Exam 3 Flashcards
If a new issue is “hot,” an issuer may NOT direct sales of that issue to a(n):
A senior management-level employee of the issuer
B key customer of the issuer responsible for more than 10% of revenue
C bank lender to the issuer that is a senior secured creditor
D an unregistered finder who initially connected the issuer and investment banker
D.
An issuer is permitted to direct sales of a new issue to any person that is not prohibited from purchasing under FINRA Rule 5130. Prohibited purchasers are basically securities industry “insiders” - including FINRA member firms, their employees, fiduciaries to member firms (these include finders, accountants and attorneys who worked on the deal) and institutional portfolio managers who wish to buy personally.
Note that employees of the issuer, customers of the issuer, creditors of the issuer, and suppliers of the issuer, all do not fall into the prohibited category and can buy the issue. Essentially, Rule 5130 prohibits persons in the distribution system of the issue from buying a new issue. It does not prohibit persons associated with the company being underwritten from buying that issue.
A long-standing client who routinely buys IPOs calls his registered representative and states that he does not want to receive prospectuses in the mail any more. The registered representative has a valid e-mail address for the client. Which statement is TRUE?
A The change request cannot be honored unless the customer makes it in writing
B The change request must be completed within 30 days
C The change request cannot be completed unless the customer signs a new IPO letter
D The change request must be validated by the BOM prior to it taking effect
B.
The SEC rule on any changes in account information (17a-3) is that the change must be reflected in the account within 30 days. Of course, most firms would make this change faster, but the rule gives 30 days to complete changes in account information.
Currently, the market price of ABC stock is at $50 and the market price of DEF stock is at $27. In which choice can both of the following orders from customers be immediately executed?
A Buy 200 shares of ABC at the market; Sell 200 shares of ABC at $55
B Sell short 200 shares of ABC at $55; Sell 200 shares of ABC @ $45
C Buy 200 shares of DEF at $30; Sell short 200 shares of ABC at $45
D Buy 200 shares of DEF at $30 Stop; Sell short 200 shares of DEF @ $45 Stop
C.
In Choice A, the market order to buy ABC stock can be immediately executed, but the order to sell ABC at $55 (a sell limit) cannot be executed because ABC is currently at $50 and a sell limit order at $55 means sell at $55 or higher.
In Choice B, the order to sell short ABC at $55 (sell limit, with the sale of borrowed shares) cannot be executed because ABC is currently at $50, and the order to sell at $55 means that the customer wants to sell for $55 or higher. The order to sell ABC at $45 is a sell limit order - the customer wants to sell at $45 or higher. Since the stock is currently at $50, this order can be executed immediately at $50.
In Choice C, the order to buy DEF @ $30 is a buy limit order - the customer does not want to pay more than $30. Since the stock is currently at $27, this order can be executed immediately at $27. The order to sell at $45 is a sell limit order - meaning sell at $45 or higher. Since the stock is currently at $50, this order can be filled immediately at $50.
In Choice D, the customer has placed an order to buy DEF at $30 stop. The order is used to establish a long position in a rising market and is placed above the current market price of $27. If the market rises to $30, the order is triggered and becomes a market order to buy. Thus, this order cannot be filled right now since the market is now at $27. The order to sell short ABC at $45 stop establishes a short position in a falling market and is placed below the current market price of $50. If the market falls to $45, the order is triggered and becomes a market order to sell. Thus, the order cannot be filled right now because the market is at $50.
Which of the following persons is NOT subject to either the holding period or volume requirements of Rule 144?
A Control person who owns unregistered shares of that company
B Control person who owns registered shares of that company
C Non-control person who owns unregistered shares of that company
D Non-control person who owns registered shares of that company
D.
A non-control person who owns registered shares is free to sell at any time without limitation.
Any person who owns restricted (unregistered) shares of a company’s stock must hold the stock fully paid for 6 months before the securities can be sold under a Rule 144 exemption.
Control persons who own registered shares do not have to meet the 6-month holding period rule, but must still meet the 1% and weekly trading average limitations.
All of the following statements are true about offerings of securities made under Regulation S EXCEPT:
A investors buy Regulation S securities at a discount to the price of the same issue offered in the U.S. market
B the offering is permitted to be advertised to non-U.S. residents
C the offering can only be made to accredited investors
D the securities must contain a legend detailing U.S. resale restrictions
C.
Regulation S gives U.S. issuers a “safe harbor” from registration of securities with the SEC if the issue is properly structured so that the offering is made by a non-U.S. issuer to non-U.S. residents. To do this, the issuer sets up a non-U.S. legal entity that offers the securities to non-U.S. residents. An issuer can structure an offering so that part of it is offered in the U.S. and part is offered outside the U.S. The non-U.S. piece of the offering is not registered with the SEC, saving the issuer time and money, so this piece of the offering is often sold at a discount to the price of the same security offered in the U.S. Under SEC rules, any securities sold under Regulation S must have a restriction legend on them, stating that they cannot be sold back into the U.S. unless they are either registered or resold under an exemption such as Rule 144A. There is no restriction on advertising Regulation S offerings, since these are being offered outside the U.S. to non-U.S. residents.
A securities offering that uses an “investment letter” to sell restricted securities is a:
A Rule 144 offering
B Rule 147 offering
C Regulation D offering
D Regulation A offering
C.
Private placements are sold under an “investment letter,” signed by the purchaser. The letter states that the issue is not registered; that resale is restricted; and that the purchaser understands these facts.
A member firm wishes to conduct a bulk exchange of all of its customer money market fund assets to another money market fund with a different sponsor. Such an exchange can be effected:
A only after each customer gives positive consent letter by signing a letter that contains a table that compares fees charged by each fund
B using a negative consent letter that contains a table that compares fees charged by each fund
C only after each customer gives positive consent by signing a letter that discloses whether the fund is FDIC insured
D using a negative consent letter that discloses whether the fund is FDIC insured
B.
FINRA permits member firms to conduct a bulk exchange of all of their customers’ money market fund assets for those of another fund sponsor. The most recent situation where this happened was in the aftermath of the Lehman bankruptcy in 2008 that took the NAV of The Reserve Fund (which was heavily invested in Lehman Brothers commercial paper) below $1 per share.
The rules regarding such bulk transfers are:
- The bulk exchange is limited to situations involving mergers and acquisitions of funds, changes of clearing members, exchanges of funds used in sweep accounts, and was also permitted by FINRA for funds in “trouble” (e.g., the Reserve fund);
- A negative response letter may be used (meaning that if the customer does not respond, the exchange will occur) and must include a tabular comparison of the fees charged by each fund;
- The letter must contain a comparative description of the investment objectives of each fund and a prospectus of the fund to be purchased; and
- The negative consent feature cannot be activated until at least 30 days after the letter is mailed.
Note that money market funds are not FDIC insured, since they are not bank deposits. Also note that they only get SIPC insurance when they are held in a brokerage account.
All of the following are defined as "account activities" that will obligate the member firm to send a monthly account statement EXCEPT: A mutual fund dividend reinvestment B liquidation of a securities position C receipt of a cash dividend D interest debit
A.
The basic rule for the sending of account statements is that they must be sent quarterly if there is no “account activity” and monthly if there is “account activity.” Account activity is defined broadly and includes purchases, sales, interest credits or debits, dividend payments, transfer activity, securities receipts or deliveries and any journal entries relating to these transactions.
Note, however, that accounts holding mutual funds are given “relief” from the requirement to send statements monthly if only “passive investment activity” occurs - meaning automatic reinvestment of dividends in additional mutual fund share purchases.
A broker-dealer is permitted to lend fully paid customer securities and excess margin securities by having that customer sign a:
A hypothecation agreement
B stock power
C margin agreement
D separate loan consent agreement
D.
Fully paid customer securities and excess margin securities are required to be reduced to possession or control daily under Rule 15c3-3. The broker-dealer cannot lend out these securities unless the customer agrees by signing a separate loan consent agreement. Many brokerage firms require customers who open any account, whether it is cash or margin, to sign such a loan consent agreement.
What obligations regarding suitability is (are) obviated if a member firm has an institutional client that is capable of exercising independent judgment when deciding which investment strategies to undertake? A Quantitative suitability B Customer specific suitability C Reasonable basis suitability D All of the above
B.
FINRA states that if an institutional customer is capable of exercising independent judgment regarding which investments to make and is capable of evaluating the risk associated with those investments, then there is no requirement to do a “customer specific” suitability determination. The “idea” is that the institution is a sophisticated investor and is capable of making an independent investment decision on its own.
In a Delivery Versus Payment (COD) transaction, a customer instructs that the securities be delivered directly to a bank that has been given instructions by the customer to pay upon delivery. Under the requirements of Regulation T, the funds must be available to pay for the securities no later than:
A the business day after trade date
B 4 business days after trade date
C 35 calendar days after trade date
D 90 calendar days after trade date
B.
Regulation T grants an exception to payment in a cash account being made promptly to “COD” - Cash on Delivery Transactions. In such transactions, “when issued” securities are typically delivered to a bank that has been instructed by the customer to pay upon delivery “POD.”
The broker-dealer has up to 35 calendar days after trade date to deliver such securities against payment under Regulation T. The funds must be ready to pay for these securities when they are delivered. In fact, the customer must have those funds deposited with the bank to pay no later than 4 business days after trade date (“Settlement + 2”) - the maximum length of time permitted under Regulation T.
