Chapters 3/4 Flashcards

Question

Disclosures regarding testimonials w/ firm communications:

Answer 1

- The testimonial may not be representative or the experience of other customers - The testimonial is not a guarantee of future performance or success - If the testimonial is a paid testimonial (more that $100), this must be disclosed.

Answer 2

- The price at the time of the recommendation - Whether the member firm makes a market or whether the member firm intends to buy/sell the security for tis own account - Whether the member firm or any associated person who's involved w/ the preperation of content has a financial interest in the security - Whether the member firm was a manager or co-manager of any of the issuer's securities offerings within the last 12 months - Info supporting the recommendation/offer | ****

Answer 3

- A list of all recommendations for the same type of security for the past year. Longer periods may be displayed if they're shown consecutively and include the last year. - The communication must state the name of each security recommended, the date and recommendation (buy, sell, hold), the price when it was recommended, as well as any price range that was recommended. - A cautionary note that warns investor not to assume that future recommendations will be profitable. ## Footnote * A research report is exempt from these recommendation requirements if it makes the proper disclosures, as described in chapter 2

Answer 4

- In any communication: provided that it doesn't imply that FINRA guarenteed to approved anything - In a confirmation statement for an OTC transaction: Provided it states, “This transaction has been executed in conformity with the FINRA Uniform Practice Code.” - On a member firm's website: provided that the member firm includes a hyperlink to FINRA's website

Answer 5

False, options communication IS subject to FINRA rules and potential filing requirements

Answer 6

All options-related RETAIL communication must be preapproved by a Registered Options Principal (ROP). However, not all forms of options correspondence require preapproval, but all forms are subject to review and general superivsion requirements. All options-related retail communications that are used prior to the delivery of the options disclosure document (ODD) must be submitted for approval to an exchange OR FINRA at least 10 calendar days prior to initial use. However, if a firm issues sales material that’s only being sent to existing clients, it will not need to be filed since all existing clients would have already received the ODD. ## Footnote * Any advertising for options must include the notice that customers can request an ODD.

Answer 7

False, barriers between the trading department and research must be in place. These information barriers prevent a trading department from learning of a pending research report regarding a security in which it has a position.

Answer 8

- The securities are being issued by the member firm and the member firm is participating in the offering - The issuer controls or is under control of the member firm - At least 5% of the net proceeds of the offering, not including the underwriting compensation, are intended to reduce or retire the balance of a loan extended by the member firm.

Answer 9

An entity that controls, is controlled by, or is under common control of the member firm

Answer 10

Having ownership of 10% or more of the CS or PS or subordinated debt of another entity, OR the right to acquire 10% or more of the profits or losses of a partnership.

Answer 11

A situation in which the same person or entity controls two or more entities.

Answer 12

1. The member firm that's primarily responsible for managing the offering may not have a conflict of interest OR may not be an affiliate of a member that has a conflict 2. The securities being offered must have a bona fide public market 3. The securities being offered must be investment grade 4. If #1, #2, or #3 aren't met, the member firm must appoint a qualified independent underwriter (QIU) to participate in the preperation of the offering documents.

Answer 13

A firm that has served as a manager or co-manager in at least 3 public offerings of a similar size and type during the 3 year period preceding the filing of the registration statement. ## Footnote * If a QIU is used, a prominent disclosure must appear in the prospectus or offering document to explain the conflicts of interest, the name of the qualified independent underwriter, and a brief statement regarding its role and responsibilities. The member firm must also notify FINRA once the offering is completed.

Answer 14

False, in this case the BD MUST get written approval.

Answer 15

If a BD is controlled by a public firm and has a customer who wants to purchase the stock of that firm, the BD must disclose the control relationship PRIOR to accepting the order. ## Footnote * If this initial disclosure was verbal, then written disclosure must also be provided prior to settlement. This is in addition to the disclsoures found in the propsectus. * If the control relationship transaction involves a discretionary client, additional written permission must be obtained for each transaction.

Answer 16

A member firm is required to make a bona fide offering of new issues to the public and not withhold any shares for its own account, the account of its employees, or any other insiders. Member firms cannot sell equity IPOs to restricted persons. An exemption exists that allows personnel of a limited BD to purchase shares of a new issue.

Answer 17

A BD that restricts its business to investment company/variable contract securities or direct participation programs

Answer 18

- Secondary offerings - All debt offerings (including convertible debt) - Pvt offerings - PS and rights offerings - Investment company offerings - Exempt securities - REIT securities - Direct participation prgoram (DPP) interests

Answer 19

Prior to issuing a new issue to an account, the firm must obtain representation from the account holder, or any authorized party for the account, which states that the account is eligible to purchase new issues in accordance w/ the New Issue rule. The representation from the account holder may be in the form of an **affirmative statement**.

Answer 20

False, firms may use electronic communications but not verbal

Answer 21

1. FINRA member firms, employees of the member firms, or associated persons 2. Immediate family members or any person who's materially supported by an employee of a member firm 3. Finders and fiduciaries (ex: accountants and lawyers) who are involved in the offering of the new issue and any person to whom they provide material support 4. PMs that can buy/sell securities on behalf of institutional investors as well as any person whom they provide material support. These are restricted since that are in a position to direct future business to the firm. 5. Persons who own 10% or more a BD. ## Footnote - #1 are only considered restricted persons if: 1. The employee gives/receives material support (providing more than 25% of the person's income or living in the same houshold) to/from the family member. 2. The employee is employed by the member firm that's selling the new issue 3. The employee has the ability to control the allocation of the new issue * When it comes to immediate family members, they can buy IPOs provided that the issuing firm does not employ their family member, meaning the IPO is of a different firm. * If an owner of a BD owns less than 10%, they can purchase.

Answer 22

- Investment companies - The general or separate account of an insurance company - A common trust fund - An accoount where the beneficial interest of all restricted persons DOES NOT exceed 10% of the account. - Publicly traded entities, other than a BD or its affiliates, that engage in the public offering of new issues - Foreign investment companies - ERISA accounts ## Footnote * Another exemption allows the BD to purchase shares of the new issue if the offering is undersubscribed. However, this exemption doesn’t allow an underwriter to sell shares of an undersubscribed issue to other restricted persons. * The rule also contains an anti-dilution provision which allows a restricted person, who already owns shares of the security, to purchase shares of a new issue if it’s being done to maintain its equity interest at the same level. However, to utilize this provision, the buyer must have owned the shares for at least one year prior to the offering and may not resell the shares for three months following the effective date.

Answer 23

A group that distributes securities under an agreement which imposes a financial commitment on its members.

Answer 24

A group that distributes securities under an agreement which DOES NOT impose a financial commitment on its members. A BD in the underwriting of an IPO as a syndicate/selling group is not permitted to publish a research report or make a public appearance for 10 calendar days. ## Footnote * A member of FINRA may not join with a non-member in any syndicate, selling group, or joint account for the distribution of securities. Any firm that has been suspended must be treated as a non-member firm. * If a syndicate or selling group is being formed in anticipation of distributing securities in the future, it may not invite a suspended member to participate, even if the firm’s suspension will terminate prior to the time of the distribution. * The restriction against including non-members in a syndicate doesn’t apply to foreign broker-dealers that are ineligible for FINRA membership. However, these foreign syndicate members must agree to abide by the same rules and restrictions that apply to member firms.

Answer 25

False, it's prohibited

Answer 26

An offering where all securities are sold to the public at the same price. Selling concessions may only be given to BDs that are engaged in the distribution and provide IB or securities services. ## Footnote * Any member firm that receives a selling concession or discount must sign a written agreement which states that it will abide by the requirements of industry rules regarding selling concessions. * A member firm may not give a discount to a research firm.

Answer 27

True ## Footnote There are 3 exceptions to this rule: 1. A communication that's clearly distinguishable as paid advertising 2. A communication that discloses the receipt and amount of compensation in accordance w/ the Securities Act of 1933. 3. A research report

Answer 28

True. The analyst MAY NOT comment on the rumor if it's unsubstantiated and has no been disseminated by a news outlet.

Answer 29

A document that provides investors of a new issue of all material info about the issuer and offering. Issuers are required to distribute this to investors. ## Footnote * MUST be filed w/ the SEC

Answer 30

A simplified version of the registration statement that also must be distributed to investors. ## Footnote * The SEC does not attest to its accuracy, but will review the prospectus

Answer 31

The managing underwriter must review all of the disclosure documentation and be liabile for any omissions and/or inaccuracies

Answer 32

1. Pre-registration period 2. Filing date 3. Cooling off period 4. Effective date 5. Post-effective period

Answer 33

During this period, the registration statement is prepared and issuers ARE NOT allowed to have discussions w/ potential investors.

Answer 34

When the issuer files the registration statement w/ the SEC. This marks the end of the pre-registration period.

Answer 35

* The character of the issuer's business * A B/S no older than 90 days prior to the filing date * Financial statements that show profits and losses for the latest fiscal year and two preceeding fiscal years * The amt of capitalization and use of the proceeds of the sale * Any money paid to affiliated persons or businesses of the issuer * Shareholders that are key personnel, underwriters, or any individual that holds >= 10%.

Answer 36

A 20 day period where the SEC reviews the registration statement to determine if it's complete and not misleading. ## Footnote * During this period, underwriters ARE NOT allowed to sell the new issue or accept payment in advance.

Answer 37

During the cooling off period, if the SEC determines that the registration statement is incomplete or misleading, the SEC will send this letter which requires the issuer to refile.

Answer 38

An abbreviated form of the registration statement that are sent to potential investors during the cooling off period. *This CANNOT include an effective date or price, but may include a price range.* ## Footnote * Underwriters use the preliminary prospectus to perform due diligence.

Answer 39

* Discuss the new issue w/ potential buyers * Provide the red herring * Record the names of potential purchasers

Answer 40

False, any changes to a prospectus must be filed w/ the SEC.

Answer 41

These are forms of registration w/ states. Registration by filing: Essentially an issuer files an application to the Administrator requesting approval to offer securities Registration by coordination: Form is done simultaneously w/ a federal registration and becomes effective at the same time. Registration by qualification: This form involves meeting specific state requirements and becomes effective at the discretion of the Administrator.

Answer 42

The end of the cooling off period, generally 20 days after the last amendment in respone to the deficiency letter, that marks to beginning of the post-effective period. If requested by issuers/underwriters, the SEC may accelerate this date. The public offering price (POP) is set on the effective date. On the effective date, potential buyers are given the final prospectus that includes the POP.

Answer 43

At this time, sales can be made. During the post-effective period RRs should contact all clients who received a red herring and determine whether they're wanting to buy.

Answer 44

- Research reports that include info about a new offering - Advertising (includes interviews regarding the new offering) - Discussions among RRs and customers - Distribution of written materials other than the red herring - Internal syndicate memoranda: internal materials that are used within the syndicate are permitted but MAY NOT be distributed to a customer

Answer 45

A written advertisement that gives investors basic details about an upcoming public offering.

Answer 46

1. Name of the issuer 2. Full title of the security 3. Amt being offered 4. Brief description of the issuer's type of business 5. Price of the security 6. Date of sale 7. Names of the underwriters 8. Contact info of the person or organization that's sending the communication 9. An anticipated schedule for the offering and a description of marketing events 10. The securities exchanges or other markets on which any class of the issuer's securities are or will be listed. 11. The names of selling security holders, if disclosed in the prospectus filed w/ the registration statement. ## Footnote - A tombstone ad is not considered a prospectus due to its limited content. - A tombtone ad CANNOT include the use of the proceeds, earnings estimates, or make any reference to the competitive position of the issuer.

Answer 47

- Potential risks related to general options trading and strategies must be disclosed - No past or projected performance figures may be used - No recommendation to purchase or sell any options can be given - No specific security can be identified, other than an option or other security exempt from registration. - Any advertisement must state the name and address of a person who can provide an OCC.

Answer 48

When the announcement contains no more than: * The name of the issuer * The title, amount, and basic terms of the security to be offered * In the case of a rights offering, the class of securities entitled to the rights, the expiration date, and the approximate subscription price. * In the case of an offering of securities in exchange for other securities, the name of the issuer, the title of the securities to be excahnged for those being offered, and the basis on which the exchange may be made . * Any statement required by law * In the case of an offering to employees of an issuer/affiliate, the offering price and the period during which the offering will be made.

Answer 49

This rule permits the use of advertising, in general terms, how investment fims work. As long as the advertisement doesn't list a specific firm, it's not considered an offer/sale. An invitation for further info may be included, as long as the name and address of the BD is included.

Answer 50

This rule states that under certain circumstances, a BD may distribute or publish research reports for securities that are in the registration process. The research reports may be distributed by a BD not involved in the distribution (they're not receiving income from the issuer). A BD may also distribute research reports for securities that are in the registration process as long as it's doing so as a regular course of business. ## Footnote * Rule 137 only applies if the issuer has not been a blank check company, shell company, or penny stock within the last 3 years.

Answer 51

This rule states that if a registration statement has been filed for a non-convertible debt security OR a non-convertible PS, a BD may publish or distribute a research report, even if it's involved in the distribution.

Answer 52

If an issuer is subject to requirements of the Act of 1934 OR is a well-known seasoned issuer, a BD may publish or distribute a research report regarding the issuer's securities even if it's a participant in the distribution, if certain conditions are met.

Answer 53

1. If the research report is about an issuer, it must be done in the normal course of coverage. 2. A report cannot be an initiation report. 3. For research reports about an industry, the report must state opinions about many securities and issuers.

Answer 54

- Securities registered w/ the federal government or municipalities - Securities registered w/ certain foreign governments - Commercial paper: denominations greater than $50M, maximum maturity of 9 months, and high credit rating - Shipping companies - FCSs - Nonprofits - Securities issued by financial institutions - Any investment contract related to a pension plan

Answer 55

Exempts registration for pvt placement securities if several conditions are met. First, an issuer must files a Form D no later than 15 days after the first sale of securities. On offerings <= $5MM, an issuing corporation is permitted to offer/sell the securities to an unlimited # of investors regardless of their knowledge/experience. However, for offerings of an unlimited amount, Reg D allows an unlimited # of accredited investors to purchase the securities and <= 35 non-accredited investors. ## Footnote * Investors who purchase a pvt placement under Reg D must sign a letter to acknowledge that they understand the securities are unregistered and may not be resold w/o registration. * For securities sold under Reg D, advertising is generally limited. An investment seminar open to the public is prohibited, but an seminar limited to potentail buyers is permitted. * Any non-accredited investors who purchase a Reg D offering of an unlimited amount MUST have the knowledge and experience to evaluate the merits and risks.

Answer 56

* Financial institutions * Any director, executive officer, or general partner of the issuer * Any individuals who have a gross income of $200M ($300M for married couples) or a net worth of $1MM (excluding primary residence). ## Footnote * Gross income expectations must be expected to persist.

Answer 57

An individual who represents a potential purchaser who's being solicited to buy securities pursuant to Reg D. The potential purchaser MUST designate the purchaser represntative in writing for EACH offering. *Blanket approval to represent the potential purhcaser for all Reg D offerings IS NOT permitted.* ## Footnote * A purchaser representative may not own 10% or more of the stock of the issuer UNLESS they're a close relative of the potential buyer. * Purchaser representatives MUST be knowledgable and experienced.

Answer 58

This rule permits the resale of restricted (unregistered) stock and control stock. Once the seller files Form 144, the restrictive legend that was placed on the securities may be lifted. Rule 144 is only available if there's adequate public info regarding the issuer.

Answer 59

Any stock that's been acquired through a pvt placement

Answer 60

Stock that has been acquired in the open market by an affiliated person of the issuer

Answer 61

The purchaser of restricted stock must hold it for 6 months, beginning at the purchase date, before disposing of it. The original purchase had to have been paid in full. ## Footnote * For the estate of a dead person, there's no holding period. * For control stock there's no holding period.

Answer 62

Rule 144 DOES NOT apply to a person who has not been an affiliate of the company for at least 3 months prior to the sale and has owned the stock for at least 1 year prior to the sale (6 months for reporting companies if current public info is avaialble). These persons can sell securities w/o complying to Rule 144.

Answer 63

4 years ago, the CFO of firm A received unregistered shares of the firm as a bonus (restricted stock). On July 1, 2001, the person resigned from the firm to work w/ a new firm. On October 1, 2001, (3 months after leaving the firm), the person will be eligable to sell the restricted stock.

Answer 64

Transactions made on an agency basis only and that don't involve solicitations.

Answer 65

1. BDs can solicit orders if a customer has already indiciated interest and the BD's inquiry is made within the next 10 business days after interest is shown 2. BDs can solicit orders if another BD has already indiciated interest and the BD's inquiry is made within the next 60 business days after interest is shown

Answer 66

An individual who sells securities under Rule 144 must notify the SEC by filing form 144 at the intended time of sale. Once the filing is made, the investor is given 90 days to sell the securities. *Notice IS NOT required if the amt of the sale doesn't exceed 5,000 shares and the dollar amt doesn't exceed $50,000.*

Answer 67

During the 90 days period, there's a limit on the amount that may be sold. For securities listed on exchanges, the maximum that may be sold is the greater of 1% of the total shares outstanding OR the avg. weekly volume over the past 4 weeks. If a stock is traded in the OTC market, the limitation is 1% of the total shares outstanding.

Answer 68

Permits the sale of restricted stock (except for sales by the issuer) to qualified institutional buyers (QIBs) w/o conditions imposed by rule 144. The seller must notify the buyer that they're relying on Rule 144A. | The buyer must be QIB, not the seller. ## Footnote * Securities that are fungible (interchangeable) w/ any class of securities that are listed on an exchange (including certain convertibles and warrants) ARE NOT eligible for this exception. * Securities of registered investment companies ARE NOT eligible for this exception.

Answer 69

- Insurance companies - Registered investment companies - Small business development companies - Pvt and public pension plans - Certain bank trust funds - Corporation, partnerships, business trusts, and certain nonprofits - RIAs - BDs that owns and invest $10MM of securities of issuers not affiliated w/ the BD, or if they ask as riskless principals for other QIBs - Any entity where the entirety of its ownership are QIBs -An investment company part of a family that in aggregate meets $100MM ## Footnote * Banks and S&Ls must have a net worth of $25MM

Answer 70

1. Must be listed in #100 2. The buyer must be purchasing it for its own account or the account of another QIB 3. The buyer must own and invest at least $100MM of securities of issuers that aren't affiliated w/ the buyer. ## Footnote *

Answer 71

Provides exemptions from the registration requirements and allows some companies to use equity crowdfunding in order to offer and sell securities w/o needing to register the securities w/ the SEC. The business that's seeking capital must be organized and having its prinipal place of business under the US, territories owned by the US, or Canada. ## Footnote * Reg A requires the filing of two years of financial statements (may be unaduditied). * Rather than a prospectus, Reg A firms provide an **offering circular**. * Reg A issuers are considered non-reporting. * Current SEC reporting companies may NOT use Reg A. * Reg A can be used for debt and equity.

Answer 72

$5MM within a 12 month period. Of that, no more than $1.5MM may be offered on behalf of the selling shareholders.

Answer 73

Tier 1: Sales of up to $20MM are permitted within a 12 month period. Of that, no more than $6MM may be sold on behalf of existing shareholders. Offerings are subject to SEC and blue sky review. Continuing disclosure info must be filed on Form 1-Z. Tier 2: Sales of up to $75MM are permitted within a 12 month period. Of that, no more than $22.5MM may be sold on behalf of existing shareholders. Offerings are ONLY subject to SEC review. Audited financial statements are required to be reported on an ongoing basis. ## Footnote * For Tier 2, Form 1-K must be filed annually, Form 1-SA must be filed semiannually, and from 1-U must be filed as necessary. * For Tier 2, investment limits apply to non-accredited investors.

Answer 74

False, 48 hours. If a preliminary circular is used, the final circular must be sent w/ the confirmation.

Answer 75

Reg A provides issuers w/ the ability to *test the waters* to see if there is interest among investors prior to filing an offering statement w/ the SEC. The only things that can be distributed when testing the waters are: the company's business, CEO's background, and a statement that no money should be sent yet. *There must be 20 days between the use of a solicitation statement and the first sale of securities.* ## Footnote * The SEC can halt an offering if conditions aren't met.

Answer 76

Allows US companies to issue an unlimited amount of securities outside of the country w/o filing any documentation w/ the SEC. To qualify for Reg S, a transaction must be completed offshore. No US person can buy a Reg S security. ## Footnote * There are NO restrcitions on which foreign investors can buy the securities. * There CANNOT be advertisement in the US.

Answer 77

A transaction where no offer is made to a person in the US and either the buyer is outside of the US or the transaction is executed through a designated offshore market.

Answer 78

* An individual who's a natural person * Any partnership, estate, or account held for the benefit of a US person ## Footnote * A person who's a US citizen who travels outside of the US for a signficant part of a year is still considered a US person

Answer 79

* For debt securities: 40 days * For equity securities of SEC-reporting issuers: 6 months * For equity securities of non-reporting issuers: 1 year ## Footnote * There is no holding period for reseales to non US persons

Answer 80

False, a price chart is only required if the analyst has covered the stock for at least a year.