chapters 11-15

Question 1

pipe (private investment in public equity)

Answer 1

It’s a private placement arrangement where an accredited investor buys stock directly from a public company at a price below market value. In exchange, the company agrees to file a resale registration statement that allows the investors to sell the shares to the public.

Question 2

types of underwriting

Answer 2

chart pg 144

Question 3

Syndicate Agreement

Answer 3

between broker dealers who form syndicates to underwrite a deal and sign selling agreement with manager of a selling group

Question 4

Liability Chart in Underwriting Process (Primary Market)

Answer 4

Underwriting managers & Syndicate members assume debt, selling group does not

lead manager is part of

Question 5

Underwriting spread

Answer 6

pre registration: no communication with public
cooling off period: filed with SEC, “blue sky” aka state registration is often the issue, distro of preliminary prospectus called “red herring”, no pricing info
post registration period: effective date is set

Question 7

When must after market prospective be sent for investors of

non listed IPO
non listed follow on
exchange listed IPO
exchange listed follow on

Answer 7

90 days
45 days
25 days
no req

Question 8

types of prospectuses

Answer 8

summary prospectus: short form, often used for mutual funds
free writing prospectus: offering term sheets, emails, press releases, and marketing materials
red herring: preliminary prospectus (no pricing)
statutory prospectus: condensed form of registration statement with offering price and effective date

Question 9

Exemptions: Reg D versus Rule 147

Answer 9

Reg D: private placement - unlimited accredited investors, no more than 35 non-accredited investors who must appoint a purchaser representative and then all investors must get a private placement memorandum

Rule 144: restricted and control stock
restricted stock: unregistered stock that’s acquired through a private placement or as compensation for senior executives of an issuer (has a 6 month holding period before it can be sold)
control stock: registered stock that’s part of an issuer’s public float and purchased in the open market by officers, directors, or greater than 10% shareholders of the issuer

Question 10

Rules 144, 144A, 145

Answer 10

rule 144: sales of restricted and control stock
144A: exemption for restricted securities that are sold to qualified institutional buyers
145: reclassification of assets (not stock splits, but instead
- substitutions of one security for another, securities that are a result of a merger/ acquisition, securities issued after a transfer of assets from one corporation to another.)

Question 11

5% markup rule: only for assets not requiring a prospectus

Answer 11

Finra believes a 5% markup is fair, no more, with certain exceptions

Question 12

Discretionary accounts

Non discretionary accounts

Answer 12

Discretionary accounts: RR must document when it is used. So if RR tells you about trade and you agree, they are not exercising discretion bc u agreed to it
Non discretionary accounts:
- Solicited: if RR recommends trade and customer agrees
- Unsolicited: customer places trade with no RR recommendation

Question 13

Review: Covered and uncovered options

Answer 13

If covered, no margin is required and risk is generally limited

Id uncovered, margin is required and risk may be significant

Question 14

Sell limit and buy limit

Answer 14

sell limit: an order that will only be executed at a specific price or higher

buy limit: an order that will only be executed at a specific price or lower

Question 15

Stop orders

Answer 15

Sell step order: placed below the current market price of the security and used to hedge a long position
Buy stop order: placed above market price and used to hedge a short position. If security increases in value, he will buy it at the next price (execution price) after the trigger price.

Question 16

Order qualifiers

Answer 16

2 popular types
1. Day order – cancelled at days end
2. Good til canceled (GTC) – stays on the book until it expires, is executed, or cancelled
- may be adjusted for distributions on the security or partial execution

Question 17

Trading Process 5 steps

Answer 17

1. Order entry: ticket details regarding how trade should be executed
2. Execution
3. Clearing: Executing firms agree to the details of a trade; any unrecognized trades may result in a DK (Don’t Know) notice
4. Settlement: Day on which customer’s name is placed on or taken off the issuer’s books
5. Custody: safeguarding of client and firm assets

Question 18

Settlement Dates

Answer 18

corporate and munis: T+!
government securities and option trades: T+1
Cash settlement for any security: Same day as trade date
Seller’s option: negotiated settlement; not earlier than 2 days after trade
When Issued: As determined by the National Uniform Practice Committee
Reg T Payment Date: 2 days after regular way settlement (s+2 or T+3)

Question 19

Good Delivery

Answer 19

1. Properly registered
2. Properly endorsed certificate
3. Signed stock power if the stock certificate is sent unsigned
4. CUSIP numbers may be used to identify and clear

Restricted securities are not considered good delivery

Question 20

Stock Splits

Answer 20

Purpose: no improve marketability (make share cheaper) of stock. No change to holder’s percentage of equity ownership, economic gain or loss, or issuer’s capitalization

Types of splits WEIRD NOTATION
1. forward (2:1 or 3:2): more shares, lower price
2. Reverse (1:5): fewer shares, higher price

10% tax dividend is factored in as 10% more shares in cost basis calculation.

Question 21

Tender Offers

Answer 21

Indicates the intent to buy shares from the owner at a fixed price

In investor can participate if: they own stock, have rights or warrants to the stock, own a call option and have exercised the call option

Question 22

Official Communication Types between issuers and investors

Answer 22

beneficial owners: investors whose securities are held in their name and recorded on the firm’s books
non-objecting beneficial owner (NONO): owners who allow issuers to contact and send communications to them directly
Objecting beneficial owner (OBO):all communication must be sent from issuer to OBO’s broker dealer; brokerage can charge issuers for forwarding financial info or proxies (voting)

Question 23

Types of accounts

Answer 23

Cash account: pay for securities in whole

margin account: 1. long - client borrows funds from the broker dealer to purchase shares 2. short - the client borrows shares from the broker dealer in order to execute a short sale
- to open a margin account, you need margin (regulation T deposit requirement of 50%), credit agreement, and a hypothecation (pledge) agreement which means that the broker dealer borrows money from bank to replace the loan made to the customer, margin disclosure document (securities can be sold from the account to meet a margin call)
optional: loan consent agreement (allows broker dealer to lend securities in a margin account to others)

options account: no response from customer means verified. But if customer refuses to provide certain info, a note of this is made in options agreement.

Question 24

Discretionary accounts

Answer 24

customer gives power of attorney to RR to make investment decisions

limited: can place orders but not withdraw

full POA: can place orders and withdraw

Question 25

Not held orders

Answer 25

No Power of attorney required
Client can provide oral authorization for trade execution if they specify AAA (action, amount, asset) but expires in a day. Then, written authorization is required

RR can decide time and price of execution

Question 26

Fee based vs commission based account

Answer 26

fee based (wrap account): roll al costs for services into one fee. better for active, frequent traders

commission based: better for infrequent trading clients who don’t need extensive servicing

Question 27

CESA accounts (Coverdell Education Savings Accounts)

529 College Savings Plans

Answer 27

CESA: individuals can contribute a maximum of $2000 annually per child up to age 18 for elementary or higher ed.

529: higher ed

Question 28

Joint account
- Joint tenancy with rights of survivorship (JTWROS): if a tenant dies, ownership passes to the surviving tenants
-Joint tenancy in common (JTIC): if a tenant dies, the decedent’s portion is transferred to her estate

Trust (revocable – can change stuff or irrevocable – reduces estate taxes and probate)

rollover: transferring funds from one IRA to another
vs
trustee to trustee transfer (can be done more than once a year)

Answer 28

accounts for minors (UGMA/UTMA) are way cheaper to set up than trust
- one minor, one custodian, gifts are irrevocable exceeding 18,000 a year will be taxed

Question 29

Traditional IRA has a penalty if you withdraw before 73 and a penalty (Required minimum distribution) if you don’t withdraw by april 1st of when you turn 73, pre tax income, tax deferred, you pay taxes when you withdraw

roth IRA, after tax dollars, withdrawals are tax free not tax deferred, contribution is never deductible

Question 30

ERISA (Employee Retirement Income Security Act)

Answer 30

Requires plans to allow all employees who are at least age 21 and have one year of full time service to be eligible to contribute to a retirement plan

Question 31

For employee to be able to receive an employer’s matching contributions in a 401k plan, they must be vested.

Answer 31

403b are for employees of public schools and non profits

non roth 401k and 403bs are pre tax income and earnings grow on a tax deferred basis

Question 32

During expansion, when GDP is growing, there may be inflation from high demand, so the government and fed responds with tight policy (cutting spending and selling bonds or letting them mature and rate hiking)–> people will put money in savings accounts.

Answer 32

During contraction, government and fed pursue an easy money policy to curb unemployment (lowering discount rate)

Question 33

Economic Indicators

Answer 33

Leading Economic Indicators (forecast where we are in the business cycle)
- building permits, private housing units
- manufacturers’ new orders, consumer goods, non-defense capital goods
- S & P 500 Index
- Initial Claims for unemployment insurance
- interest rate spreads, 10 year T bonds less federal funds

Coincident (move with the business cycle)
- Index of Industrial Production
- Employees on non agricultural payrolls
- Personal Income less transfer payments

Lagging (move after the business cycle)
- Change in the CPI for services
- Average prime rate charged by banks
- average duration of unemployment

Question 34

Interest Rates

Answer 34

Prime rate: rate charged by commercial banks to their best corporate clients
Discount rate: rate charged by the FRB (Fed) when a member bank borrows from it
Federal funds rate: rate charged on an overnight loan of reserves between member banks
Call Money Rate: rate charged by commercial banks on collateralized loans to broker dealers (because broker dealers are lending to customers usually at a higher rate)

Question 35

keynesian (government intervention)
monetarist (money supply fed intervention)

Answer 35

Tools of the FED: monetary policy
Immediate effect of a Repo (buying securities with a provision to sell them soon) is an easing (increasing money supply to stimulate demand)

Immediate effect of a reverse repo (selling securities with a provision to buy them back soon) is a tightening

influences the fed funds rate through this