20: NEW ISSUES MARKET (255)

Question 1

Can a RR send sales literature about a variable annuity w/o sending the prospectus?

Answer 1

No

A prospectus must always precedy or accompany any solicitation

Question 2

T/F: When recomending variable annuities, A prospectus must precede or accompany any solicitation, including distribution of sales literature to retail customers

Answer 2

True

Question 3

T/F: You may solicit transactions during the mandatory 20-day cooling-off period

Answer 3

False
During the 20-day cooling-off period, only unsolicited requests for information may be honored. Soliciting sales is prohibited.

Question 4

Can you publish a tombstone ad during the 20 day cooling off period?

Answer 4

Yes

Question 5

can you foward a preliminary prospectus to a customer during the 20 day cooling off period?

Answer 5

Yes

Question 6

T/F: If the transaction is exempt, a security that would otherwise have to be registered is exempt from registration

Answer 6

True

Question 7

Can cooling off period be longer than 20 days?

Answer 7

Yes

Question 8

What happens to communication between issuer and underwriter during the 20 day cooling off period

Answer 8

communication between underwriter and issuing company must be minimized or silenced altogether.

Question 9

29 day cooling off period comes after the ISSUER files ______

Answer 9

Registration statement

Question 10

Tombstone ad

Answer 10

newspaper ad that’s shaped like a, well, tombstone (it’s rectangular with black borders) — is simply an announcement (not an offer) of a new security for sale. It’s the only advertisement allowed during the cooling-off period.

Question 11

Only advertisement allowed during cooling off period

Answer 11

Tombstone ad

Question 12

T/F: The preliminary prospectus must be made available to all customers who are interested in the new issue during the cooling-off period.

Answer 12

True

Question 13

In a new issue, who gives out the preliminary prospectus

Answer 13

Underwriters and selling group members use the preliminary prospectus to obtain indications of interest from prospective customers.

Question 14

What is the purpose of a preliminary prospectus

Answer 14

During the cooling off period, Underwriters and selling group members use the preliminary prospectus to obtain indications of interest from prospective customers.

Question 15

[New issues] When is the last point in time that syndicate members can back out of an underwriting agreement

Answer 15

toward the end of the cooling-off period (around the time of the due diligence meeting). You can assume that if syndicate members are backing out, it’s most likely due to negative market condition

Question 16

Can underwriters give out info about an issuer during the 20 day cooling off period following the registration statement?

Answer 16

Yes, but only if it’s an unsolicited request for information
You can’t give our advertising material to people who didn’t ask for it

Question 17

T/F: The preliminary prospectus will include an overview and history of the issuer’s business and any risks associated with the offering.

Answer 17

True
>overview of history and also
> any risks associated with the offering

Question 18

T/F: The preliminary prospectus cannot include the effective date or the public offering price because they have yet to be determined

Answer 18

True

Don’t know those things yet

Question 19

T/F: A preliminary prospectus will include the effective date of the offering and the final offering price.

Answer 19

False
Don’t know those things yet

> usually includes an expected price range but not final offering price

“The preliminary prospectus cannot include the effective date or the public offering price because they have yet to be determined. It will generally include the expected price range, but not the final offering price.”

Question 20

For a Reg D offering, do officers or directors of the issuer count as accredited investors?

Answer 20

Yes

They count

Question 21

T/F: A mini-max agreement is a best efforts underwriting setting a floor, or minimum, which is the least amount the issuer needs to raise to move forward with the underwriting, and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell.

Answer 21

True

> sets Min amount issuer needs to raise to move forward
max $ amount of securities issuer willing to sell

Question 22

T/F: A mini-max underwriting is a firm underwriting agreement

Answer 22

False, mini-max agreement is a type of best efforts underwriting

> sets min amount the issuer needs to raise to move forward with the underwriting
and max dollar amount of securities issuer is willing to sell

Question 23

T/F: A registered secondary offering is the sale of previously issued stock to the public.

Answer 23

True

An example would be a selling stockholder (typically an insider or affiliate) wishing to sell more than Rule 144’s safe harbor.

Question 24

The portion of a municipal bond underwriting spread that remains after the syndicate manager subtracts the management fee is ____

Answer 24

The total takedown

“The total takedown is that portion of the municipal underwriting spread that remains after the underwriting manager takes the management fee. The total takedown consists of the additional takedown and the concession.”

Question 25

Stabilizing bids may be entered at a price no higher than ____

Answer 25

price no higher than the public offering price.

“Stabilizing bids cannot be used to raise the market price of an issue. Stabilization may only be used to support a new issue security at or below the public offering price.”

Question 26

T/F: Stabilizing bids cannot be used to raise the market price of an issue. Stabilization may only be used to support a new issue security at or below the public offering price.

Answer 26

True

Can only support at or below public offering price

Question 27

T/F: In a muni GO underwriting the syndicate members earn the takedown

Answer 27

True

Syndicate members compensated via the takedown

Question 28

In a muni GO underwriting, who earns the takedown?

Answer 28

Syndicate members
The syndicate members earn the takedown.

(The syndicate manager earns the management fee)

Question 29

Who earns the management fee in a muni GO underwriting?

Answer 29

The syndicate manager

Syndicate manager earns the management fee

Question 30

T/F: In a standby agreement, the underwriter agrees to purchase any remaining shares at the subscription price, which is generally lower than the stock’s market price.

Answer 30

True

In stand by agreement, underwriter purchases unsold shares

Question 31

In a standby agreement, the underwriter agrees to purchase any remaining shares at the ____ price, which is generally lower than the stock’s market price.

Answer 31

At subscription price

“In a standby agreement, the underwriter agrees to purchase any remaining shares at the subscription price, which is generally lower than the stock’s market price. “

Question 32

T/F: Regarding new issues, in-laws as well as supported persons of a registered rep are restricted purchasers.

Answer 32

True

“Restricted purchasers include spouses, parents, children, siblings, and in-laws. Aunts and uncles, as well as grandparents, are excluded. A person supported by an employee of a member can never buy a new equity issue.”

Question 33

Would grandparents, or aunts and uncles of a registered rep be considered restricted purchasers of a new issue?

Answer 33

No

“Restricted purchasers include spouses, parents, children, siblings, and in-laws. Aunts and uncles, as well as grandparents, are excluded. A person supported by an employee of a member can never buy a new equity issue.

Question 34

Would parents of a registered rep be considered restricted purchasers of a new issue?

Answer 34

Yes

“Restricted purchasers include spouses, parents, children, siblings, and in-laws. Aunts and uncles, as well as grandparents, are excluded. A person supported by an employee of a member can never buy a new equity issue.”

Question 35

T/F: The full and fair disclosure document for municipal securities is called the official statement.

Answer 35

True, full and fair disclosure doc is official statement

Question 36

Is commercial paper maturing in 90 days exempt from registration provisions of the Securities Act of 1933?

Answer 36

Yes

If commercial paper expires in less than 270 days, exempt

Question 37

T/F: Additional information may be added to a red herring at a later date.

Answer 37

True

Can add info at a late date

Question 38

T/F: The 5% markup policy applies to primary market transactions

Answer 38

False
Only secondary, non exempt

“The 5% markup policy applies to secondary market transactions in nonexempt securities.”

Question 39

Which plan can accept more? Section 529 or coverdell esa (education savings)

Answer 39

529 accepts more

Coverall esa contribution limit of $2k per year

Question 40

What are blank check and blind pool offerings?

Answer 40

Blank-check and blind pool securities are offerings where the issuer has not specified the use of the capital it is raising.

Question 41

T/F: A customer must present a signed representation letter stating that he is not a restricted purchaser before buying a new issue of corporate bonds.

Answer 41

False

Only required for common stock new issue

Question 42

A customer must present a signed representation letter stating that he is not a restricted purchaser before buying a new issue of

A)
corporate bonds.
 B)
municipal bonds.
 C)
U.S. government bonds.
 D)
common stock.

Answer 42

D) common stock

Explanation
New issues of common stock may not be sold at the public offering price to any account in which a restricted person has a beneficial interest. Before buying an IPO, a customer must present a representation letter stating he is not a restricted person.

LO 20.f

Question 43

Which of the following provisions govern the offering of control stock to the public without filing a Form 144?

The dollar amount is $1 million or less.
100,000 shares or fewer are sold.
5,000 shares or fewer are sold.
The dollar amount is $50,000 or less.
A)
I and II
 B)
III and IV
 C)
I and III
 D)
II and IV

Answer 43

B) 3 and 4

Explanation
Under Rule 144, when shares are sold by an affiliate (control), Form 144 need not be filed if 5,000 or fewer shares are sold, and the dollar amount is $50,000 or less. This de minimis rule applies to sales in any 90-day period.

LO 20.f

Question 44

Gentry is the chief operating officer (CFO) of RMBM, a NYSE-listed corporation. Gentry has an account at your firm, and five months ago, Gentry purchased 1,000 shares of RMBM common stock at $50 per share. The RMBM shares are now $125 per share, and Gentry exits the position at that price. Which of the following statements presents the view of the SEC?

A)
Gentry has violated the holding period requirements of Rule 144.
B)
Gentry has done nothing wrong because the stock was purchased in the open market.
C)
Gentry has violated the volume requirements of Rule 144.
D)
Gentry has violated the short-swing profits rule.

Answer 44

D) violated short-swings profits rule
>can’t make purchase and sale in 6 months

Explanation
Section 16 of the Securities Exchange Act of 1934 contains the short-swing profits rule. This rule states that any insider of a publicly traded corporation (the CFO would certainly be included in the definition of insider or affiliate) is prohibited from profiting from any purchase or sale (or sale and purchase) of the company’s equity securities within a period of less than six months. This rule authorizes the corporation to recover from such statutory insider any so-called “short swing” profits. The term used in industry circles is that the profit must be disgorged (given back). There is nothing illegal here—no fines or penalties. However, we investors might consider returning a $75,000 profit to be a penalty. This stock was purchased in the secondary market, so the Rule 144 holding period does not apply. Rule 144 permits affiliates (like Gentry) to sell up to 1% of the outstanding shares over a 90-day period. RMBM is listed on the NYSE, and 1,000 shares is certainly much less than 1% of the shares outstanding. You do not need to know the listing requirements, but listing on the NYSE requires a minimum of 1.1 million shares outstanding.

LO 20.f

Question 45

T/F: The short swings profit rule would apply to the CFO of a nyse listed corporation

Answer 45

True
>Would apply to CFO
>Can’t make purchase and sale within 6 months

Question 46

For the short swings profit rule, an inside can’t profit from any sale or purchase on it’s own stock within andy __ month period

Answer 46

6 months period
>insider can’t profit on his company’s own stock within 6 months

“Any insider of a publicly traded corporation is prohibited from profiting from any purchase or sale (or sale and purchase) of the company’s equity securities within a period of less than six months”

Question 47

When an existing, long established publicly traded corporation issues a large block of new shares in order to expand or modernize, it is

A)
a secondary distribution.
B)
a refunding.
C)
a primary distribution.
D)
an IPO

Answer 47

C) A primary distribution
>any time it’s new shares is a primary distribution

Explanation
New shares are always part of a primary distribution. When it is the first time, it is an initial public offering (IPO). That does not apply here because this company already has shares publicly trading.

LO 20.a

Question 48

T/F: A concession between broker-dealers on secondary market transactions is a discount from the yield that the broker-dealer is quoting

Answer 48

True

“A concession between broker-dealers on secondary market transactions is a discount from the yield that the broker-dealer is quoting”

Question 49

The term “standby” is accociated with an offering of what kind of security?

Answer 49

a rights offering

Standby underwriting is a term associated only with a rights offering.

Question 50

T/F: Standby underwriting is a term associated only with a rights offering.

Answer 50

true

Question 51

The syndicate manager in a firm commitment underwriting takes which of the following actions in a divided municipal syndicate account that does not sell out?

A)
Prorates the bonds according to syndicate participation
B)
Holds an auction
C)
Returns the bonds to the issuer
D)
Confirms the bonds to the member that did not sell its share

Answer 51

D) Confirms the bonds to the member that did not sell its share
>Then it receives the bonds for inventory
>Western syndicate

Explanation
Because this offer is a divided, or Western, syndicate, each member is responsible for selling a specific number of securities. If a member does not sell its share, it receives the bonds for its inventory.

LO 20.b

Question 52

Would the prospectus for a new issue of common stock include a FINRA disclaimer on the cover?

Answer 52

No

>It’s the SEC disclaimer that’s on the front cover

Question 53

Does an official notice of sale contain the bonds rating?

Answer 53

No

“The notice of sale is the advertisement placed by a municipality soliciting bids from underwriters for an issue it wishes to sell. It does not include the bond’s rating.”

Question 54

When an underwriting syndicate commits to distribute an entire offering, it may enlist other FINRA member firms to help in the offering. These member firms are known as

A)
affiliated members.
B)
syndicate participants.
C)
co-managers.
D)
selling group members.

Answer 54

D) selling group members

Explanation
Underwriting syndicates often enlist other FINRA member firms to help with the distribution of an offering. These members become part of the selling group. Unlike the syndicate members, selling group members have no capital commitment. They are acting as agents of the syndicate and earn a selling concession on their sales.

LO 20.b

Question 55

T/F: The agreement among underwriters, also called the syndicate letter, is signed by representatives of all syndicate members and establishes a joint account to sell newly issued securities.

Answer 55

True
>Singed by reps of all syndicate members
>Establishes joint account to sell securities

“The agreement among underwriters, also called the syndicate letter, is signed by representatives of all syndicate members and establishes a joint account to sell newly issued securities.”

Question 56

T/F: the agreement amongst underwriters establishes a joint account for all the syndicate members to sell new issued securities

Answer 56

True
>makes joint account for syndicate members
>agreement omognt underwriters is sigend by reps from all syndicate members

Question 57

For a new issue municipal syndicate account, settlement of the account must occur

A)
as soon as dealers who are not members of the syndicate request a bond.
B)
when the last bond is sold with no time limit imposed.
C)
within one year after the issuer delivers the securities to the syndicate.
D)
within 30 calendar days after the issuer delivers the securities to the syndicate.

Answer 57

d) Within 30 calendardays afrer issuer delivers securities to the syndicate

Explanation
The maximum length of time a new issue municipal bond syndicate can exist is 30 calendar days after the issuer delivers the securities to the syndicate. At that time, the account must be settled and allocation of unsold bonds must be determined in accordance with each member’s original allocation and whether the syndicate was set up as divided (western) or undivided (eastern).

LO 20.b

Question 58

T/F: The six-year records do not include blotters, the general ledger, the stock record, customer ledgers, and customer account information.

Answer 58

False
>these things DO need to be kept for 6 years

“The six-year records include blotters, the general ledger, the stock record, customer ledgers, and customer account information.”

Question 59

An issuer may direct sales of a new issue to all of the following except

A)
officers of the managing underwriter.
 B)
officers of the issuer.
 C)
officers of its largest supplier.
 D)
officers of its largest customer.

Answer 59

A) officers of managing underwriter

Explanation
Issuer-directed sales are permitted if the persons to whom the new issue is sold are not restricted. Officers of the managing underwriter are restricted.