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Series 79 Flashcards

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Series 79 Top-Off Exam flashcards
1
Q

Sponsored ADRs vs Unsponsored ADRs

A
  • ADRs facilitate domestic trading of foreign securities
  • Sponsored ADRs trade on an exchange and pay dividends in USD; sponsored ADRs are used to raise money
  • Unsponsored ADRs trade over the counter and pay dividends in USD
  • Both provide annual reports in English to shareholders
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2
Q

What are Global Depositary Receipts (GDRs)?

A

-foreign equivalent of ADRs

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3
Q

At a bond’s maturity, you receive…

A

Par Value + Semi Annual Coupon Payment

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4
Q

When is an issuer most likely to call away a bond?

A

-when rates are falling because they can refinance for lower interest payments

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5
Q

Bond Yields for a discount bond (lowest to highest)

A

nominal yield
current yield
yield to maturity
yield to call

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6
Q

Bond Yields for a premium bond (lowest to highest)

A

yield to call
yield to maturity
current yield
nominal yield

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7
Q

What type of bond has the greatest volatility for a given change in interest rates?

A

-long term, low coupon bond

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8
Q

Reinvestment Rate risk

A

risk that as interest rates fall, periodic cash flows are reinvested at a lower rate
**zero coupon bonds have NO reinvestment rate risk because you don’t have any cash flows

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9
Q

If you have a bond rated AA S&P and it is downgraded 2 notches, it is…

A

A+

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10
Q

Refunding Debt

A

issuer refinances debt at lower rate to retire older more expensive debt before maturity

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11
Q

Debenture Bonds

A

-UNSECURED bonds NOT backed by an asset

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12
Q

Conversion Ratio of Convertible Bonds

A

Par Value/Conversion Price

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13
Q

Parity of convertible bonds

A

-price where an investor is indifferent between converting and not converting the bonds
Parity Price of Bond = MV(stock)*conversion ratio
Parity price of stock=MV(bond)/conversion ratio

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14
Q

TIPS (Treasury Inflation Protected Securities)

A
  • no credit risk because they are treasuries
  • no inflationary risk
  • principal value adjusted based on rate of inflation
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15
Q

What are OTC Pink and OTCBB (OTC Bulletin Board)?

A
  • non exchange quotation facilities
  • generally for unlisted stocks
  • NOT execution facilities; can only view information
  • national listed stocks CANNOT be quoted OTC pink, but regionally listed stocks CAN be quoted OTC pink
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16
Q

Suitability Requirement

A

-refers to appropriateness of a recommendation

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17
Q

Reasonable Basis Suitability

A

-requires that a recommended transaction be appropriate for someone; can only recommend securities that you understand

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18
Q

Quantitative Suitability

A

-requires a series of recommendations to be appropriate for an investor; about diversifying investor

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19
Q

Customer Specific Suitability (individual and institutional investors)

A
  • individual investors: requires an examination of investment profile
  • institutional investors: exempt from customer specific suitability as long as investor can effectively evaluate risk
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20
Q

How is retail inflation measured? How is wholesale inflation measured?

A
  • retail inflation is measured via the CPI

- wholesale inflation is measured via the PPI

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21
Q

Two important coincident economic indicators?

A

(1) Industrial Production Index

(2) Monthly Non Agricultural Pay Rolls

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22
Q

Subchapter C Corporation vs Subchapter S Corporation

A

Subchapter C Corporations: big businesses;; can have unlimited number of shareholders; can list on an exchange; DOES NOT pass through gains and losses; corporation pays corporate taxes

Subchapter S Corporations: small businesses; 100 shareholders maximum; can’t ever list on an exchanges; DOES pass through gains and losses; investors pay taxes but not firm

Both are taxed at a favorable long-term capital gains tax rate

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23
Q

To qualify as a REIT:

A 
must satisfy: 
75% gross income derived from RE
75% total assets invested in RE
90% income distributed to investors
**Reits pass through gains to investors
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24
Q

Master Limited Partnerships

A

limited partnerships that can be public (i.e., Blackstone, Och Ziff)

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25
Q

Who is exempt from issuing securities?

A
  • US government and government agencies
  • municipalities
  • short-term corporate debt
  • securities issued by commercial banks
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26
Q

What is the order of registering securities with the SEC?

A

(1) Pre-Registration Period: no sales, no marketing, no indications of interest
(2) Issuer files registration statement with SEC
(3) Cooling off period: 20 days; no sales, marketing and road show OK; indications of interest are OK; FWPs OK
(4) Effective Date: SEC clears the issue
(5) Post Effective Date: sales OK; all purchasers must receive a final prospectus

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27
Q

Form S-1

A

long form registration generally used for an IPO; first thing issuer files for registration statement
-lists underwriters, compensations, officers/directors/10% shareholders, financial statements, etc

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28
Q

Form S-3

A

short form registration generally used for a follow on offering; already public firm

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29
Q

Form S-4

A

exchange offer like a merger is debt refinancing

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30
Q

Blue Sky Laws

A
  • state securities laws

- issuer and underwriter must be appropriately registered in each state where securities are sold

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31
Q

Gun-Jumping

A
  • issuer discusses deal after making decision to go public but before filing registration statement with the SEC
    i. e., two weeks prior to filing a registration statement, a firm releases results for previous quarter
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32
Q

What is the preliminary prospectus (“red herring”)?

A
  • distributed by underwriter to collect indications of interest during the cooling off period
  • “red herring” is the same as the S-1: S-1 becomes the red herring
  • *For an IPO, the red herring must be distributed 48 hours before trade confirmation**
  • during the cooling off period, the S-1 becomes the red herring
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33
Q

Permitted ways to market a deal during the cooling off period:

A

(1) tombstone ad
(2) roadshows
(3) FWPs

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34
Q

What is prohibited during the cooling off period?

A

-no order, no sales, no money

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35
Q

Prospectus = Form 424(b)

A
  • final prospectus; same document as red herring but page one is filled in with additional data
  • underwriter can never make any changes to prospectus
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36
Q

Prospectus Supplement (as it pertains to shelf registration)

A
  • Includes details (e.g., price) of each individual security sold under the shelf
  • Shelf registrations typically have a duration of 3 years
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37
Q

What characterizes a WKSI (well known seasoned issuer)?

A
  • $700 million or more in public float OR $1 billion in non-convertible debt (within the past 3 years)
  • must be an SEC filer for at least one year
  • WKSIs can use automatic shelf registrations
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38
Q

Investment companies are NOT____

A

WKSIs

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39
Q

Free Writing Prospectus

A
  • written or graphic communication in connection with a securities offering, other than the full prospectus
  • could be anything: 1-2 page teaser, information on firm website
  • no limit on number of FWPs allowed
  • *INTERVIEW WITH SENIOR MANAGEMENT IN A LOCAL NEWSPAPER IS A FREE WRITING PROSPECTUS**
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40
Q

What characterizes a Seasoned Issuer

A

Public float of $75mm or more AND at least one year SEC filing

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41
Q

What characterizes an Unseasoned Issuer

A

Public float of less than $75mm OR less than one year SEC filing

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42
Q

Non-Reporting Issuer

A

-private company with NO SEC FILINGS

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43
Q

What is the most significant threshold for an issuer?

A

going from unseasoned to seasoned because the firm can file an S-3 instead of an S-1

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44
Q

Where can you look to learn about a firm’s major shareholders?

A

(1) 10K
(2) Proxy
(3) Form 13D
NOT 10Q

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45
Q

What does a proxy NOT include?

A

Proxy does NOT include a voting record of each board member

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46
Q

Schedule 14A

A
  • Proxy Statements - not always required
  • PRE14A = proxy draft; not required; includes letter from chairman, list of board nominees up for election, membership of board committees, director attendance, list of officers, directors and greater than 5% shareholders
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47
Q

DEF14A

A

-Proxy Statements; these are always required

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48
Q

A PRE14A must be filed ___ days before the definitive proxy, while a DEF14A must be filed ___ days before the meeting.

A

at least 10 days; at least 20 days

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49
Q

Section 404 of Sarbanes Oxley Act

A

-requires that a company on an annual basis must obtain an outside audit of its internal controls for financial reporting

50
Q

What defines a corporate insider?

A

-a director, officer (CEO, CFO), or an owner of more than 10% of a company’s stock

51
Q

Form 3

A
  • filed when a person becomes an insider
  • initial statement of beneficial ownership
  • filed within 10 DAYS of becoming an insider
52
Q

Form 4

A
  • statement of changes of beneficial ownership

- must be filed within 2 DAYS of the trade in the open market

53
Q

Form 5

A
  • filed to clean up any other change in ownership (i.e., gifting shares to charity)
  • must be filed within 45 DAYS of the year end
54
Q

Corporate insiders cannot:

A
  • sell short
  • write uncovered calls
  • perform “short swing profits”: where they sell their company’s stock before 6 months
55
Q

What is Schedule 13D (think D for Dominate)?

A
  • filed when an investor’s ownership of a company exceeds 5% with active intent to influence issuer
  • has to be filed within 10 DAYS with issuer, SEC, and exchange where security trades
  • investor must disclose intent and must disclose any time their ownership changes by more than 1% since the last filing
  • from this form, can learn who a specific company’s largest active shareholders are
56
Q

At which ownership threshold is an investor required to Schedule at 13D?

A

-equal to or exceeding 5.1%

57
Q

What is the minimum threshold at which a 13D filing is required?

A

5%

58
Q

What is Schedule 13G (think G for Go with the flow)?

A
  • filed when investor’s ownership exceeds 5% but with passive intent
  • due within 45 DAYS of calendar year end
59
Q

What is Form 13F?

A
  • quarterly filing for institutional investment managers
  • due within 45 DAYS of calendar quarter end
  • investor must disclose all equity positions
  • from this form, cans e what other stock’s investors own
60
Q

Who is an institutional investment manager?

A

-managing at least $100m in discretionary assets; means you are controlling the investments

61
Q

For shareholder ownership greater than 5%, what forms are necessary?

A

13D or 13G

62
Q

For shareholder ownership greater than 10%, what forms are necessary?

A

Forms 3, 4, 5

63
Q

What is the order for selecting an underwriter?

A

(1) “Bake Off”/Pitch
(2) Mandate - awarded to banks that issuer wants to hire/select
(3) Engagement Letter - issuer and winning bank sign an engagement letter, formally hiring the bank
(4) Book building/marketing
(5) Pricing
(6) Allocation of Shares to investors
(7) Secondary Market Trading

64
Q

Lead Manager in Underwriting Syndicate

A
  • manages deal

- directs/leads entire underwriting process

65
Q

Syndicate Members

A
  • don’t run deal/road show/determine pricing

- financially committed to underwrite shares (will buy/own unsold shares)

66
Q

Selling Group

A
  • helps sell shares (as agent)
  • no financial commitment to deal
  • SOLE ROLE IS TO COLLECT INDICATIONS OF INTEREST
67
Q

Agreement Among Underwriters (AAU)

A
  • signed between syndicate manager and syndicate members

- confirms size of offering and spread

68
Q

What are two prohibited activities during the book building process?

A

(1) Tie-in Arrangements = shares allocated to investor only if he agrees to buy more in the secondary market
(2) Spinning = IPO Shares allocated to executives of private companies in the hopes to do business with them in the next 3 months

69
Q

Underwriting Agreement

A
  • signed by issuer and underwriter once the book is built

- where underwriter agrees to take on the shares

70
Q

MAC Clause (Material Adverse Change)

A

-allows the underwriter to cancel the deal under exceptional circumstances (i.e., criminal indictment against the firm)

71
Q

The underwriting spread is composed of what three components:

A

(1) Syndicate Managers Fee
(2) Syndicate Member’s Fee
(3) Selling Concession

72
Q

Gross Spread=

A

Underwriting Fee + Selling Concession + Manager Fee

73
Q

Full Take Down=

A

Underwriting Fee + Selling Concession

74
Q

Green-Shoe Clause

A
  • allows underwriter to increase the size of the deal by up to 15% to satisfy demand
  • green-shoe clause must be done within 30 days of the effective date
75
Q

Lock Up Period

A
  • prohibit company executives from trading shares for a period of time after the effective date
  • help maintain stable share price, reduces selling pressure, avoids negative perception
76
Q

Block Trade

A

-big institutional investor sells their position in the market which drives the price down and makes it hard to find investors

77
Q

What is the maximum amount of gross spread that is considered reasonable and fair per FINRA Corporate Finance Department?

A

7%

78
Q

Reimbursement for legitimate and bona fide expenses is…

A

NOT compensation; if underwriter pays on behalf of issuer and issuer pays them back, that is fine

79
Q

Reimbursement for underwriters counsel or marketing expenses is…

A

COMPENSATION and is part of the spread per FINRA; issuer should not pay these; these are costs of underwriter

80
Q

Any tail fee arrangement for more than two years is prohibited because…

A

tail fee is paid if the issuer cancels the deal and then does the same deal with a different firm
-can have a tail fee but not for more than 2 years

81
Q

FINRA Rule 5130 (pertaining to IPOs)

A
  • applies to ALL IPOs of common stock
  • restricted people cannot invest in IPOs
  • underwriting selling IPO has to enforce this rule
  • think of immediate family restricted persons as UP, DOWN, SIDEWAYS, and in-laws
  • rule isn’t that important because most securities are sold to institutional investors
82
Q

Per the FINRA Rule 5130, who is considered a restricted person and cannot invest in an IPO?

A
  • FINRA member firms and employees
  • finders and fiduciaries of managing underwriter
  • portfolio managers for their personal accounts
  • immediate family members of restricted people
83
Q

If you live with a restricted person:

A

you cannot invest in any IPO

84
Q

If you do not live with a restricted person but are related to them:

A

you cannot invest with the restricted person’s firm but can invest in IPOs of other firms

85
Q

What are some exceptions to the restricted persons in FINRA Rule 5130 re: IPOs?

A
  • if employee’s family member works at the issuing firm (i.e., if spouse works for company doing IPO)
  • stand-by agreements: allows broker-dealer to invest in IPO that no one else wants as long as broker holds shares for at least 90 days
86
Q

Common types of conflicts of interest include

A
  • issuer is a broker-dealer or intends to become one
  • issuer controls or is controlled by a broker-dealer or its employees
  • at least 5% of net offering proceeds are used to pay off debt extended by a syndicate member
87
Q

What is a QIU (Qualified Independent Underwriter)?

A
  • QIU must be hired for due diligence if conflicts of interest exist
  • name of QIU must be disclosed in prospectus
  • no real restrictions, just can’t have a conflict
88
Q

When does Regulation M apply? (think M “manipulate”)

A
  • When a firm is both a market maker and an underwriter in the same security - there is a conflict there - firm wears two hats
  • mostly applies to follow on offerings
  • issuer and underwriter CANNOT manipulate price
89
Q

If you are underwriting a convertible bond, Regulation M applies to…

A

both the converts AND the underlying stock

90
Q

Regulation M prohibits distribution participants (underwriters) from…

A

-manipulating the price of the stock up

91
Q

For smaller businesses, when is the restricted period under Regulation M?

A

-begins 5 BUSINESS DAYS before determination of offering price and ends when distribution is complete

92
Q

For medium businesses, when is the restricted period under Regulation M?

A

-begins 1 BUSINESS DAY before determination of offering price and ends when distribution is complete

93
Q

For big businesses with an ADTV of at least $1 million and a public float of at least $150 million, what is the restricted period?

A

-there is no restricted period

94
Q

Under Reg M, what are stabilization bids?

A
  • allows the underwriter to bid on securities in the open market to prevent a decline in price
  • can NEVER be above the IPO price
  • MUST disclose in prospectus and to SEC when stabilization bid is in effect
  • only underwriter stabilizes, NEVER issuer
95
Q

Under Reg M, what is a penalty bid?

A
  • special type of stabilization bid
  • underwriter must return the selling concession when an investor flips their shares within 30 days
  • must be announced in advance and applied equally to all syndicate members
  • discourages sales to investors who might flip their shares (bc if you flip your stock, you have to return your fees)
96
Q

How are Syndicate Covering Transactions an alternative to pure stabilization?

A

-it allows underwriters to oversell a deal because it allows them to buy shares in the market to support the price without making any public disclosure (like they would have to do under stabilization bids)

97
Q

What are the two ways an underwriter will cover a short position?

A
  • if the stock price increases and it is within 30 days, exercise green shoe clause
  • if stock price decreases, buy in the open market
98
Q

Who is not required to register with the SEC/is considered “exempt”?

A
  • US government and agency securities
  • municipal bonds
  • short term corporate bonds
  • commercial paper: MAX 270 DAYS TO MATURITY
  • commercial bank securities
  • eurodollars and Eurodollar bonds
99
Q

How does Regulation A allow some firms to avoid registration?

A
  • registration not required because of the size of the transaction
  • can raise up to $50 million but have to file financials with the SEC every 6 months
100
Q

What is required under Reg A?

A
  • requires Form 1A to be filed with SEC (instead of S-1)
  • must send out Offering Circular (instead of Prospectus so shorter and cheaper)
  • ISSUER MUST UPDATE SEC SEMI-ANNUALLY ON AMOUNT OF SECURITIES SOLD
101
Q

Rule 147 (exempt transactions)

A
  • intrastate offerings (company must be incorporated in the state)
  • exempt of registration because of where securities are sold
  • must satisfy one of the following: 80% revenue in state, 80% assets in state, 80% proceeds used in state, majority of employees in state
  • ONLY state residents can make purchases
  • resale to non-state-residents is SIX MONTHS after the initial purchase
102
Q

Regulation S (exempt transactions)

A
  • exempt because selling securities outside the US
  • US residents cannot purchase these securities; such investors MUST have an overseas address
  • these securities can trade immediately on an offshores securities exchange
  • citizenship doesn’t matter; just have to be offshore
103
Q

Regulation D (SEC definition of a private placement)

A
  • safe harbor under 4(a)(2) and 4(a)(5)
  • accredited investors: officers, directors, institutional investors with $5m in assets and legitimate business purpose, individual investors ($200,000 income in past 2 years OR $1m in net worth excluding real estate)
  • non-accredited investors: need purchaser representative
104
Q

Rule 144 (exempt transactions)

A
  • THINK RESTRICTED AND CONTROL STOCK
  • permits sale of restricted and control stock
  • applies ONLY to existing public companies
  • when shares are sold via rule 144, they become fully registered
105
Q

Per Rule 144, what is the definition of restricted stock and controlled stock?

A
  • Restricted stock: any unregistered stock

- Control stock: any stock that is owned by a corporate insider (an officer, director, or >10% shareholder)

106
Q

How many shares can a corporate insider sell over the next 90 days under Rule 144?

A

-volume limit is the greater of:
1% outstanding shares
OR
average reported weekly trading volume over the 4 weeks preceding the sale

107
Q

Rule 144A (exempt transactions)

A
  • applies to QIBs
  • allows unregistered securities to be freely sold to QIBs
  • provides fully liquid market for high yield debt among institutions
  • can be traded as unregistered among QIBs under Rule 144A
108
Q

What are QIBs?

A
  • qualified institutional buyers

- institutional investors with 100m of discretionary assets

109
Q

When you see the word accredited in the question, think of…

A

REGULATION D [private placement]

110
Q

What is the true definition of private equity?

A

-investors that look for investments with steady cash flows

111
Q

Reasons for a private placement vs a registered offering:

A
  • faster speed of execution
  • cheaper regulatory cost
  • but, higher cost of capital
112
Q

PPM (Private Placement Memorandum)

A
  • like a prospectus/registration

- cautionary language, summary of offering terms, business plan, etc

113
Q

What is the difference between selling away and outside employment?

A
  • Selling Away: addresses a rep selling securities outside the firm’s supervision. It requires permission if the rep receives any compensation (even future deal flow). Requires notice to the firm if the rep receives no compensation.
  • Outside Business refers to any second job that is not selling securities. It always requires notice whether for compensation or not.
114
Q

What are the circumstances under which a registered representative can borrow or lend to a customer?

A
  • Can freely do so if the firm has written policies and procedures without firm approval. If the client is a family member or a bank.
  • Can do so with permission from the firm if the client is a registered rep at the same firm or the loan is based on an outside business or personal relationship
115
Q

Who can and cannot invest in an IPO (FINRA 5130)?

A
  • IPO allocations are limited:
  • CANNOT invest if you are a FINRA firm, FINRA employee, or immediate family members (including in-laws)
  • CAN invest: accounts with restricted ownership <10%; grandparents, ex-spouse, aunts/uncles, nieces/nephews, cousins
116
Q

What are the rules regarding an IPO with a conflict of interest?

A

-must hire QIU if there is a conflict

117
Q

What is the difference between restricted and control stock (Rule 144)?

A
  • Restricted: unregistered securities (6 month holding period)
  • Controlled: stock owned by an insider
118
Q

For a company that wants to generate liquidity for shareholders in a non-dilutive fashion, what would be the best way to do so?

A

Dividend Recapitalization

119
Q

What an investor immediately reinvests dividends in more stocks, what type of investment strategy is this?

A

Aggressive Growth

120
Q

What are examples of a bona fide issuer expense?

A

Accounting fees, blue sky fees, and printing costs. Reimbursement by the issuer to the underwriter for any of these is not considered compensation to the syndicate

121
Q

Is a prospectus that describes the characteristics of a new equity security considered a research report?

A

No. By definition, a prospectus is not considered a research report.

Series 79 (1 decks)

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