Unit 1: Seeking Business for the Broker Dealer

Question 1

Describe Rule 5130

Answer 1

FINRA rule designed to protect the integrity of the public offering process by ensuring:

• members make a bona fide public offering at the POP, -members do not withhold securities to reward persons who are in position to direct future business
• industry insiders do not take advantage of their insider access to new issues at expense of the public.
• Rule 5130 only applies to IPOs of common stock. Other categories are exempt.

Question 2

Define “spinning”

Answer 2

Practice of allocating highly sought after IPO shares to individuals who are in a position to direct securities business to the firm

Question 3

Describe Trust Indenture Act of 1939

Answer 3

The Trust Indenture Act of 1939 requires all corporate debt issues of $50 million or more sold interstate to have a trust indenture; U.S. governments are exempt.

• issue of more than $50M within 12 months
• Maturity of nine months or more
• Offered interstate

Question 4

Define a short-swing profit

Answer 4

A short swing profit is when an affiliate sells (restricted) control stock for a profit prior to satisfying the holding period. If a short swing profit occurs, the affilaite must disgorge the profit and is responsible for any capital gains tax.

Question 5

What is a stabilizing bid?

Answer 5

Bids made when demand is lower than supply. Must not be made at a price higher than the public offering price. Stabilizing transactions are permitted if the SEC is notified in the registration statement and the investing public is notified in the prospectus

Question 6

Define an accredited investor.

Answer 6

As define in Rule 502 of Reg D, an accredited investors include individuals with annual incomes of $200,000 or more, individuals with a net worth of $1 million or more not including net equity in a primary residence, officers or directors of the issuer, and institutions.

Question 7

The largest portion of an underwriting spread is the:

Answer 7

Concession. Paid to the syndicate members and selling group members on the basis of he number of shares sold by each firm.

Question 8

What are four main exclusionary provisions of the Securities Act of ‘33?

Answer 8

Reg A+: small and medium corporate offerings
Reg D: private placements
Rule 147: securities offered and sold exclusively intrastate
Regulation S: offers and sales made outside the US by US issuers