Chapter 1 Overview of Regulation

Question 1

Act of 1933

Answer 1

Regulates the new issue market

Requires registration of most new issues

• IPO,
• Secondary offering,

Identifies exemptions from the act

Question 2

Act of 1934

Answer 2

Regulates the trading of securities in the secondary market

• Requires registration of securities firms
• Defines insiders
• Establishes margin guidelines ( Regulation T)

Question 3

A Financial and Operational Combined Uniform Single (FOCUS) report Part I is filed:

Answer 3

Monthly

Question 4

Which of the following systems is used to report information on the origination, transmittal, and execution of an equity security?

Answer 4

The Order Audit Trail System (OATS).

The Order Audit Trail System (OATS) is a system that enables a regulator (FINRA) to review equity market activity. OATS records the life of an order from receipt, to routing, to modification if applicable, and to cancellation or execution. The TRF is a reporting system for equity securities. TRACE is used to report transactions in corporate debt. The NSCC is a clearing system used by broker-dealers. (70158)

Question 5

Which of the following situations requires a DK (don’t know) notice?

Answer 5

.b. The firms disagree on the amount of shares in the trade.

A DK notice is used for a don’t know trade. This occurs when one side does not recognize the trade or the firms disagree on the details. Choice (b) is the only situation that would require a DK notice. (70162)

Question 6

Shares of stock in a corporation are called equity securities because shareholders:

Answer 6

Have an ownership interest in the company

Shares of stock are referred to as equity securities since shareholders have an ownership interest (equity) in the company. Choices (a) and (d) are true statements but they are not the reason that shares of stock are called equity securities. (63209)

Question 7

A trader at your firm executes an order for a corporate bond. The trade must be reported to the:

Answer 7

Trade Reporting and Compliance Engine (TRACE)

The Trade Reporting and Compliance Engine is a reporting system that was created to provide greater transparency in the corporate bond market. The Trade Reporting Facility is the reporting system for stocks listed on Nasdaq. The OTC Reporting Facility is a reporting system for non-Nasdaq or OTC equity securities, which are quoted on the OTCBB or in the OTC Pink Market (Pink Sheets). The Real-Time Transaction Reporting System is the reporting system for municipal bonds. (63760)

Question 8

A registered representative will be soliciting customers to purchase low-priced equity securities. A special disclosure document must be provided to customers if the securities are quoted on:

Answer 8

The OTC Pink Market

A special disclosure document may be required if the customer will be trading low-priced securities (known as penny stocks). Under SEC rules, a penny stock is generally defined as an equity security with a bid price of less than $5.00 and is not listed on an exchange (e.g., NYSE or Nasdaq). An electronic communication network (ECN) mostly quotes securities that are listed on an exchange. (63585)

Question 9

A registered representative (RR) in your office would like to compensate a client for referrals the client provided that resulted in commissions. Which of the following statements is TRUE concerning such compensation?

Answer 9

The client is unregistered and may not be compensated for the referrals.

In order to be compensated, the client would need to be registered with the same broker-dealer and in the same states as the customers. Referral fees would be considered a type of compensation. (63401)

Question 10

A bond on which a call notice has been issued is purchased by a customer. Which yield must be disclosed on the confirmation?

Answer 10

The yield to call

When bonds are called, the yield to call must be disclosed on the confirmation. If a call notice has not been issued, the lower of the yield to call or the yield to maturity must be disclosed. (63649)

Question 11

Exchange

Answer 11

Any market place that has the ability to bring buyers and sellers together.
NYSC - Physical
NASDAQ- Electronic

Question 12

IPO

Answer 12

1st time company offers shares

Question 13

Secondary/Follow-On Offering

Answer 13

Raises capital again

Question 14

Underwriter

Answer 14

Middle person between issuer and investors

Question 15

Syndicate

Answer 15

Helps underwriter sell

Question 16

Listed

Answer 16

Company chooses to list on an exchange

Question 17

Nonlisted

Answer 17

Two venues for quotations of non listed securities:

1. Pink sheets (aka the OTC Pink Market)
2. OTCBB (Bulletin Board)

Question 18

Underwriting

Firm-Commitment

Who is responsible for unsold shares

Answer 18

Syndicate commits to the entire offering

Syndicate is responsible for unsold shares

Question 19

Underwriting

Best-Efforts

Who is responsible for unsold shares

Answer 19

Syndicate sells what it can

Issuer is responsible for unsold shares

Question 20

Underwriting

Best-Efforts All-or-None

Who is responsible for unsold shares

Answer 20

Offering is cancelled if all shares are not sold

Issuer is responsible for unsold shares

Question 21

Underwriting

Best-Efforts Mini-Max

Who is responsible for unsold shares

Answer 21

Offering is cancelled if a set minimum is not sold

Issuer is responsible for unsold shares

Question 22

Underwriting

Standby

Most on firm commitment basis
Who is responsible for unsold shares

Answer 22

Used for secondary offering

Syndicate is responsible for unsold shares

Question 23

Securities Act of 1933
regulates what and
requires what

Answer 23

• regulates the primary market
• requires securities to be registered

-Some securities may be exempted from registration

1. type
2. way

Question 24

Securities Act of 1933 - Scope of the Law

1, 2, 3

Answer 24

1. To prevent for full and fair disclosure to investors
2. Prevention of fraud in the sale of new issues
3. No ruling as to investment merit – SEC “no approval clause” on prospectus cover

Question 25

Full Registration Timeline 1. Preregistration Period

Answer 25

- Document preparation | - No communication with the public

Question 26

Full Registration Timeline 2. File registration statement; begin 20-day cooling-off period

Answer 26

- No sales or money accepted - Issuer distributes preliminary prospectus - All info except exact price and date - Nonbinding indications of interest - Register the issue at the state level (Blue-Sky) -Starts when co files the reg statements with the SEC

Question 27

Full Registration Timeline 3. Post Registration Period (Effective date)

Answer 27

- Sales confirmed and final prospectus delivered - Dealers who sell securities in the aftermarket may be required to provide purchasers with a copy of the final prospectus - No funds can be accepted unless effective date -Effective date - when SEC allows you to sell the securities

Question 28

Red Flag Issue

Answer 28

B/D MUST provide a Final Prospectus to EVERY purchaser, even those who already received a Preliminary Prospectus. Send it anyway. Access electronically OK Access = Delivery

Question 29

Exempt Securitas

Answer 29

Exempt from registration 1. U.S Government and Agency Securities 2. Municipal Securitas 3. Securities issued by banks (not Bank Holding Cos) 4. Those issues by non-profit organizations 5. Short term, unsecured corporate debt - Maturity no exceeding 270 days All remain subject to antifraud provisions of the '33 Act

Question 30

Exempt Transactions

Answer 30

Regulation D - Private Placement -Sold to an unlimited number of accredited investors -Institutional investors -Financial test for individuals accredited investor -$1 million net worth OR - $200K annual income - With no more than 35 non-accredited investors - Stock acquired is restricted from resale (illiquid) - Many hedge funds are sold in this matter

Question 31

Regulation D 1. Purchasers sign an "Investment Letter'

Answer 31

- Indicates purchase is for investment purposes, not for immediate resale - Generally 6 months

Question 32

Regulation D 2. Shares are Restricted

Answer 32

- Bears a legend - Stop transfer instructions remove requires an OPINION LETTER from the legal counsel - May be sold to the public only if registered or sold in accordance with Rule 144

Question 33

Rule 144

Answer 33

Permits the sale of restricted and control stock

Question 34

Rule 144 Restricted stock

Answer 34

Acquired through private placements (unregistered with the SEC)

Question 35

Rule 144 Control stock

Answer 35

registered stock purchased by officers, directors, or greater than 10% shareholders

Question 36

Rule 144A

Answer 36

provides an exemption if restricted securities are sold to Qualified Institutional Buyers (QIBs)

Question 37

Rule 144A | QIB (Qual Inst Buyer)

Answer 37

Institution with at least $100 million under management - allows QIB NO holding period - Regular -> 6 month holding period

Question 38

Rule 144 Restricted Holding Period ----- Volume ---- Paperwork ----- Time Limit ----

Answer 38

Holding Period ----- 6 months Volume ---- Greater of : 1% of outstanding or Avg of last 4 wks of Trading Volume Paperwork ----- File Form 144 Time LImit ---- 90 Days to execute sale

Question 39

Rule 144 Control Holding Period ----- Volume ---- Paperwork ----- Time Limit ----

Answer 39

All same as Restricted but Holding period - No holding period

Question 40

Rule 144 What is the difference between Restricted and Control

Answer 40

Control - no holding period

Question 41

Securities Exchange Act of 1934

Answer 41

Secondary Market Regulation - Creation of SEC - Utilizes various Self Regulating Organizations (SROs) - Reporting requirements for publicly-traded companies - Form 10-K, 10-Q, and others - Defines control persons: - Any officer or director of issuer or any person who owns greater than 10% of the issuer's outstanding shares - Accounts of Control Persons have special On-Boarding requirements - Gave the Fed control over the extension of credit through Regulation T - Fed controls the Margin

Question 42

DK notice

Answer 42

A DK notice is used for a don't know trade. This occurs when one side does not recognize the trade or the firms disagree on the details.

Question 43

1-1 The primary objective of FINRA is to

Answer 43

Adopt, administer, and enforce rules and regulations in the securities industry

Question 44

1-2 The Code of Procedures pertains to

Answer 44

The handling of complaints and violations

Question 45

1-4 (no3) Persons that serve as the conduit for bringing the issuer and potential buyer together are:

Answer 45

The day that the SEC receives the registration statement is known as the filling date. A 20 day cooling-off period follows.

Question 46

1-5 After the registration statement is receive by the SEC, the following time called the:

Answer 46

Cooling-off period.

Question 47

1-6 The herring is an

Answer 47

Cooling-off period, the issuer prepares a prelim prospectus(red herring). It has a red border on the cover page that informs potential investors that a registration statement has been filed with the SEC, but has not yet become effective

Question 48

1-7 Blue-skying an issue refers to the:

Answer 48

Registration of securities where it will be sold

Question 49

1-8 For securities that will be listed on a national exchange or quoted on Nasdaq, the final prospectus must be distributed to any purchaser for how many days from the effective date?

Answer 49

25 days

Question 50

1-9 According to the Securities Act of 1933, a Regulation D exemption exists if the securities are offered to a maximum of

Answer 50

35 nonaccredited investors

Question 51

1-10 The Securities Exchange Act of 1934 regulates the trading of securities:

Answer 51

Once they have been issued with the regulation of exchanges and broker-dealers