at the request of a BD that maintains editorial influence over the content of the report. This type of report must be reviewed and approved by a Supervisory analyst (Series 16) or a registered principal (Series 24).

Answer 40

- A firm may not distribute 3rd party research if it knows or has reason to know the research is not objective or reliable. - A member firm must have written policies and procedures to mitigate the risk of any untrue statements in 3rd party research. - Whether the member firm or any affiliates have received compensation for or expect to receive compensation (within the next 3 months) from IB activity from the subject company in the last 12 months. - Whether the member firm or any affiliates have managed or co-managed a public offering for the subject company in the preceding 12 months. - Whether the research analyst's compensation is based on the member firm's IB revenues - Whether the firm or its affiliates have an ownership interest in the subject security of 1% or greater of the outstanding CE of the subject company. - Whether the firm is making a market in the subject security at the time of publication or distribution of the research report. - Any other material conflicts of interest

Answer 41

A research report prepared by a person or firm that has no affiliation or contractual relationship w/ the distributing member AND makes content determinations w/o any input from the distributing member of the member firm's affiliates. The distributing BD has no editorial control and is not required to pre-approve the report. ## Footnote * The required disclosures included in the report apply to the firm that prepares the report, NOT the firm that distributes the report.

Answer 42

If the research provided by the firm: - was requested by the customer - Through the firm's website - To a customer in connection w/ a solicited order in which the RR had informed the customer of the availability of independent research and then the customer requests it.

Answer 43

1. Whether the research analyst or a member of their household has a financial interest 2. Whether the firm or its affiliates has an ownership interest in the subject security of 1% or greater of the outstanding CE of the subject firm. 3. Any material conflict of interest 4. To the extent the RA knows, or has reason to know, whether the member of an affiliate has received compensation from the subject firm in the last 12 months. 5. Whether the RA received compensation from the subject company in the past 12 months. 6. To the extent the RA knows, whether the subject company is or was in the 12 month period prior to the distribution of the report, a client of the member firm. If so, any services provided to the subject company must be disclsoed.

Answer 44

False, 3 years

Answer 45

A disclosure that must be made in any research report or public appearance of any material conlfict or interest the RA or member of the analyst's household has. ## Footnote * The catch all disclosure requirement extends further to research reports than to public appearances by adding the requirement to disclose any material conflict of interest by an associated person of the firm with the ability to influence the content of a research report (ex: An MD of the IB department). * **A firm or RA is not required to make a disclosure of any future IB transactions OR any material nonpublic info**

Answer 46

When an RA terminates coverage on a subject company, the BD is required to notify its clients promptly. This must be accompanied by a note that states the analyst's final recommendation or rating. ## Footnote * A BD that’s terminating research coverage is not required to discontinue market making in the subject security.

Answer 47

False, firms are required to have written procedures to ensure that research reports ARE NOT selectively distributed. However, firms are permitted to have different research products and services available to different types of clients (ex: short-term trading research vs long-term). Firms can have different recommendations and ratings depending on these different categories of clients. ## Footnote * Firms that offer different research products and recommendations for different categories of clients must inform all clients of the different categories and products they offer. This disclosure IS NOT required to be in every research report.

Answer 48

A limited IB is a very small IB. Personnel in this case may act in duel capacities. This exception is available to firms that have over the previous three years, on an average per year, participated in 10 or fewer investment banking service transactions as manager or co-manager and have generated $5 million or less in gross investment banking services revenues from these transactions. This definition of investment banking services transactions includes underwriting of both corporate debt and equity, but excludes underwriting of municipal securities. ## Footnote * Although these small firms are not required to separate the IB and research departments, they must establish info barriers or other institutional safeguards that are reasonably designed to ensure that RAs are insulated from pressure by persons who are engaged in IB services activites.

Answer 49

False, ALL reports are subject to pre-approval.

Answer 50

- Discuss an IB services transaction w/ a client or potential client. This is permitted as long as no one from IB is there during the conversation. - Discuss an IB services transaction w/ internal personnel, again, as long as no IB personnel is there. - Attend a non-IB or non-deal roadshow. - Listen/view IB roadshow from a remote location. ## Footnote * These rules are in place so that RAs can discuss their research w/o being pressured from the IB department. * In any case where a RA is talking to clients on internal personnel regarding IB transactions, communications must be fair and balances AND IB and firm mgmt cannot be present.

Answer 51

False, this is considered inconsistent trading

Answer 52

True, permitted that there recommendation is sell

Answer 53

1. RAs can sell securities if they have a buy recommendation if an unanticipated change in their personal financial circumstances occurs. 2. RAs can disregard the rules of the transactions are in a registered investment company. 3. RAs can disregard the rules if the transactions in the accounts are not controlled by the analyst for investment funds in which the analyst has no investment discretion (ex: blind trust)

Answer 54

FINRA leaves this up to the firms. FINRA states that the firms must have written procedures in this case. These procedures must be approved by legal/compliance.

Answer 55

C. Termination of coverage reports should be prepared for the 3 issuers that are no longer being covered. Price charts will be continued on the other 5 issuers.

Answer 56

True, as long as all appropriate disclosures are made

Answer 57

- Whether a member firm has acted as a manager or comanager of IB services transactions on behalf of the subject firm - Whether a member firm expects to receive compensation for IB services transactions within the next 3 months - Whether a member firm makes a market in the securities of the subject company - Price chart - Meanings of ratings - Any form of distribtuion of ratings | Do not need to write down

Answer 58

B. Disclosure is required since the wife is a member of the RA's household. Any houshold holdings is required to be disclosed in a research report whether they have influence over the account or not.