Underwriting Flashcards
Rule 101 of Regulation M generally prohibits participants in a distribution from:
Buying or bidding for the security being distributed during the restricted period
Selling or offering the security being distributed during the restricted period
Joining a syndicate distributing the security in which the broker-dealer makes a market
Maintaining a net-long position in the security being distributed during the restricted period
A: Distribution participants (syndicate members, selling group members, and any other broker-dealers helping to sell the security being offered to the public) may not bid for or purchase the subject security (the security being distributed) during the restricted period. The restricted period generally begins with the later of five business days prior to pricing, or whenever the broker-dealer becomes a participant. It ends when the broker-dealer participation is over. However, if the subject security has an average daily trading volume (ADTV) value of at least $100,000 and the issuer’s public float value is $25 million or more, the five-business-day standard is reduced to one business day. Exceptions to Rule 101 include the following.
Transactions involving government and municipal bonds, nonconvertible investment-grade debt and preferred stock, and registered investment company securities
Actively traded securities, which are those with an ADTV value of at least $1 million, where the public float value of the issuer’s common stock is at least $150 million
Odd-lot transactions
The exercise of any option, warrant, right, or similar instrument during the restricted period, regardless of when it was acquired
Unsolicited brokerage transactions and unsolicited purchases as principal
Securities of domestic and foreign issuers eligible for a 1933 Act exemption under Rule 144A if sold to qualified institutional buyers (QIBs), and certain Regulation S transactions
Transactions in the subject security that are part of a basket strategy, if the basket is not used for manipulation – the subject security must be no more than 5% of the basket, which must contain at least 20 securities
Inadvertent (de minimis) transactions
However, any activity that is obviously manipulative will violate general SEC antifraud rules, whether the activity is listed as an exception or not. [60853]
If a syndicate manager is underwriting securities subject to Rule 101 of Regulation M, which TWO of the following types of orders may be executed for the firm’s customers during the distribution period?
Unsolicited agency orders
Solicited agency orders
Solicited principal orders
Solicitation of offers to buy the securities that are being distributed
I and III
I and IV
II and III
II and IV
B: If a broker-dealer is participating in the distribution of a security subject to Rule 101 of Regulation M, it may not solicit orders from its customers to purchase already-outstanding securities of the same issuer. This rule applies whether the firm is acting in an agency or dealer capacity. Unsolicited transactions are always permitted. A broker-dealer is permitted to solicit an offer to buy the (new) securities being distributed. The firm must notify FINRA by way of a Restricted Period Notification Form (aka regulatory wire) if it is changing its market-maker status based on an upcoming offering, or if it is engaged in stabilizing transactions. [60722]
All of the following persons are defined as restricted persons under the New Issue Rule, EXCEPT:
A portfolio manager employed by an insurance company
A registered representative employed by a general securities firm
A registered representative employed by a broker-dealer that only transacts business in mutual funds
The parents that reside in the same household as a registered representative employed by a member firm
C
All the choices listed are considered restricted persons except the registered representative employed by a broker-dealer that sells only mutual funds. An exemption exists from the definition of a restricted person for personnel of a limited broker-dealer. A limited broker-dealer restricts its business to investment company/variable contract securities or direct participation programs. [60870]
A person who has purchased a new issue of securities through an underwriter, would be in violation of the 1934 Act if that person had sold short the same securities: 5 business days preceding pricing 10 business days preceding pricing 13 business days preceding pricing 20 business days preceding pricing
A: Rule 105 of Regulation M stipulates that it is a violation for any person to sell short a security that is the subject of a public offering, and purchase the same security from an underwriter, if the short sale was executed five business days (or less) prior to the pricing of the offering. If the pricing of the offering occurs within five business days of the filing of the registration statement, then Rule 105 applies from the filing date until the pricing of the issue. [60863]
In the case of a distribution regarding a merger, acquisition, or exchange offer the restricted period according to Regulation M is:
Five business days prior to the date the proxy solicitation materials are first disseminated and ending upon the completion of the distribution
One business day prior to the date the proxy solicitation materials are first disseminated and ending upon the completion of the distribution
The day the proxy solicitation materials are first disseminated and ending upon the completion of the distribution
Ten business days after the date the proxy solicitation materials are first disseminated and ending upon the completion of the distribution
C: Under Regulation M, in the case of a distribution regarding a merger, acquisition, or exchange offer, the restricted period is defined as the day the proxy solicitation materials are first disseminated to holders of the securities and ending upon the completion of the distribution. The one and five business day period prior to pricing refers to a distribution of securities (for example, a follow-on offering). [61308]
Immediately prior to the effective date of an underwriting, an adverse event occurs that causes a sharp decline in the price of the stock. Which of the following clauses permits the underwriter to withdraw without a penalty? All-or-none Best-efforts Market-out Penalty bid
C: A market-out clause in an underwriting agreement allows the underwriter to withdraw from the issue if certain events occur that make the sale of the issue difficult or impossible. (99564)
An initial public offering has been priced at $10.00 per share. The manager's fee is 14 cents, the selling syndicate member's compensation 56 cents, and the selling concession 42 cents. The issuer will receive: $10.00 per share $8.88 per share $9.44 per share $9.30 per share
D: The underwriting spread is comprised of the manager’s fee and the compensation paid to the selling syndicate members. The selling concession is part of the syndicate compensation. Therefore, the total spread is 14 cents (manager’s fee) plus 56 cents (the syndicate compensation) for a total of 70 cents. The issuer will receive $9.30 per share ($10.00 - .70).
Which of the following market participants is responsible for maintaining firm quotes on the Nasdaq Market Center Execution System? The Designated Market Maker A market maker An ECN An order-entry firm
B: A registered Nasdaq market maker is responsible for maintaining firm quotes and executing orders that are entered into the Nasdaq Market Center Execution System. The Designated Market Maker (formerly known as a specialist) is responsible for maintaining a fair and orderly market on the floor of the NYSE. An order-entry firm places orders with market makers for execution. An electronic communication network (ECN) accepts orders and attempts to match up orders in its system. [60983]
Relevant information may be found in Exhibit 54.
How much money will American Motors receive from the sale of the common stock, assuming the underwriters exercise the overallotment option?
$15,655,695,000
$2,348,354,250
$3,275,250,000
None
The prospectus specifically states that all of the shares of common stock are being sold by selling stockholders, and the company will not receive any proceeds from the sale. The cover page of this prospectus also contains information on a concurrent offering of preferred stock by the company. Since this question is asking for the amount of proceeds from the sale of common stock, this information is irrelevant. [99919]
How much money will the selling shareholders of American Motors receive from the sale of the common stock, assuming the underwriters exercise the overallotment option?
None
$136,050,750
$15,655,695,000
$18,004,049,250
D: The selling shareholders are selling 478,000,000 shares through the offering and the overallotment or Green Shoe provision allows the underwriters to purchase an additional 71,700,000 shares. Assuming the underwriters exercise the overallotment option, the selling shareholders will be selling a total of 549,700,000 shares. The proceeds to the selling shareholders is $32.7525 and, therefore, the total proceeds to the selling shareholders is $18,004,049,250 (549,700,000 x $32.7525). Note that if the question would have asked how much the issuer would have received from the offering, the answer would be zero. The prospectus specifically states that all of the shares of common stock are being sold by selling stockholders, and the company will not receive any proceeds from the sale.
Which of the following statements is TRUE concerning Regulation M and the distribution of a Nasdaq issue?
The managing underwriter must file a notice with FINRA indicating whether the participants in the distribution will be excused from trading, or will be passive market makers during the restricted period
FINRA automatically applies the status of passive market maker to all distribution participants unless the managing underwriter files a notice requesting excused withdrawal status
FINRA requires that all distribution participants withdraw from market making and may execute transactions only as agent on an unsolicited basis
Each distribution participant that is a market maker must file a separate notice with FINRA requesting excused withdrawal or passive market-making status
A: For any Nasdaq security that is part of a distribution subject to Regulation M, the managing underwriter must request an Underwriting Activity Report from FINRA’s Corporate Financing Department. The report will identify if the security’s restricted period begins one day or five days prior to pricing, or whether it is exempt as an actively traded security. For those securities that are not exempt, the manager must submit to FINRA’s Market Regulations Department, no later than the day prior to the commencement of the restricted period, a Restricted Period Notification Form, indicating whether distribution participants will be excused, or designated as passive market makers. [61258]
A syndicate manager is considering stabilizing an offering of a Nasdaq-listed stock. The shares are now trading in the secondary market and are being quoted at less than the public offering price. The stabilizing activity would be initiated during normal Nasdaq operating hours after the stock has opened for trading. If the current ask price on Nasdaq is greater than the last reported transaction price, what is the highest price at which stabilization could be initiated? The current best bid The last transaction price The current best offer The public offering price
After the opening of quotations in a security’s principal market, stabilization may be initiated at a price no higher than the last independent transaction in the principal market if (1) the security has traded in its principal market (Nasdaq in this case) on the day stabilizing is initiated or on the preceding day, and (2) the current asked price in the principal market is equal to or greater than the last independent transaction price. Since both (1) and (2) are true in this question, stabilizing can be initiated at a price no higher than the last independent transaction.
If either condition (1) or (2) is not satisfied, stabilizing may start after the opening of quotations at a price no higher than the last independent bid for the security on Nasdaq. The maximum stabilizing bid is the public offering price; however, a lower ceiling may apply. [60861]
A company is considering listing its common stock on an exchange. Place the following trading venues in order from LEAST to MOST stringent listing requirements. NYSE Nasdaq Capital Market Nasdaq Global Market Nasdaq Global Select Market II, III, IV, I II, III, I, IV III, II, IV, I I, IV, III, II
Nasdaq capital -> nasdaq global -> NYSE -> nasdaq global select
Considering the three levels of Nasdaq, the Capital Market has the least stringent initial listing requirements. The Nasdaq Global Market introduces more stringent listing requirements for net income, publicly held shares, stockholders’ equity, etc. The NYSE initial listing requirements are less stringent than Nasdaq Global Select in several area such as publicly held shares, and financial criteria. [60989]
Market maker (MM) #1 has placed a bid on Nasdaq as a passive market maker. MM #1’s bid was placed at the same price as two other market makers and was at the inside bid. The two independent market makers have just dropped their bids by $0.05, leaving MM #1 alone at the inside. Which of the following statements is TRUE?
Once a passive bid has been placed, it does not need to be lowered
MM #1 does not need to change its bid until it buys two times the minimum quotation size for that security, or its remaining daily purchase limit
MM #1 must immediately lower its bid so that it is no higher than the highest independent bid
MM #1 must immediately withdraw its Nasdaq quote after notifying Market Operations
B: When making a passive market, a firm involved in a distribution may not enter a bid or effect a purchase at a price that exceeds the highest independent bid on Nasdaq. In a falling market, when the last independent bid drops below that of a passive market maker, the passive market maker may maintain its bid until its purchases have reached or exceeded the lesser of two times the minimum quote size for that security (as set by FINRA), or the passive market maker’s remaining daily limit. If twice the minimum order size is executed, the passive market maker must drop its bid to or below the highest independent bid. If its daily purchase limit is reached first, it must withdraw from the market for the rest of the day. In a rising market, a passive market maker may raise its bid when the best independent bid rises, but is not required to do so. [60856]
For an initial public offering, the total dollar amount of the underwriter's fees is found in which of the following? The letter of intent The final prospectus The preliminary prospectus The S-1 registration statement
B: For an initial public offering, the total dollar amount of the underwriter’s fees is found in the final prospectus. Since the other documents are created prior to the offering, the underwriting fees would not yet be known. (79620)
Bear Brokerage is acting as the lead underwriter for the IPO of Global Transport Ltd. The new issue is expected to be priced at $22.00. Which of the following entities could potentially buy shares below the public offering price?
Only syndicate members
Any FINRA members and officers of the issuer
Any FINRA members or QIBs
Only FINRA members
D: Under industry rules, syndicate and selling group agreements set the price at which the securities are to be sold to the public, or the formula to determine the price. The agreements must also state the amount and under what circumstances concessions are permitted. According to FINRA rules, only FINRA members are permitted to receive a concession or allowance. This must be based on the member firm’s participation in the underwriting. Choice (a) is incorrect because both syndicate and selling group members may receive shares at a discount from the public offering price. [60732]
In which of the following circumstances may a member firm recover a commission from an associated person who sold shares of a new issue that were subsequently flipped by a customer?
The managing underwriter assesses a penalty bid on the entire syndicate
A customer of a syndicate member sells the IPO on the same day
The customer sells the IPO when there is a significant increase in the secondary market
The customer flipping the shares had not previously purchased IPOs
A: Flipping is defined as the initial sale of a new issue that occurs within 30 days following its offering date as an IPO. In many circumstances, flipping may create downward pressure on the price of the security in the secondary market and, therefore, underwriters may attempt to discourage these types of sales. FINRA prohibits a member firm and any person associated with a member firm from directly or indirectly recovering, or attempting to recover, any portion of a commission or credit that was paid or awarded to an associated person who sold shares of a new issue that were subsequently flipped by a customer. An exception to this prohibition is available if the managing underwriter has assessed a penalty bid on the entire syndicate. (79634)
In which of the following meetings may a research analyst participate?
An internal meeting between the investment banking and legal departments of his member firm to perform fact checking of a new issue
A meeting between prospective high net worth clients and the issuer concerning a potential IPO
A meeting between the investment banking department and two current clients regarding a merger
A meeting with the head of research, the investment banking department, and prospective investment banking clients
A: Under industry rules, research analysts may participate in due diligence meetings and the screening of potential investment banking clients; however, they may not participate in or attend meetings for the purpose of soliciting investment banking business (pitches). The rules are intended to separate the research department from the investment banking function of member firms. [60656]
Exhibit 35.
Which TWO of the following statements are TRUE concerning the offering?
This is a primary offering
This is a combined primary and secondary offering
The net proceeds to the company will be $121,210,005
The net proceeds to the company will be $347,199,997
I and III
I and IV
II and III
II and IV
C: This is an initial public offering of shares by both the company and the selling shareholders. Shares sold by the company are a primary offering, while shares sold by selling shareholders are a secondary offering. The offering price is $17.00 and the underwriting discount is $1.19. The net proceeds figure to the company and selling shareholders is $15.81 per share. The net proceeds to the company are $121,210,005 (7,666,667 x $15.81). The company will not receive any proceeds from the shares being sold by selling shareholders.
