FC Chapter 2 Flashcards
According to the Equity IPO Rule, member firms and their associated persons are considered ___________ persons.
According to the Equity IPO Rule, member firms and their associated persons are considered restricted persons.
The Green Shoe Clause allows the issuer to expand the offering by a maximum of ____%.
The Green Shoe Clause allows the issuer to expand the offering by a maximum of 15%.
Under Regulation M, how many stabilizing underwriters are permitted for a specific offering?
Only one
In a declining market, how long may a PSMM maintain the highest bid?
Until it purchases the lesser of two times the minimum quote size or reaches its daily purchase limit (DPL)
An S Corporation is allowed a maximum of ____ shareholders.
An S Corporation is allowed a maximum of 100 shareholders.
What is the maximum period that a stabilizing bid may remain open in the marketplace ?
Indefinite
A ___________ underwriting is used for shares not purchased through a rights offering.
A Stand-by underwriting is used for shares not purchased through a rights offering.
When participating in a firm-commitment underwriting, when is the underwriter required to set up an escrow account?
Never, an escrow account is only required for contingent best-efforts underwritings.
A stabilizing underwriter who lowers its bid may now bid no higher than the ________ bid of an ___________ market maker.
A stabilizing underwriter who lowers its bid may now bid no higher than the highest bid of an independent market maker.
What stipulation in the registration statement relieves underwriters of their contractual obligations?
Market out clause
The highest price at which a stabilizing bid may be placed is the ________________________.
The highest price at which a stabilizing bid may be placed is the public offering price (POP).
Under Rule 105 of Regulation M, how does the bona fide purchase exception apply for an investor?
If unaware of a new issue, he may close the short sale at least one business day before pricing and then buy the issue.
True or False: BDs and their employees may buy shares of equity IPOs from the syndicate.
False. They are considered restricted.
After offering a new IPO publicly as an underwriter, a BD places shares in its own account. Is this acceptable?
Yes, since a bona fide public offering had been made first.
From what are underwriting participants prohibited during the restricted period?
Purchasing or bidding for a covered security
True or False: Stabilization is designed to artificially raise the price of a new issue.
False. Stabilization is designed to support or keep a new issue’s price from falling.
What securities are exempt from FINRA’s Corporate Financing Rule?
Reg. D securities and those listed on the NYSE, AMEX, or Nasdaq Global Market
True or False: During the restricted period, passive market making is allowed for all Nasdaq and OTC equity securities.
False. Passive market making is not allowed for OTC equity securities.
If the syndicate manager anticipates a delay in the closing of the syndicate, who is notified?
FINRA
In what underwriting does the syndicate attempt to sell an entire issue with any unsold balance returned to the issuer?
Best-efforts underwriting
In a rising market, may a passive market maker set the market?
Yes, but only to display a customer’s buy order under the Limit Order Display Rule.
If a BD underwrites its own offering, what is required to place the securities in a client’s discretionary account?
The client’s specific written consent is required.
According to Regulation M, the Restricted Period begins either ___ or ___ business days before pricing.
According to Regulation M, the Restricted Period begins either 1 or 5 business days before pricing.
____________ is the only form of price manipulation allowed by the SEC.
Stabilization is the only form of price manipulation allowed by the SEC.
If a bona fide market exists for a BD’s security, may the BD underwrite the issue without a qualified independent U/W
Yes. If a bona fide market exists, or managing U/W has no conflict, or issue is investment-grade, a QIU is unnecessary.
Under Rule 105 of Regulation M, how does the separate accounts exception apply for different trading desks?
If information barriers exist and trading is not coordinated, one desk may buy a new issue even if another sold it short
May a market maker acting as an underwriter for the issuer continue to make a market in the issuer’s securities?
Yes, according to Reg M, but only as a passive market maker.
What type of issuer may use a free writing prospectus before, or after, filing a registration statement with the SEC?
WKSI
The final settlement of a syndicate account must occur within _________ of the syndicate closing.
90 days
What are actively-traded securities as defined by Regulation M?
Those with a public float of at least $150 MM and ADTV of $1 MM
For tax purposes, S Corporations and limited liability companies (LLCs) are ______________ investments.
For tax purposes, S Corporations and limited liability companies (LLCs) are pass through investments.
Define the market-out clause.
A provision releasing an underwriter from liability if events occur that make the sale of the issue difficult/impossible
In a best-efforts underwriting, when will the escrow agent (bank) release the funds?
When the offering is cancelled or when the contingency is met
A BD may publicly distribute its own securities or an affiliate’s securities. Define the term affiliate.
An entity that controls or is controlled by the BD (i.e., ownership of 10% or more of outstanding equity)
True or False: To stabilize an issue, the principal market on which the stock trades must be notified.
TRUE
In a firm commitment underwriting, unsold securities are retained by ________________.
The Syndicate
A seasoned issuer may use a free writing prospectus (FWP) ______ filing its registration statement with the SEC
A seasoned issuer may use a free writing prospectus (FWP) after filing its registration statement with the SEC.
Under the Equity IPO Rule, who is NOT considered to be part of an associated person’s immediate family?
Grandparents, aunts, uncles, or cousins
Besides BDs and their employees, who else is restricted from purchasing equity IPOs?
An employee’s immediate family if materially supported by, or sharing household with, the employee
Is there a limit to the number of purchases able to be made at the stabilizing bid price?
No. While only one stabilizing bid is allowed, there may be an unlimited number of purchases.
True or False: Portfolio managers may purchase equity IPOs for their own accounts if not excessive.
False. Portfolio managers may purchase for the fund they represent, but not for their own accounts.
How is the taxation of income for S Corporations and LLCs identical to that of a partnership?
Federal tax is avoided by passing through income and loss to shareholders (no double taxation).
When does FINRA consider it unreasonable for an underwriter to receive options or warrants from an issuer?
When the options/warrants have a duration exceeding five years with better terms than offered to the public
True or False: In a mini-maxi underwriting, the syndicate may contribute needed funds to meet the minimum requirement.
False. Contributing funds would change the type of underwriting.
Under the Equity IPO Rule, how does the de minimis exemption apply?
An account that includes restricted persons may purchase the shares, provided their combined ownership is 10% or less.
Under the Equity IPO Rule, who is considered to be part of an associated person’s immediate family?
Parents, siblings, spouse, children, or in-laws
__________ is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).
Pegging is a manipulative activity that is designed to keep the price of a stock from falling (and is prohibited).
For passive market making to occur for a stock, it must have how many independent market makers?
ONE
Which two of these underwriting types require an escrow account? Firm-Commitment, All-or-None, Standby, or Mini-Maxi
All-or-None and Mini-Maxi underwritings
True or False: During the restricted period, underwriting participants may act as a PSMM for any type of security.
False. Passive market making is permitted for Nasdaq securities, but not for OTC equities.
True or False: Under the Equity IPO Rule, personnel of a limited BD are included as restricted persons.
False. Employees of limited BDs are exempt (firm limits its business to investment company/variable contracts or DPPs)
Is a BD forced to drop its stabilizing bid because an independent market maker drops its bid below the stabilizing bid?
No. However, if it chooses to lower its bid, it must lower it to a price no higher than the highest independent bid.
What is the role of FINRA’s Corporate Financing Department?
To evaluate the fairness of an underwriter’s compensation
What type of underwriting is cancelled if the entire issue is not sold?
All-or-None
What provision in an underwriting agreement allows for the expansion of the offering?
The Green Shoe Clause or Over allotment Covenant
A penalty bid allows the managing underwriter to reclaim a ___________________ from a syndicate member.
A penalty bid allows the managing underwriter to reclaim a selling concession from a syndicate member.
When may a well-known seasoned issuer (WKSI) use a free writing prospectus (FWP)?
Before, or after, the filing of a registration statement with the SEC
True or False: Nonmember firms are treated in the same manner as member firms.
False. Nonmember firms are treated in the same way as the public. They receive no preference (discounts).
During the restricted period, what activities are permitted by underwriting participants?
Executing unsolicited customer orders and soliciting offers to buy the securities being distributed
Are finders and fiduciaries (e.g., attorneys and accountants) restricted persons under the Equity IPO Rule?
YES
True or False: During the restricted period, distribution participants may act as passive MMs for OTC equity securities.
False. Only Nasdaq securities are eligible for passive market making.
What is the goal of Regulation M?
To limit the activities that could be used to manipulate the price of a security prior to, and during, an underwriting
True or False: When determining a person’s eligibility to purchase an equity IPO, oral verification is acceptable.
False. Firms must obtain written or electronic verification of eligibility.
What items would be considered part of underwriting compensation if the syndicate is reimbursed by the issuer?
Finder’s fees, wholesaler’s fees, syndicate legal expenses, and salaries of investment banking personnel
Under FINRA rules, who may be offered underwriting discounts?
Only FINRA member firms or foreign BDs who intend to sell outside the U.S.
Does FINRA consider it reasonable for an U/W to receive an unlimited number of shares from the issuer as compensation?
No. FINRA considers it unreasonable to receive an excessive number of shares as compensation.
In what type of underwriting does the syndicate pledge to sell the entire issue or keep the unsold balance?
A firm-commitment underwriting
What regulation restricts activities that could be deemed manipulative during an offering?
Regulation M
True or False: Escrow funds are deposited with the issuer’s legal counsel until the deal becomes effective.
False. The escrow account is maintained at a bank that has agreed to hold the funds.
For how many trades is a PSMM permitted to exceed its daily purchase limit (DPL)?
For only one trade. After the trade, the PSMM must withdraw from the market for the remainder of the day.
True or False: Institutional clients may be offered a discount from the offering price of a new issue.
False. Clients, both institutional and retail, must pay the full public offering price for a new issue.
To cover a short sale, investors may not use a new stock issue if the short sale occurred within ___ days of the offer.
5
True or False: To assist in distributing a new issue, a syndicate may sell shares to institutional buyers at a discount.
False. Once the POP has been set, it must be maintained unless the syndicate manager authorizes sales at a discount.
If a BD distributes its own securities, when is a qualified independent underwriter (QIU) not required?
When the managing U/W has no conflict, or the securities have a bona fide market, or the securities are investment-grade
When does the syndicate manager send a passive market making notice to FINRA?
No later than one day prior to the beginning of the restricted period
When does the restricted period begin for a security with a public float of $50 million and an ADTV of $125,000?
One business day prior to pricing
List the securities for which there is no restricted period as determined by Regulation M.
A public float of at least $150 MM and ADTV of $1 MM, municipal, government, or nonconvertible investment-grade
True or False: Under Reg M, a security’s restricted period is typically based on the issuer’s public float and ADTV.
True
The Green Shoe clause gives underwriters the ability to buy additional shares from the issuer to cover over-allotments.
The Green Shoe clause gives underwriters the ability to buy additional shares from the issuer to cover over-allotments.
The New Issue Rule covers what new issues?
All equity IPOs
In a best-efforts underwriting, unsold securities are retained by ______________.
In a best-efforts underwriting, unsold securities are retained by the issuer
True or False: A suspended firm may still be invited by existing members to participate in an underwriting.
False
When is a passive market maker temporarily permitted to maintain the highest bid?
When an independent market maker lowers its bid
According to the Equity IPO Rule, firms must update the eligibility of purchasers ___________ .
According to the Equity IPO Rule, firms must update the eligibility of purchasers annually.
During the Regulation M Restricted Period, underwriters may not_______________________________________.
During the Regulation M Restricted Period, underwriters cannot purchase (bid) for the securities for their own account.
A new issue is priced on Friday, July 15. No violation occurs if a buyer of the new shares shorted them on what date?
Thursday, July 7 since the five-day-period prohibition of Rule 105 of Regulation M begins on Friday, July 8.
Related to penalty bids, when is a managing underwriter allowed to reclaim selling concessions from syndicate members?
When the securities originally sold by the syndicate member are repurchased by the syndicate in stabilizing transactions
In addition to the spread, what other items may be considered part of the underwriter’s compensation?
Syndicate legal fees and finder’s fees
True or False: Sharing a household with a person who is not immediate family does not constitute material support.
True
What must a BD forfeit if its client buys a new issue and then sells it back to the syndicate at the stabilizing price?
The selling concession
Does issuer reimbursement to an U/W for printing expenses, SEC fees, and issuer legal fees constitute compensation?
No. Reimbursement of expenses normally incurred by an issuer, but paid by the syndicate, is not considered compensation.
FINRA considers it unreasonable for a BD to receive shares in excess of ____% of the total offering.
FINRA considers it unreasonable for a BD to receive shares in excess of 10% of the total offering.
Under the Green Shoe Clause, the maximum overallotment is ____% of the offering.
Under the Green Shoe Clause, the maximum overallotment is 15% of the offering.
Under Reg M, how many days prior to pricing does the restricted period for actively traded securities begin?
Actively traded securities have no restricted period.
rue or False: According to the Equity IPO Rule, all associated persons connected to a BD are restricted.
True. The associated persons of a BD include owners, officers, directors, and other employees.
A QIU is a firm that has acted as _______ or __________ in at least _____ similar offerings within the last _____ years.
A QIU is a firm that has acted as manager or comanager in at least three similar offerings within the last three years.
What is a passive market maker’s daily purchase limit (DPL)?
The greater of 30% of its average daily trading volume (ADTV) or 200 shares
When is a passive market maker required to withdraw from the market for the remainder of a day?
When its net purchases exceed its DPL
What is the underwriting spread?
The difference between the amount paid by an investor and the amount received by the issuer
During the restricted period, what purchases are prohibited for issuers and selling shareholders?
Open-market purchases of the offered securities
Is a stabilizing underwriter required to maintain the bid for a specific length of time?
No. There is no specific minimum or maximum length of time for maintaining a stabilizing bid
True or False: A PSMM is freely permitted to effect purchases at a price that exceeds the highest independent bid.
False. A PSMM is generally prohibited from effecting purchases at a price that exceeds the highest independent bid.
Related to short selling, Rule 105 of Regulation M prohibits investors from engaging in what practice?
`Buying shares of a new issue if they had sold short the securities within five business days prior to pricing the issue
True or False: Syndicates must file reports with FINRA if anticipating a delay in final settlement of the syndicate.
True
An investor’s eligibility to purchase an equity new issue must be confirmed _______________.
An investor’s eligibility to purchase an equity new issue must be confirmed annually (called the pre-condition of sale).
If a BD is underwriting its own offering, what are the disclosure requirements prior to accepting client orders?
If disclosure is first made verbally, written disclosure is then required at, or before, settlement.
Explain the exception provided to investment companies under Rule 105 of Regulation M.
One fund in the complex (family) may buy a new issue even if another fund in the complex had sold it short
What is typically NOT considered compensation to an underwriter?
Issuer legal fees and registration fees
True or False: If your daily purchase limit is exceeded, your firm is subject to disciplinary action.
False, after exceeding its daily purchase limit, the firm must withdraw as a market maker for the remainder of the day.
rue or False: The manager’s fee is generally the smallest component of the underwriting spread.
True
May a passive market maker’s displayed size exceed its daily purchase limit?
No
True or False: FINRA’s Corporate Financing Department evaluates the fairness of the POP (public offering price).
False. FINRA’s Corporate Financing Department evaluates the fairness of the underwriter’s compensation, not the POP.
If a security is defined as _______________ under Regulation M, there is no Restricted Period.
If a security is defined as actively traded under Regulation M, there is no Restricted Period.
What type of information must be contained in a file created by the stabilizing underwriter?
Names/addresses of syndicate members, their percentage of liability, and the date the bid was entered
True or False: Under FINRA’s Corporate Financing Rule, only a managing underwriter may file the underwriting agreement.
False. The agreement may be filed by the managing underwriter, a syndicate member, or the issuer.
Explain the issuer-directed sale exemption under the Equity IPO Rule
A BD employee may buy an equity IPO if an immediate family member is employed by the issuer who authorizes the sale.
For new issues, how does the syndicate manager actually penalize another participant with the penalty bid?
By refusing to pay the underwriting participant whose client buys the issue and immediately sells back to the syndicate
A non dilutive offering of previously issued shares, often by officers or directors, is called a __________ offering.
secondary offering.
When a selling group member sells shares of a new issue, it is entitled to only the ____________.
When a selling group member sells shares of a new issue, it is entitled to only the concession.
What type of underwriting is cancelled if a specified portion is not sold?
Mini-max
To what is a syndicate manager entitled when selling shares of a new issue?
The entire spread
What is an ownership characteristic of S Corporations, C Corporations, and limited liability companies (LLCs)?
Limited liability for the owners
While engaging in passive market making, what is the daily purchase limit?
The greater of 30% of your ADTV in the stock, or 200 shares
True or False: A standby underwriting is a form of best-efforts underwriting.
False. A standby underwriting is a form of firm-commitment underwriting used in conjunction with a rights offering.
- When selling shares of a new issue, in what capacity are members of the selling group acting?
Since selling group members do not assume risk, they are acting in an agency capacity.
Rule 105 of Regulation M is designed to minimize what possibility for a short seller?
He may benefit from an impending new issue at a set price and use those shares to cover a short position.
How are passive market makers identified to FINRA?
They are identified in the underwriting activity report that is filed with FINRA by the syndicate manager.
Is notification required when a member firm imposes a penalty bid or engages in syndicate covering transactions?
Yes. FINRA must be notified of these practices related to both Nasdaq and OTC securities.
True or False: When selling a new issue, a syndicate member is entitled to the entire spread less the U/W fee?
False. When a syndicate member sells a new issue, it is entitled to the entire spread minus the manager’s fee.
Is there a maximum number of stabilizing bids that may be placed?
Yes, one. It is usually placed by the syndicate manager
When may an unseasoned or non reporting issuer use a free writing prospectus (FWP)?
After filing its registration statement with the SEC, but it must be accompanied by its statutory prospectus
What business structure provides flow-through tax treatment and has a P&L reported on the owner’s personal tax return?
An S Corporation
For how long are securities restricted if received by the syndicate as compensation?
Six months
When must final settlement of a syndicate occur?
Within 90 days of the syndicate closing
How long are securities restricted that are received by a BD as compensation for an underwriting?
6 months
Jim is an associated person. When is someone in his immediate family prohibited from buying an equity IPO?
Material support/household sharing exists, or purchase is made through his firm, or he controls IPO share allocation
