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Flashcards in Chapter 3 - Primary/Secondary Markets Deck (314):
1

True or False


The Securities Act of 1934 was passed regulating the primary market -issuance of new issues.

False.


The Securities Act of 1933 was passed regulating the primary market -issuance of new issues.

2

True or False


The Securities Act of 1933 was passed regulating the primary market -issuance of new issues.

True

3

Which Securities Act was passed to regulate the primary market?

The Securities Act of 1933

4

Included in the ___________ is the general character of the business:

the uses of the proceeds of the offering;

historical audited financial statements;

biographical data on officers and directors as well as their percentage holdings;

legal issues;

the proposed price of the issue;

underwriting spread;

a copy of the proposed prospectus;

and any other relevant information.

Registration Statement - Form S-1

5

Once the registration statement is filed, the issue enters into the "____________" period.

During this time, the SEC reviews the filing for "full and fair disclosure."

20-Day Cooling Off period

6

True or False

During the 20-day Cooling-off period, the issue may not be sold, but it may be advertised.

False.

During the "20-day cooling off" period, the issue cannot be sold or advertised; recommendations of the issue are prohibited; soliciting orders to buy are prohibited. If any of these occur, this is a violation called "gun jumping."

During this period, lists of interested customers may be drawn, but no orders can be taken and no sales can be made. This is termed "taking indications of interest."

7

True or False

During the 20-day cooling off period, underwriters are allowed to distribute preliminary prospectuses.

True.

the underwriters are allowed to distribute a "preliminary prospectus" to interested parties. This is called a "red herring."

The "red herring" is not considered to be "offering" the securities to investors, so it is allowed.

8

If the SEC finds that there is an untrue statement of material fact in the registration statement at any time during the "20-day cooling off", it can issue a "stop" order suspending effectiveness. What two conditions must be met for a stop order to be issued?

The stop order can only be issued after 15 days' notice is given to the issuer and underwriters and an opportunity for a hearing is given.

9

True or False

The final prospectus must be given to purchasers during the 30-day period following the effective date.

False.

The final prospectus must be given to purchasers during the 90-day period following the effective date.

10

What is required of firms who wish to send prospectuses to clients by email?

The firm has to confirm that the client has internet access.

11

True or False

During the prospectus delivery period, dealers effecting purchases of the security for customers must be "quiet" about the issue - they cannot "hype" the issue.

True

12

True or False

Under the Act of 1933, an omission or misstatement of material fact in a registration statement or prospectus is fraud. It is fraud for the underwriter only, because it is the underwriters responsibility to check for these types of errors.

False

It is fraud for all those individuals involved in the offering: the issuer, the underwriters, the accountants, and the lawyers.

13

What do the following have in common?

Direct obligations of the U.S. Government and Agency issues.

Municipal obligations.

Foreign government obligations.

Banker's Acceptances and Commercial Paper as long as the maturity does not exceed 270 days.

Insurance company offerings such as life insurance policies and fixed annuities, EXCEPT for variable annuities (covered under state insurance laws which predate the Act of '33).

Bank issues (covered under state banking laws which predate the Act of '33).

Common carrier issues such as railroads, trucking companies (covered under Interstate Commerce Commission - I.C.C. - laws that predate the Act of '33).

-and-

Issues of Benevolent organizations (non-profit corporations such as farmer's cooperatives).

These are the primary "exempt" securities that will be tested on the exam.

14

What do the following transactions have in common?

Intrastate offerings under Rule 147

Private placements under Regulation D

Certain trades of securities that would otherwise require the use of a prospectus defined under Rule 144

Private placements that can only be sold to large institutional investors under Rule 144A

Transactions between private parties

Transactions outside the U.S. to non-U.S. residents under Regulation S

These are exempt transactions that do not require registration.

if new issues of non-exempt securities are offered through an exempt transaction, no prospectus is required. For example, if a new issue of common stock (a non-exempt security) is sold in a private placement (an exempt transaction), no registration is required.

15

True or False

The Act of 1933 defines an intrastate transaction as one that takes place:
between 2 states;

between the United States and a territory such as Puerto Rico;

between the United States and the District of Columbia;

and between the United States and any foreign country.

False.

This describes interstate transactions, not intrastate.

16

For an intrastate offering to be exempt from federal registration under Rule 147, the requirements are:


(4 answers)

1. 100% of the issue must be offered and sold to residents of that state. The issue cannot be sold to a non-resident; all purchasers must submit written verification of residency.

2. The issuer must be a "resident" of that state. To determine residency, the SEC applies the "80%" tests. The issuer must meet all of the following to be considered a "resident" of that state. 80% of the:

A. issuer's assets must be located m the state.
B. issuer's sales revenue must be derived in that state.
C. proceeds of the offering must be used within that state .

3. In addition, the issuer must be incorporated in that state, if it is a corporation; or the issuer's principal office must be located in that state, if it is a partnership.

4. For a 9-month period after the sale is completed, resale is only permitted to residents of that state. The issue cannot be resold "interstate" until after the 9-month waiting period. To enforce this, a legend is printed on the certificates with the restriction .

17

True or False

Under a Regulation D private placement, the issue can be sold to a maximum of 25 "non-accredited" investors and an unlimited number of accredited investors.

False.

The issue can be sold to a maximum of 35 "non-accredited" investors and an unlimited number of accredited investors.

18

True or False

The issue can be sold to a maximum of 35 "non-accredited" investors and an unlimited number of accredited investors.

True

19

True or False

Under rule 501, an accredited investor is a purchaser who meets all of the following tests;

1. Individual with a net worth of $1,000,000, exclusive of home.

2. Individual with annual income of $200,000 a year for the past 2 years; or couple with a joint income of $300,000; and the expectation of continuing to earn that level of income in the future.

3. Individual who is an officer or director of the issuer.

4. Financial Institutions (banks, insurance companies, . mutual funds), and non-profit institutional investors (pension plans and college endowment funds), with assets in excess of $5,000,000.

False.

To be an accredited investor, the entity must only meet one of the above tests.

20

True or False

Under Regulation D for private placements, there is no limit on the dollar amount sold, the number of units sold, or the number of states in which the offering is made.

True

21

Under Regulation D for private placements, even though the issue is exempt from registration and prospectus requirements, full disclosure to investors must be given to investors through an "______________".

Offering Circular

22

All non-accredited purchasers of private placements under Reg D must be "sophisticated" investors.

What is a "sophisticated investor"?

This means that the investor is able to evaluate the merits of the issue.


This does not mean that the purchaser cannot bear the investment's economic risk.

23

True or False

Registered representatives must act as purchaser representatives in offerings that they are selling.

False

Registered representatives are prohibited from acting as purchaser representatives in offerings that they are selling.

The only exception is given to purchasers who are related by blood to the registered representative.

24

True or False

A Rule 506 private placement offering that includes non-accredited investors (up to the 35 maximum), cannot be advertised, but if it excludes non-accredited investors, it can be advertised.

True

Until September 2013, private placements could not be advertised to potential investors. To promote small business formation, this was changed for Rule 506 (unlimited dollar amount) offerings made only to accredited investors.

25

Typically, private placements are sold in "private transactions" which are exempt from the Act.

Alternatively, the issue can be sold in the public markets under the exemption provided by Rule 144.

True or False:
To claim the exemption, a Form D must filed with the SEC 15 calendar days prior to the first sale.

False.

To claim the exemption, a Form D must filed with the SEC 15 calendar days after first sale.

26

Typically, private placements are sold in "private transactions" which are exempt from the Act.

Alternatively, the issue can be sold in the public markets under the exemption provided by Rule 144.

True or False:
To claim the exemption, a Form D must filed with the SEC 15 calendar days after the first sale.

True

27

In a PIPE (Private Investment in Public Equity) transaction, a publicly held company raises funds quickly by doing what?

Selling unregistered private placement common stock to institutional investors (usually hedge funds).

28

True or False

In a PIPE (Private Investment in Public Equity) transaction, a publicly held company raises funds quickly by selling unregistered private placement common stock to institutional investors at a discount to the market price.

True

29

True or False

In a PIPE (Private Investment in Public Equity) transaction, a publicly held company raises funds quickly by selling unregistered private placement common stock to institutional investors at a premium to the market price.

False

In a PIPE (Private Investment in Public Equity) transaction, a publicly held company raises funds quickly by selling unregistered private placement common stock to institutional investors at a discount to the market price.

30

What does Rule 144 allow?

Rule 144 allows small amounts of restricted stock to be sold periodically without formal registration.

31

True or False

Rule 144 allows the holder of "restricted" (never registered) shares to sell them publicly if:

The seller files a Form 144 - Notice of Intention To Sell - with the SEC at or prior to the sale date.

True

32

True or False

Rule 144 allows the holder of "restricted" (never registered) shares to sell them publicly if:

The issuer has no registered shares outstanding,

False

The issuer has to have registered shares outstanding and be current with its SEC filings.

33

True or False

Rule 144 allows the holder of "restricted" (never registered) shares to sell them publicly if:

The seller has held the securities, fully paid, for 3 months.

False.

The seller has held the securities, fully paid, for 6 months

If the securities are used as collateral for a loan, or a put option is purchased on the securities, the holding period is "tolled" - that is, does not count for that period.

34

How frequently may a holder of restricted securities file a Form 144 to sell shares of the restricted stock?

The seller may file a Form 144 no more than 4 times per year (every 3 months).

35

The maximum sale under each Form 144 filing is the Greater of what?

The maximum sale under each Form 144 filing is the Greater of:

1 % of the outstanding shares of the company;

or

Weekly average of the 4 weeks trading volume preceding the filing of the Form 144

36

Rule 144 is extended to include __________ stock, defined as stock held by an officer, director, 10% shareholder or "affiliated person" (such as an officer's wife).

Control

37

True or False

To prevent severely depressing the market price of the stock, control stock is subject to the "dribble" rule, but there is no 6-month holding period required.

True

38

The filing requirements of Rule 144 are waived for transactions that are below a certain number of shares and market value.

True or False

A person may sell up to 5,000 shares, with a value of no more than $25,000, of that security every 90 days without filing.

False.

A person may sell up to 5,000 shares, with a value of no more than $50,000, of that security every 90 days without filing.

39

For what two reasons is a firm prohibited from acting as a dealer in "144" transactions?

(may only act as an agent)

Because the SEC does not want a firm to be known as the place for officers to unload their "144" shares; and it wants to make sure that the price at which the shares are sold reflects the prevailing market.

Exception: if a firm is a bona fide market maker in that security.

40

When is a firm considered a bona fide market maker?

A firm is a bona fide market maker if it has published bid and ask quotes in that stock on at least 12 of the preceding 30 calendar days with no more than 4 successive days elapsing without a quote.

41

If a customer has contacted a firm about buying 144 shares without any action at that point, the customer may be recontacted in the next __a__ business days without that action being considered a "solicitation" to buy.

If a brokerage firm has contacted another firm about buying 144 shares without any action at that point, the other firm may be recontacted within the next __b__ calendar days.

A. 10

B. 60

42

True or False

Gifts of restricted securities to a charity do not eliminate the holding period requirement.

If the 6 month holding rule has not been met, the charity must wait out the balance of the holding period.

True.



However, securities that have not met the 6 month holding period that are part of the estate of a person since deceased can be disposed of without dollar limit under Rule 144.

43

Rule 144A - This rule was enacted in 1992 to allow large institutional purchasers to trade what?

Rule 144A - This rule was enacted in 1992 to allow large institutional purchasers to trade private placement securities in the United States. Do not confuse this rule with Rule 144 - it is totally different!

The rule permits any "qualified institutional buyer" -known as a "QIB" that owns, and invests on a discretionary basis, at least $100,000,000 of securities as an investment (e.g. , insurance companies, investment companies, employee retirement plans, trusts) to purchase "unregistered" securities either directly from issuers or from broker-dealers. These are typically sold in minimum block sizes of $500,000.

44

The marketplace for the trading of 144A issues is called what?

"PORTAL"

A separate electronic market owned by NASDAQ and a number of FINRA-member firms.

45

Regulation S details what?

The requirements necessary for an issue offered overseas to non-U.S. resident to be exempt from registration.

Note that U.S. citizens living outside the United States can purchase these securities. All sales made under Regulation S are reported to the SEC on Form 8K.

46

All sales made under Regulation S are reported to the SEC on which form?

All sales made under Regulation S are reported to the SEC on Form 8K.

47

True or False

"Eurodollar" bonds are denominated in US dollars.

True.


Therefore, there is no currency exchange rate risk with Eurodollar bonds.

48

What are "WKSIs"?

Well Known Seasoned Issuers

In 2005, the SEC enhanced and streamlined the existing shelf registration rule for the largest, most active issuers (known as "WKSis - Well-Known Seasoned Issuers") with a new rule - Rule 405.

49

What is the intent of Regulation A?

The intent of Regulation A is to make it easier and less costly for smaller start-up companies to raise capital through a securities offering registered with the SEC.

It provides for 2 "tiers" of capital raising.

50

Under Regulation A, are audited financial statements required under Tier 1 offerings, Tier 2 offerings, or both?

Only Tier 2 offerings

51

Under Regulation A:

A. Tier 1 is good for offerings up to $________ raised within a 12 month period.


B. Tier 2 is good for offerings up to $________ raised within a 12 month period.

A. $20,000,000 (20 million)

B. $50,000,000 (50 million)


Note: No more than 30% of the proceeds may go to the selling shareholder in Tier 1 or Tier 2.

52

Under Regulation A, are audited financial statements required under Tier 1 offerings, Tier 2 offerings, or both?

Only Tier 2 offerings

53

Under Regulation A:

A. Tier 1 is good for offerings up to $________ raised within a 12 month period.


B. Tier 2 is good for offerings up to $________ raised within a 12 month period.

A. $20,000,000 (20 million)

B. $50,000,000 (50 million)


Note: No more than 30% of the proceeds may go to the selling shareholder in Tier 1 or Tier 2.

54

True or False

Under Regulation A, Tier 2 securities are subject to State "Blue Sky" registration and review, whereas Tier 1 securities are "federal covered," meaning that the States cannot subject them to State registration and review requirements.

False.

Tier 1 securities are subject to State "Blue Sky" registration and review, whereas Tier 2 securities are "federal covered," meaning that the States cannot subject them to State registration and review requirements

55

In 2005, the SEC enhanced and streamlined the existing shelf registration rule (Rule 415) for the largest, most active issuers, known as "WKSis - Well-Known Seasoned Issuers" with a new rule.

Rule ____.

Rule 405


We call these the SECs "E-Z Registration Rules" since the intent is to ease the regulatory burden on issuers.

56

Under Regulation A, for both tiers, a simplified registration statement (Form S 1-A) is filed with the SEC and a 20-day cooling off period must be completed.

True or False:
At the end of 20 days, if the SEC has no "problems," the issue is "effective" and the issue may be sold.

False

At the end of 20 days, if the SEC has no "problems," the issue is "qualified" (a legally simpler version of a registration becoming "effective") and the issue may be sold.

57

For a Regulation A offering, there is no prospectus. The disclosure document is called an offering circular. During the 20-day cooling off period, must the preliminary offering circular must be delivered to any customer at least _______ prior to the sale.

48 hours.


The preliminary offering circular and the final offering circular may be delivered electronically.

58

The "test the waters" provision is unique to which Regulation?

Regulation A

59

What is the "test the waters" provision?

Under Regulation A, issuers can distribute promotional materials to prospective purchasers prior to filing the registration statement with the SEC and all through the 20-day SEC review period.

Any solicitation materials being used must be filed with the SEC at the time that the Form Sl-A is filed. Any solicitation materials distributed once the Form S 1-A is filed must be accompanied or preceded by a copy of the Preliminary Offering Circular.

60

Under Regulation A. non-accredited investors cannot purchase an amount of a Tier 2 offering that is the greater of ___% of their annual income or net worth.

10%

Note that this purchase limitation does not apply to Tier 1 offerings.

61

True or False

Like a Regulation D private placement, there are restrictions on the resale of Regulation A securities.

False.

Unlike a Regulation D private placement, there is no restriction on the resale of Regulation A securities because they are registered with the SEC, can be sold to any investor and can be freely traded in the market.

62

True or False

Regulation A offerings cannot be used for "bad actors" such as bankrupt companies, asset backed securities, investment company issues, business development companies, foreign companies (other than Canadian companies) or blank check companies.

True

63

How long are Rule 415 shelf registrations effective?

3 years

64

True or False

For Rule 415 shelf registrations, there is no cooling off period and once registration is effective, the securities may be sold at any time during the 3-year period.

True

65

To sell shelf registered securities, how much advance notice must be given to the SEC?

the issuer gives 2 days' advance notice to the SEC.

66

To qualify for a "shelf'' registration, the issuer must have been public for at least 1 year; must be current in its SEC filings; and must have a "public float" of at least ____ million.

$75,000,000

75 million.

67

What are 3 benefits of shelf registration?

1. It is cheaper than filing an S1
2. It is faster than filing an S1
3. There is no cooling-off period

"The benefit of shelf registration is that it is cheaper and faster than filing an S-1 and there is no "20 day cooling off period" - so that issuers can "time" the market when making add-on offerings to sell the issue at the optimal moment to achieve the lowest financing cost."

68

True or False

A new company may file shelf registration under Rule 415, if they have a public float of at least $75 million.

False.

New companies and IPOs may not do shelf registration because the company has to exist for at least 1 year.

69

What does SEC Rule 127 allow with regard regard to prospectuses?

It states that the prospectus or prospectus supplement, in use for more than 9 months, can omit any dated information such as financial statements previously required - as long as current information is substituted. No matter what, any prospectus information cannot be older than 16 months.

70

What is the minimum market cap for a "Well-known Seasoned Issuer"?

700 million

or has at least $1 billion in non-convertible senior securities registered with the SEC in the past 3 years.

71

A "Well-known Seasoned Issuer" must have a minimum market cap of 700 million or has at least how much in non-convertible senior securities registered with the SEC in the last 3 years?

1 billion

72

True or False

Under Rule 405, "free writing prospectuses" which are written offers of securities - are prohibited.

False.

Under Rule 405, "free writing prospectuses" which are written offers of securities - are permitted.

Free writing prospectuses include offers to sell securities in the form of:
a. Email
b. Fax
c. Term sheets
d. Websites w/ offering information
e. Recorded electronic road shows

73

Free writing prospectuses (FWPs) must be filed with the SEC by when?

On or before the date of first use.

74

Under the Act of 1933, what is the difference between Rule 134 and Rule 135?

Rule 135 relates to issuer's announcements

Rule 134 relates to underwriter's announcements

75

Under which rule does the Act of 1933 prohibit the recommendation of the purchase of the issue or the recommendation of the purchase of a security convertible into the issue being underwritten by any member of the underwriting group during the cooling off period?

Rule 137


Rule 137 allows firms that are not members of the underwriting group to disseminate research reports or opinions during the underwriting period.

76

True or False

Rule 137 of the Act of 1933 permits any firm in the syndicate or selling group to compensate another firm to disseminate research reports or opinions during the underwriting period.

False.

The rule PROHIBITS this action. (P.18 - Chap 3). Bribery is prohibited.


Please note that it is allowed for a firm that is part of the underwriting group to compensate another firm for regular business activities.

77

True or False

Rule 138 of the Act of 1933 allows firms in the underwriting group to recommend the purchase of a non-convertible securities of the issuer in a common stock offering.

True


Similarly, if the firm is underwriting the non-convertible securities of an issuer, it can recommend the common stock - since there is no equivalency between the 2 securities.

78

True or False

Under Rule 139 of the Act of 1933, members of the syndicate can recommend the purchase of an issue during the cooling off period if all of the following conditions are met:

recommendation has been distributed with reasonable regularity in the normal course of business;

publication includes similar information, opinions or recommendations with respect to a substantial number of companies in the registrant's industry, or sub-industry, or contains a comprehensive list of securities currently recommended by such broker or dealer;

recommendation is given no more space or prominence than other recommendations;

recommendation is no more favorable than previous opinions.

True

79

Which SEC rule states that certain corporate reorganizations will require the filing of a registration statement, while some others are exempt from registration.

Rule 145

80

What do the following three reorg scenarios have in common in relation to SEC Rule 145?

A reorganization involving the substitution of one security for another security.

A merger or consolidation in which securities of existing holders will be exchanged for securities in the· new entity.

A transfer of assets from one person to another in consideration for the issuance of new securities.

These reorg scenarios require the filing of a registration statement.

81

The SEC requires on Form S-4 that the prospectus must be sent to security holders at least ____ business days prior to the special meeting when the vote will be taken.

20

82

What do the following reorg scenarios have in common in relation to Rule 145?

A stock split or reverse split;

A par value change;

A stock dividend.

These reorg situations do not require the filing of a registration statement.

83

Under the Act of1933, if there is willful omissions or misstatements, criminal penalties apply.

What are the criminal penalties for fraud?

If there is willful omission or misstatement, criminal penalties apply under the Act.

Criminal penalties consist of a $10,000 fine and up to 5 years in prison for each offense.

84

True or False

Before a new issue can legally be sold in a state, it must be registered in that state (or must be exempt from registration), under each state's "Blue Sky" laws.

True

85

True or False

Sending a preliminary prospectus or accepting an indication of interest does not constitute an "offer" under the Act of 1933.

True

Accepting an order, confirming a certain amount of the issue, or accepting a check from a customer are all considered to be "sales" and are prohibited until registration is effective.

86

True or False

Form 144 does not have to be filed to sell restricted or control stock if 5,000 shares or less, worth $50,000 or less, are sold every 6 months.

False.

Form 144 does not have to be filed to sell restricted or control stock if 5,000 shares or less, worth $50,000 or less, are sold every 3 months.

87

Under Rule 144, how long must a holder of restricted securities hold the fully paid for shares prior to selling?

The seller has to hold the securities, fully paid, for 6 months

If the securities are used as collateral for a loan, or a put option is purchased on the securities, the holding period is "tolled" - that is, does not count for that period.

88

Which, if any of the following activities are allowed prior to the filing of the registration statement?

I Sending a customer a "red herring" preliminary prospectus
II Accepting an indication of interest from the customer
III Accepting a deposit from the customer
IV Accepting a firm order from the customer

None!

Prior to the filing of the registration statement, nothing can be done. Once the registration statement is filed, a preliminary prospectus may be used to obtain indications of interest. Once the registration is effective, the final prospectus can be used to offer and sell the issue.

89

True or False

Restricted shares are normally acquired through ESOPs.

False.

Restricted shares are normally acquired through private placements.

90

The prospectus delivery rule requires that any dealer (not only the firms in the underwriting group) that sells the security during the specified delivery period following the effective date must provide a copy of the prospectus to the purchaser.

For primary distributions of companies that never had registered shares outstanding, the delivery period is ___ days following the effective date.

90 days

91

The prospectus delivery rule requires that any dealer (not only the firms in the underwriting group) that sells the security during the specified delivery period following the effective date must provide a copy of the prospectus to the purchaser.

For established companies that are not listed on a stock exchange or traded on NASDAQ, the delivery period is ___ days.

40 days

92

The prospectus delivery rule requires that any dealer (not only the firms in the underwriting group) that sells the security during the specified delivery period following the effective date must provide a copy of the prospectus to the purchaser.

For companies that have obtained either a listing on a stock exchange or on NASDAQ, the delivery period is __ days.

25 days

93

True or False

The Securities Act of 1933 requires that all non-exempt new issues must be registered, if the mails or other means of interstate commerce are used to offer the security.

True

94

Access equal delivery permits delivery of an electronic prospectus (as opposed to paper) if the underwriter knows that the customer has internet access. However, this is not permitted for ___________ offerings.

____________ purchasers get a paper "Profile prospectus." If they want the full, detailed prospectus, this can be delivered either on paper or electronically.

Mutual Fund

95

True or False

FINRA Rule 5130, which is designed to ensure that new issue securities that are "in demand" are not withheld from sale to the public by member firms, does not apply to secondary offerings, preferred stock, or bonds.

True

96

Which rule prohibits member firms or their associated persons from selling a new common issue to any account owned by a "restricted person" or to any account in which a "restricted person" has a beneficial interest

FINRA Rule 5130

97

The "restricted persons" who are prohibited from buying IPOs of common stock are broadly defined into what 4 groups?

1. Member firms for their own accounts, officers of member firms, associated persons, or any other employee of a member firm are restricted. Also prohibited are "agents" of broker-dealers; and immediate family members of the officers and employees ofbroker-dealers.

2. Fiduciaries to member firms are restricted, such as lawyers, accountants and financial consultants who provide services to member firms.

3. Portfolio managers who have authority to buy or sell securities for institutional investors are restricted from purchasing the issue for their personal accounts

Also restricted are the immediate family members of these individuals. Note, however, that officers of investment clubs are NOT restricted.

4. Passive owners of broker-dealers that are not included in Category 1 are restricted as well

4.

98

FINRA prohibits underwriters from placing the securities being underwritten in the accounts of "related persons" - defined as any account where the underwriter has more than __% interest or control.

25%

A bona fide public offering must be made. Once the offering is complete, these persons may buy the issue in the aftermarket.

99

NASDAQ has instituted a process to establish an opening price for each IPO that provides for fair execution at a single opening price.

It is called the NASDAQ IPO Cross

100

Which rule prohibits member firms from executing trades in a security that is subject to an IPO (Initial Public Offering) until the security first opens for trading on the national exchange that is listing the stock?

FINRA Rule 5110


The rule applies to NASDAQ-listed securities (since NASDAQ is now a registered stock exchange) as well as traditional exchanges such as the NYSE and AMEX.

101

True or False

Any manipulation of the price of a stock is prohibited.

False.

The only allowed form of manipulation is stabilization, which is covered in detail under Regulation M.

102

True or False

A sale is considered to be long if the customer owns:

the stock and will deliver on settlement;

owns a convertible security, has given orders to convert, and will deliver on settlement; or

owns rights, warrants, or call options and has exercised and will deliver on settlement.

True

103

FINRA Rule 10b-2 prohibits underwriters, issuers, and participants in a new issue from doing what?

Placing buy orders for the issue in the secondary mkt

Buying the issue in the secondary mkt

Or taking options positions on the issue.


It also prohibits them from from paying another person to effect this transactions.

104

True or False

FINRA Rule 10b-9 prohibits misrepresentation in "all-or-none" offerings.

True.

A customer cannot be told that an offering is "all or none" and that money paid by the customer in the underwriting will be promptly refunded unless:

all of the securities are sold at the Public Offering Price within a specified time limit; and

the total amount due the issuer is received within a specified time limit.

105

True or False

FINRA Rule 10b-9 establishes that once the tender offer is publicly announced, and until its expiration, the shares cannot be purchased on an exchange or privately by "prohibited persons." They can only be purchased through the offer.

False.

This is rule 10b-13.

106

Rule 10b-18 - Sets ground rules for issuers or affiliated persons who wish to buy their shares in the open market.

What are the trading rules established through this rule?

5 answers

Purchases:

1. must be effected through I broker/dealer on any given day;

2. cannot be the opening transaction;

3. cannot be executed within 10 minutes of market close if the security is "actively traded" as designated by Rule 101 of Regulation M (covered next); otherwise, the purchase cannot be executed within 30 minutes of market close;

4. must be effected at prices no higher than the current highest independent bid for that security or last reported sale price (whichever is higher);

5. cannot exceed 25% of the trading volume in the security that day (except for block purchases handled outside the normal flow of orders).


In essence, the rule says that if an issuer buys in its stock during market "quiet" hours; does not bid up the price of the stock; and does not buy too aggressively; then it will not be considered to be manipulating the price.

107

In additional issue offerings, market makers who are also syndicate members, could manipulate the price of underwritten security upwards prior to the effective date.

The SEC deals with this potential market manipulation through which regulation?

Regulation M

108

True or False

All securities offerings are subject to Regulation M.

False.

Only securities that can be readily manipulated are subject to Regulation M - that is, securities that are not actively traded or have a small number of shares outstanding. Actively traded securities are not subject to the regulation.

109

What is an "actively traded stock" under Regulation M?

If it has an average daily trading volume of $1,000,000 or more AND has a public float of at least $150,000,000.

110

Rule 101 under Regulation M indicates 3 tiers for secondary offerings.

Tier 1 - actively traded stock.

Tier 2 - moderately traded

Tier 3 - inactively traded

What are the minimum daily trading volume and public float amounts for each tier?

Tier 1 - volume of $1,000,000 and public float of $150,000,000.

Tier 2 - volume of $100,000 and public float of at least $25,000,000.

Tier 3 - anything less than tier 2.

111

Rule 101 under Regulation M indicates 3 tiers for secondary offerings. Syndicate members who are not market makers are subject to different trading restrictions in each tier.

How long is the "restricted period" for each tier?

Tier 1 - no restriction

Tier 2 - the business day prior to effective date

Tier 3 - 5 business days prior to the effective date

112

Under Rule 103 (Reg M) - syndicate members who are also market makers may either seek an excused withdrawal from making a market in that security -that is, get permission of FINRA/NASDAQ to stop making a market during this period; or...?

may elect to operate as a "passive" market maker - that is, they may bid for that security at no higher than the highest current independent bid. Thus, they cannot push the price up in the market.

113

Passive market makers are limited as to the amount of "net purchases" of that security (orders from all sources) that can be made on any day during the restricted period.

The limit is ___% of that market maker's average daily trading volume over the preceding month. Once this limit is reached for the day, it must obtain an excused withdrawal from FINRA/NASDAQ from making a market.

30%

114

Where does a "notice of stabilization" occur?

On the inside front cover of the prospectus.

115

A stabilizing bid can only be placed at or _________ the Public Offering Price.

Below

116

If a current independent market exists for the security at the time that the stabilizing bid is placed, the rules for stabilizing bids change.

The bid cannot be entered any higher than the _____________, as long as the current ask price is equal to, or higher than, the ______________.

Last reported trade

117

True or False

A stabilizing bid may be placed on or before the effective date of the offering.

False.

The stabilizing bid can only be entered on the effective date of the offering, not before (for an IPO).

118

Stabilization is not allowed for which type of offerings?

"At the market" offerings - meaning shelf offerings under rule 415.

119

Although there is no time limit or numerical limit is placed on stabilization activities, stabilization must stop when the manager disbands what?

Stabilization must stop when the manager disbands the syndicate


(FINRA has a rule requiring that syndicates be disbanded no later than 90 days from the effective date).

120

Rule 105 prohibits broker-dealers from purchasing shares of stock either from the underwriters at the offering price, or in the market, to cover short positions established within ___ business days of the effective date.

5

121

3 types of transactions are exempted from the provisions of Regulation M because they are unlikely to impact the market price. What are those 3 transaction types?

1. Odd-lot trades

2. Unsolicited customer orders to buy that are not effected through another broker-dealer

3. Exercises of options, rights, warrants, or conversion privileges (since these don't go through the market)

122

Rule 15c2-4 - Prohibits an underwriter from collecting funds in an "all or none" underwriting without the use of what?

An escrow agent.


*this rule does not apply to firm commitment underwritings since the issuer is paid and the title to the securities is transferred upon signing the underwriting agreement (signed by the issuer and underwriters)*

123

True or False

Rule 15c2-8 - Requires that any person who gives a dealer a written, or verbal request for a prospectus (or preliminary prospectus) must be sent the document within a reasonable time period.

False.

This is only required for written requests, not verbal.

Furthermore, sufficient copies of the prospectus (or prelimillary prospectus) must be made available to all persons participating in the distribution.

124

Rule 13d-l - Requires that persons who acquire a _a_% ownership interest in the outstanding equity shares of a company report to the SEC under a 13D filing within _b_ days of the acquisition.

a. 5%

b. 10 days

The intent of the rule is to make takeover attempts public information.

125

Copies of filings under Rule 13d-1 must be sent to who?

3 answers

Copies of filings under Rule 13d-1 must be sent to the Securities and Exchange Commission, the issuer, and the self-regulatory organization.

126

True or False

FINRA Rule 5130, which prohibits industry "insiders" from buying new issues from underwriters, only applies to IPOs of common stock.

It does not apply to new prefened stock or debt issues; secondary offerings; or to private placements.

True

127

True or False

An issuer is prohibited from reserving shares of its new equity issue for key employees, officers, and suppliers.

False

There is nothing prohibiting the issuer from reserving shares of a new equity issue for its key employees; its officers; or its suppliers; since they do not fall into the prohibited categories of FINRA Rule 5130.

However, officers and employees of the underwriter cannot be directed shares of a new issue by the issuer since they are prohibited. Note, however, that if an officer or employee of the underwriter also happens to be either an officer or employee of the issuer - that in this case only, the issuer can direct shares of the IPO to these individuals.

128

The term "offering at the market" is defined as an offering:

a. made at the Public Offering Price as stated in the prospectus

b. made at a price other than a fixed price

c. where the price can change only once per day

d. where the price can change only twice per day

B.

An "at the market" offering is one made at a price determined by existing market conditions - there is no preset Public Offering Price. This is only done when there is an independent trading market that exists in that security, meaning it is an add-on offering.

129

Which of the following statements are TRUE regarding stabilization?

I Only 1 stabilizing bid is permitted

II A stabilizing bid can only be placed if there is an independent bid for that security

III Any stabilizing bid cannot be higher than the highest current independent bid for the security

I, II, and III

130

Regulation M - Rule 105 prohibits broker-dealers from buying shares from who to cover short positions in that stock established 5 business prior to the effective date?

Underwriters

131

A copy of the Form 13D must be filed with what 3 entities within 10 business days of crossing the 5% equity holding threshold?

The SEC

The exchange where the security trades

The company's board of directors


*no requirement to notify or file with the shareholders*

132

True or False

Floor brokers can act in principal capacity only.

False.

Floor brokers act as agent only, attempting to get the best fill for their customers.

133

True or False

A floor broker cannot:

initiate a trade as a principal (this is proprietary trading);

initiate a trade for an account in which he or she has an interest;

initiate discretionary transactions.

True.


These prohibitions do not apply to Specialists/DMMs on the exchange floor: to odd lot transactions; to stabilizing transactions; and to bona-fide arbitrage transactions.

134

True or False

A market-not held order would be routed to a DMM by SuperDisplayBook and not to the floor broker under NYSE rules.

False

A market-not held order would be routed to a floor broker by SuperDisplayBook and not to the DMM under NYSE rules.

135

True or False

A market-not held order would be routed to a floor broker by SuperDisplayBook and not to the DMM under NYSE rules.

True

136

A limit order to sell would be routed directly via SuperDisplayBook to who?

A limit order to sell would be routed directly via SuperDisplayBook to the Specialist/DMM in that stock and would be placed on the Specialist's/DMM's book of open orders.

137

The SuperDisplayBook system accepts limit orders for execution if the market rises or falls. These are maintained on an electronic "book" run by who?

The designated market maker (DMM) for the stock.

138

Who performs "courtesy" functions including "stopping stock" and handling odd lot orders, the DMM or the floor broker?

The DMM

139

True or False

Stopping stock can only be done for orders from public customers - stock cannot be stopped for member firms' own trading accounts.

True

140

True or False

Stopping stock can only be done for orders for a member firm's own trading accounts - it cannot be done for orders from public customers.

False.

Stopping stock can only be done for orders from public customers - stock cannot be stopped for member firms' own trading accounts

141

True or False

Not-held orders can be handled by the designated market maker?

False.

The DMM is not allowed to exercise discretion over price and time of execution of any orders. Thus, the DMM cannot accept "not held'' orders -these are executed by floor brokers.

142

True or False

CQS gives bid and ask quotes in exchange-listed securities for all NYSE listed issues (and American Stock Exchange-listed issues, now renamed the NYSE-MKT), from a select few market makers.

False

CQS gives bid and ask quotes in exchange-listed securities for all NYSE listed issues (and American Stock Exchange-listed issues, now renamed the NYSE-MKT), from all market makers.

143

True or False

CQS gives bid and ask quotes in exchange-listed securities for all NYSE listed issues (and American Stock Exchange-listed issues, now renamed the NYSE-MKT), from all market makers

True

144

To give firms access to quotes of all market makers in NYSE the _____________ was established.

To give firms access to quotes of all market makers in NYSE issues, the Consolidated Quotations Service (CQS) was established.

145

Each FINRA CQS market maker must designate a closing time for each security between _____pm and _____pm.

4:00pm and 6:30pm

146

True or False

The CQS includes quotes for common stock and preferred stock only.

False.

CQS includes quotes for common stocks, preferred stocks, rights and warrants.

147

The CQS shows quotes for which securities exchanges?

3 answers

The NYSE and AMEX (now named NYSE-MKT)

Certain securities listed solely on regional exchanges

And

Certain over-the-counter securities given trading privileges on exchange floors.

*Does not include stocks on NASDAQ*

148

What two types of securities are not included on the CQS?

CQS does not include quotes for options on NYSE or AMEX (NYSE-MKT)-listed securities

nor does it show quotes for debt issues of NYSE and AMEX (NYSE-MKT)-listed issuers.

149

As trades are performed on the floor of the exchange, it is required that the executing member report to the Consolidated (Network A) Tape within ___ seconds of the trade.

10

150

Why is the trade tape called "consolidated"?

The tape is called "consolidated" because trades in NYSE-listed issues that take place in any market are reported to the tape via computer linkups

151

For Third and Fourth Market trades, FINRA has created the ___________ that obligates executing members that trade NYSE-listed securities in the Third and Fomth Markets to report trades within 10 seconds of execution.

The NYSE TRF

NYSE Trade Reporting Facility

152

True or False

If a member firm holds an order to buy a security from one customer and an order to sell a security from another customer at the same price, the order can simply be "crossed" within the firm.

False

The order CAN NOT be crossed within the firm.

The security must first be offered in the trading market at $.01 (the minimum price change for NYSE listed stocks) more than the bid held by the firm. If the offer is not taken, then the cross may be performed.

153

Rule 77 prohibits who from offering to do the following:

Bet on the course of the market;

Buy or sell dividends;

Buy or sell privileges to receive or deliver securities;

Buy or sell securities "at the close";

Buy or sell securities at a "stop" price away from the cun-ent market.

Any person on the NYSE trading floor.

154

True or False

Rule 78 allows for prearranged trades - meaning that traders may sell a stock with an arrangement in place to buy it back at a started price.

False.

Rule 78 prohibits this practice.

155

Rule 410 - requires that records of orders transmitted to the floor be kept for _a_ years, with the preceding _b_ years' records kept readily accessible.

a. 3
b. 2

The order record must include the terms of the order, the time the order was transmitted, and the time the order was executed. If the order is canceled, the time of cancellation must be placed in the record.

156

Member firms are required to report trades no later than when?

The settlement date.

157

Rule 435 prohibits member firms from 6 practices... What are they?

Effecting trades of excessive frequency or of excessive size in an account;

Effecting trades at successively higher or successively lower prices to create a misleading appearance of activity in the stock;

Participating in any manipulative operation;

Circulating rumors of a sensational nature which might be expected to influence market prices;

Changing the price on a transaction before settlement date;

Loaning money with stocks, bonds, or securities as collateral (unless the provisions of Regulation T of the Federal Reserve Board are followed)

158

True or False

The short sale circuit breaker rule does not apply to:

Short sales effected above the national best bid;

Technical short sales where the seller actually owns the security but delivery is delayed;

Odd lot transactions;

Arbitrage transactions;

Riskless principal transactions;

Volume Weighted Average Price (VWAP) transactions.

True

159

Rule 203 states that a broker-dealer cannot execute a short sale for its own account or for the account of another person unless what?

Two conditions

the security has been borrowed or an arrangement has been entered into to borrow the security; or

there are reasonable grounds to believe that the security could be borrowed and delivered on settlement.

160

How frequently does the "easy-to-borrow" list need to be updated?

Daily

161

True or False

The SEC states that, the reasonable grounds test can be met by getting the client's assurance that the client will be able to deliver the securities on settlement (and this must be documented).

True

162

True or False

The NASDAQ threshold list covers only NASDAQ securities.

False

the NASDAQ threshold list covers not only NASDAQ securities, but OTCBB and Pink Sheet issues as well.

163

If a customer sells short a security on the threshold list and fails to deliver on settlement, the rule requires that the position be bought in if the security remains on the threshold list for ___ consecutive settlement days.

13

It counts settlement days, so the rule requires short positions to be bought in within 10 business days fel settlement.

(T+3 = settlement + 10 more business days)

164

The 13 business day close out requirement is extended to ___ settlement days for Rule 144 restricted threshold securities, because of the additional processing steps needed by the transfer agent to "wash" the resale restriction off the shares.

35

165

True or False

The provisions of Reg SHO apply if a trade is agreed to in the United States even if the trade is effected on a non-US market.

True

166

True or False

Rule 204 of Reg SHO states that naked short selling and misrepresenting ownership of shares is considered fraud.

True

167

True or False

Rule 204 applies to fails to deliver that occur only if the sale was short.

False.

Rule 204 applies to fails to deliver that occur whether the sale was long or short - so now Reg. SHO doesn't only apply to short sales anymore. It requires that any fail to deliver in an equity security be bought in:

No later than the day after settlement (T +4 as stated in the rule) if the fail is a short sale; and

No later than 3 business days after settlement (T +6 as stated in the rule) if the fail is a long sale.

168

How much must the S&P 500 fall (percentage-wise) to trigger a:

a. Level 1 drop

b. Level 2 drop

c. Level 3 drop

a. 7%

b. 13%

c. 20%

169

If a level 1 or level 2 drop occurs in the S&P 500 before 3:25pm, what happens?

Causes the market to close for 15 minutes.

170

If a level 1 or level 2 drop occurs in the S&P 500 after 3:25pm, what happens?

Nothing.

171

If a level 3 drop occurs in the S&P 500 , what happens?

The market is closed for the remainder of the day.

172

If a level 3 drop occurs in the SP500 and the market closes for the day, what happens to open "market-on-close" orders?

They are cancelled.

173

How late in the day will the NYSE accept market-on-close orders?

Until 3:45pm.

174

How late in the day will the NASDAQ accept market-on-close orders?

3:50pm

175

The "limit up - limit down" rule tracks each NMS stock's price movement in ___ minute windows.

5

176

How frequently must the Chief Executive Officer (CEO) of a firm required to certify that its controls and procedures comply with rule 15c3-5 and that the firm has conducted a regular review.

Annually.

The Chief Executive Officer (CEO) of the firm is required to certify, on an annual basis, that its controls and procedures comply with the rule and that the firm has conducted a regular review. Copies of the firm's written procedures, documentation of each review, and the annual certification, must be retained for 3 years.

177

Which 4 types of securities are listed on the NASDAQ?

Equities

Rights

Warrants

Convertible bonds

178

Who is the regulator of the OTC market?

FINRA

179

Trades of corporate debt are not listed on NASDAQ, they are traded through newer private trading networks or over the phone. Reports on these trades are made electronically through what system?

"TRACE"

Trade Reporting and Compliance Engine

180

NASDAQ has the power to suspend or terminate registration of any security included in NASDAQ under 3 conditions, what are they?

If the issuer:

Files for bankruptcy;

Receives a disclaimer of opinion on its financial statements from its independent accountants;

Is deemed to have engaged in fraudulent or manipulative practices.

181

The rule on principal transactions is that the mark-up included in a net price and is not disclosed to the customer unless the security is traded on _________.

NASDAQ

182

True or False

On the NASDAQ, there are no principal transactions with customers - the only dealers are the Specialists/DMMs and they only deal with retail firms - not customers.

FALSE

On the NYSE, there are no principal transactions with customers - the only dealers are the Specialists/DMMs and they only deal with retail firms - not customers.

183

True or False

On the NYSE, there are no principal transactions with customers - the only dealers are the Specialists/DMMs and they only deal with retail firms - not customers.

True

184

FINRA requires that if an OTC principal translation is done in a NASDAQ stock, the mark-up must be disclosed on what?

The trade confirmation.

185

If a firm has never registered as a market maker before, who must the firm file with?

FINRA.

If approved, FINRA will notify NASDAQ who will then notify the market maker that it is approved for trading.

186

If a firm is already a NASDAQ market maker and wants to register in additional issues, when will the registration typically be effective.

On the same day of the request.

187

True or False

A market maker may only stay open during regular market hours.

False.

A market maker (MM) may elect to stay open for either the "Premarkef' or "Aflermarket" session, but is under no obligation to do so.

If the MM chooses to stay open during these sessions, the firm quote rule still applies.

188

What is a "locked market"?

A locked market is one where the "inside" bid and ask are the same.

A "crossed" market is one where the inside ask is lower than the inside bid.

189

What is a "crossed" market?

A "crossed" market is one where the inside ask is lower than the inside bid.

190

FINRA requires that market makers in NASDAQ stocks report their trades within 10 seconds of execution (only sellers report) during regular market hours (9:30 AM - 4:00 PM).

The trade reporting is done through another NASDAQ system called what?

ACT - Automated Confirmation of Transaction

191

What time does the ACT (automated confirmation of transaction) system open and close?

8:00am to 8:00pm

192

If a market maker voluntarily terminates registration, how long is it prohibited from re-registering in that security?

20 business days

193

True or False

Orders can be entered in the NASDAQ Book for either round lots, odd lots, or mixed lots.

True

194

As each automatic execution occurs against the displayed quote, the size of the quote is reduced by the fill amount - this is termed "___________"

"decrementation."

195

True or False

There are no "stop" orders accepted in the NASDAQ System, in contrast to the NYSE Super Display Book system, which takes these orders.

True

196

True or False

There are no "stop" orders accepted in the NYSE Super Display Book System, in contrast to the NASDAQ system, which takes these orders.

False

There are no "stop" orders accepted in the NASDAQ System, in contrast to the NYSE Super Display Book system, which takes these orders.

197

True or False

Market and limit orders placed on the NASDAQ system must be accepted by market makers.

False

NASDAQ orders can either be Market or Limit orders. Market makers must accept market orders. They can choose to accept limit orders, but are not obligated to do so.

198

On the NASDAQ, which order type is used if the client wants to fill the order after the close of the market based on the "average price" of the security as determined over a specified time period during that trading day. VWAP orders are used by large institutions to reduce timing risk.

VWAP orders, Volume Weighted Average Price

VWAP orders are used by large institutions to reduce timing risk.

199

If a member firm receives a VWAP order, it must disclose in writing what?

That it may engage in hedging or other positioning activity in order to complete the order, and that this could affect the market that is involved in the transaction.

The customer must sign the written letter that covers the potential hedging and positioning transactions related to the handling of the VWAP order.

200

What are ECNs (Electronic Communications Network)?

ECNs - Electronic Communications Networks - are FINRA member firms that are registered broker-dealers.

They accept agency orders from customers (mainly institutions) for execution. The ECN can match the order internally, or can place it in the NASDAQ System, as long as the order is filled at the best market price.

201

ACES stands for "Advanced Computerized Execution System," but the system has been updated by NASDAQ and is now called the _______.

ACES Pass Through System.

It allows NASDAQ order-entry firms to "pass-through" their limit orders to a market maker, who will enter them into the NASDAQ System and maintain them, if the orders are within the allowed deviation.

202

True or False

The ACES Pass-Through system makes it easier for large firms to use the NASDAQ system.

False.

ACES makes it much easier for smaller NASDAQ member firms to use the NASDAQ System.

The reasons why such an order entry firm would choose to do this are:

1. The order entry firm is freed from the hassle of maintaining its own limit orders; and

2. The cost of limit order maintenance is borne by the market maker. The cost of the service is borne by the market maker. The computer software is "soft dollared" by the receiving market maker and transaction costs are paid by the market maker.

203

For what two reasons would a small NASDAQ member firm want to use the ACES Pass-through" system?

1. The order entry firm is freed from the hassle of maintaining its own limit orders; and

2. The cost of limit order maintenance is borne by the market maker. The cost of the service is borne by the market maker. The computer software is "soft dollared" by the receiving market maker and transaction costs are paid by the market maker.

204

The Automated Confirmation of Transactions Service ("ACT") is a NASDAQ system that provides reporting and dissemination of last sale information on equity securities traded "over-the-counter." The market venues that must report trades to ACT are?

4 answers

1.NASDAQ (both Global Market and Capital Market);

2. OTCBB and Pink Sheets;

3. Third Market (OTC trades of listed equities);

4. Fourth Market (ECNs).

205

True or False

NASDAQ lists both equities and "equity equivalents," including convertible bonds - so these trades are reported via ACT.

True

206

True or False

NASDAQ lists both equities and "equity equivalents," including non-convertible bonds - so these trades are reported via ACT.

FALSE - convertible bonds would be reported via ACT, but not non-convertible bonds.

FINRA has another system for non-convertible and convertible bond trade reports called "TRACE" - Trade Reporting and Compliance Engine.

DPPs, Direct Participation Programs, which are limited partnership tax shelter vehicles, are traded OTC via the Pink Sheets and DPP trades must be reported to ACT as well.

207

True or False

DPPs, Direct Participation Programs, which are limited partnership tax shelter vehicles, are traded OTC via the Pink Sheets and OPP trades must be reported to TRACE (Trade Reporting and Compliance Engine).

False

DPPs, Direct Participation Programs, which are limited partnership tax shelter vehicles, are traded OTC via the Pink Sheets and DPP trades must be reported to ACT.

208

Unlinked ECNs that are not NASDAQ participants that effect trades through the ADF (Alternate Display Facility) report their trades through another system called what?

TRACS (Trade Reporting and Comparison Service)

209

1. What are the NASDAQ system hours?


2. What are the ACT system hours?

1. 4:00am to 8:00pm

2. 8:00am to 8;00pm

210

The ACT system compares trade information entered by ACT participants and submits "locked-in" trades to who for clearance and settlement?

National Securities Clearing Corporation (NSCC - a division of DTCC - Depository Trnst and Clearing Corp.)

211

When did NASDAQ officially become an exchange?

NASDAQ officially became a registered stock exchange in the last quarter of 2006

212

Which system does the following?

is open from 8:00 AM - 8:00 PM ET. Also note that this is different than NASDAQ System Hours of (4:00 AM - 8:00 PM ET);

compares trade information entered by ACT participants and submits "locked-in" trades to the National Securities Clearing Corporation (NSCC - a division of DTCC - Depository Trnst and Clearing Corp.) for clearance and settlement;

provides participants with the ability to enter pre-negotiated priced trades (for example, a trade used to establish the price of a security for purposes of making a gift);

sends transaction reports to the National Trade Reporting System;

provides participants with the ability to monitor and review their trades in the System; and

provides clearing firms with the ability to monitor and manage risk.

The ACT system

213

The _____ reports completed trades for NASDAQ stocks and for exchange listed stocks traded OTC (Third Market trades).

These are the securities for which the NASDAQ Stock Market has registered to trade as an exchange with the SEC.

TRF - Trade Reporting Facility

214

Trades of OTCBB and Pink Sheet issues, as well as foreign issues that are not listed and reported over another exchange, are reported to the ________ that is also run by ACT.

"ORF" - Over The Counter Reporting Facility

215

As a general rule, ACT participants must report trades within ___ seconds of execution.

10

216

What are the system hours for the TRACS system?

the TRACS system is only open from 8:00 AM - 6:30 PM, so the 10 second trade reporting rule applies to this time window.

Any trades that occur outside of these hours are to be reported within 15 minutes of the next system opening.

217

True or False

NASDAQ market makers are obligated to accept market and limit orders.

NASDAQ market makers are not obligated to accept limit orders from customers.

If they do so, they are pennitted to charge a special fee for the acceptance and execution of the orders - as long as this is disclosed to customers.

218

The "Manning Rule" is also known as what?

The "Limit Order Protection Rule," also called the "Manning Rule," prohibits broker-dealers from "trading ahead" of customer limit orders.

219

Under NASDAQ limit order rules, once an order is "fillable" it must be executed promptly - that is within __ minute(s) after the order has been activated.

1 minute

220

The "protection rule" does not apply to what two types of orders?

Odd lots

And

"Working orders" where the executing firm has discretion over time and price

221

True or False

The protection rule only applies during regular market hours.

False.

They apply at all times that a member may execute a customer order.

222

The protection rule applies to equity orders on what exchanges?

The protection rule applies to orders received for ALL equity issues - NYSE listed issues, NYSE-MKT (AMEX)-listed issues, issues listed on regional exchanges, NASDAQ-listed issues, OTCBB issues, and Pink Sheet issues.

223

SEC Rule 604 of Regulation NMS requires that a market maker that receives limit order priced at or better than its current quote to immediately (within ____ seconds of receipt) display the order 's price and/or size.

30 seconds.

Don't confuse this with the 10 second requirement to report executed trades.

224

True or False

A firm may act as an agent and a principal on a transaction.

False.

They may only act as agent or principal. Not both.

225

True or False

If the issuer is delinquent for 90 days or more in its regulatory filings, the market maker can no longer quote the issue in the OTCBB or Pink Sheets.

False.

If the issuer is delinquent for 30 days or more in its regulatory filings, the market maker can no longer quote the issue in the OTCBB or Pink Sheets.

226

What form must be filed if a firm wishes to make a market in a non-NASDAQ security?

Form 211

Must be filed at least 3 business days prior to the quotation being published or displayed.

227

Under what exception would a market maker who wishes to make a market in non-NASDAQ securities not have to file Form 211?

If an existing market maker in an OTCBB issue has met the "continuous quote rule" then there is a "proven market" and any new market maker to the issue would not have to file a Form 211.

This is the "piggybacking rule"

228

In the OTCBB market, market makers may enter quotes that are:

Firm - 2-sided or 1-sided

Unfirm

Bid Wanted

Or

Offer Wanted

True

229

When executing an order for a customer, the member must obtain the best available price in the market (the "inside" market). Among the factors to be considered in finding the best market are:

4 answers.

The character of the market for that security (price; volatility; liquidity).

The size and type of transaction.

The number of markets checked.

Location and accessibility of customer's broker-dealer to primary markets and quotations sources

230

True or False

Interpositioning is prohibited in all cases.

False.

Interpositioning is prohibited unless it can be demonstrated that the use of a middle firm allows for a better execution.

231

What are the two exceptions that would allow a market maker to back away from a trade?

If the market maker:

has entered a revised quote into NASDAQ that, due to system slowness, does not yet show, the market maker does not have to fill orders at the non-updated display price; or

is effecting a trade at the display price at the time that a new order is received and intended to update its quote before filling any subsequent orders.

232

A block order is generally considered to be how many shares?

10,000+

233

True or False

FINRA requires that commissions and mark-ups in OTC and exchange transactions be fair and reasonable, with mark-ups no greater than 5%.

False

FINRA requires that commissions and mark-ups in OTC and exchange transactions be fair and reasonable, with 5% being a guideline, not a rule.

234

True or False

Under the Conduct Rules, FINRA also requires members to maintain a record of each outstanding short position in all NASDAQ, OTCBB and Pink Sheet securities.

True

235

Short positions held by member firms must be reported to FINRA by which day of the month?

The 15th of each month

and

The last day of each month

236

The TRACE system gives real time trade information for what types of securities?

Investment grade corporate bonds

Non-investment grade corporate bonds

Convertible

And

Non-convertible bonds

237

What 3 types of securities do not need to be reported on TRACE?

• Treasury debt;
• Municipal debt; and
• Money market instruments.

238

True or False

The TRACE system reports both quotes and executed trades.

False.

TRACE does not show quotes - it only reports completed trades.

TRACE rules require both the buy side and the sell side to report the trade (unlike equity trades, where only the executing side reports).

239

When TRACE gets a trade report, how quickly does it disseminate the report?

When TRACE gets a trade report, it disseminates that report immediately.

240

True or False

In 2010 and 2011, FINRA. required all agency bond trades - both straight debt (2010) and mortgage-backed debt (2011) - be reported to TRACE.

The agency debt trades that must be reported are primarily the debt instruments of Fannie Mae, Freddie Mac, Federal Home Loan Banks and the Federal Farm Credit system.

True

241

True or False

Corporate new issues are reported to TRACE but are not disseminated over the TRACE tape.

True.

In 2010, FINRA required that corporate new issue offerings (Primary Market) be reported to TRACE, but these are not disseminated over the TRACE tape - the information is collected for regulatory purpos

242

TRACE - provides real-time trade reports for about __________ corporate bond issues, including investment grade and non-investment grade issues; and convertible and non-convertible issues.

17,000

243

Trades in all NASDAQ stocks (Global Market and Capital Market) must be reported by the executing member or the initiating member?

and how long does the member have to report the trade?

Trades in all NASDAQ stocks (both Global Market and Capital Market stocks) must be reported by the executing member within 10 seconds of execution to the tape.

244

Which of the following are found on the Non-NASDAQ OTC Bulletin Board?

i. Firm Quotes
ii. Unfirm Quotes
iii. Bids Wanted
iv. Offers wanted

All of them.

i, ii, iii, and iv

245

If a customer submits a VWAP order, can the firm engage in positioning and hedging activity?

Yes - ONLY if it is disclosed to the customer in writing.

246

Under FINRA rules, which of the following are prohibited trading practices:

i. Backing away
ii. Interpositioning
iii. Marking to market
iv. Using a correspondent

i and ii

247

Under what situation will FINRA/NASDAQ not allow a market maker to withdraw a quote?

If the market maker is going to withdraw the quote due to a pending news announcement from the issuer.

248

True or False

A broker-dealer may charge a mark-up and a commission on the same trade.

False

249

Under the 5% policy, which of the following are considered in determining reasonable markup?

i. size of transaction
ii. dollar amount of transaction
iii. nature of member's business
iv. financial condition of the customer

i, ii, and iii

250

True or False

The 5% policy applies to secondary market trades, exempt securities, and prospectus offerings.

False.

The 5% Policy applies to both secondary market trades effected OTC and to trades that take place on an exchange floor. It applies to both agency and principal trades effected OTC; and to third market trades since these are also effected OTC.

The policy does not apply to trades of exempt securities, nor
does it apply to prospectus offerings.

251

True or False

There is no requirement to disclose mark-ups for principal transactions effected in OTC stocks that are not included in NASDAQ.

True

252

Disclosure of mark-ups or commissions is required for:
i. riskless or simultaneous trades
ii. agency transactions
iii. principal transactions in NASDAQ stocks
iv. Principal transactions in non-NASDAQ stocks

i , ii , and iii

In principal transactions, mark-ups are required to be disclosed for NASDAQ stocks only.

There is no requirement to disclose mark-ups for principal transactions effected in OTC stocks that are not
included in NASDAQ.

253

When the executing broker-dealer reports the trade on the TRF, does he include commission in the price of the trade?

No.

254

The NASDAQ system displays and executes orders for:

i. Global Market issues
ii. Capital Market issues
iii. OTCBB issues
iv. Pink Sheet issues

i and ii only

The NASDAQ Market Center Execution System is the quotation and trading system for all NASDAQ issues - both Global Market and Capital Market. OTCBB and Pink Sheet issues cannot be traded in the System.

255

Under SEC rules, limit orders for NASDAQ issues must be displayed within how many seconds of receipt?

30 seconds.

256

The NASDAQ system fills marketable orders based on:

a. price/time priority
b. price/size priority
c. time/price priority
or
d. size/time priority

A. Price/Time


The NASDAQ System arranges the orders on the book based on best price and then within each price level, the time that the order was entered.

The size of the order is not a factor.

257

All of the following orders can be placed in the NASDAQ system EXCEPT:
a. market order
b. marketable limit order
c. limit order
d. not held order

D. Not held order.

It does not accept stop orders either.

258

What is the system called that is the quotation and trading
system for all NASDAQ issues - both Global Market and Capital Market?

NASDAQ Center Market Execution System

This system accepts market orders, limit orders, and marketable limit orders.

Does not accept stop orders or not held orders.

259

Quotes placed by market participants in unlinked ECNs can be accessed through which system?

ADF

An unlinked ECN is one that is not placing its quotes into the NASDAQ System.
The SEC mandated that FINRA provide an Alternate Display Facility ("ADF") to publicly display these quotes. Thus, to find the best market for a NASDAQ stock, both the NASDAQ System and the ADF must be checked.

260

Under FINRA rules, confirmations of customer trades must be sent to customers no later than when?

the "completion of the transaction" - which is defined as settlement date.

261

Confirmations for securities transactions must include:

11 answers... Lol

Customer name and address;

Firm name, address and telephone number;

Name of security purchased;

Size of trade;

Price of trade;

Trade date;

Settlement date;

Accrued interest if a bond trade;

If the trade is an agency trade, the commission must be disclosed;

CUSIP

and

Type of account

262

If the trade is a principal transaction, the mark-up is not disclosed except for principal transactions in what?

NASDAQ stocks - note that a mark-up is defined as the difference between the reported transaction price and the price to the customer;

263

On the trade confirmation, is it indicated whether a trade is solicited or unsolicited?

No.

Note that there is no requirement to disclose whether the trade was solicited or not on the confirm - this is only required on the order ticket copy.

264

Which two types of securities have a next day settlement?

U.S. Government bonds and listed options

265

What three types of securities settle regular-way T+3?

stock, corporate bond, and municipal bond

266

What is a "cash" settlement?

Same day settlement.

"Cash" settlement is same day settlement, before 2:30 PM EST. Prices that sellers receive for cash settlements are typically lower than for regular way settlements because of the difficulty of arranging the settlement on that day.

267

When sellers of a stock use cash (same day) settlement, do they receive a higher or lower price for their shares?

Prices that sellers receive for cash settlements are typically lower than for regular way settlements because of the difficulty of arranging the settlement on that day.

268

"When, As, and If Issued" (WAII) trades required me that a confirmation be sent out. What is missing from the trade confirmation versus a regular stock trade confirmation?

There is no settlement date on the trade confirmation for WAIIs because the securities aren't available yet.

269

For "When, As and If Issued"(WAII) issues, who determines the settlement date?

Uniform Practice Code Committee sets a settlement date (typically 3 business days after the certificates are issued).

270

Comparisons must be sent no later than when?

Comparisons must be sent no later than the day after trade date.

271

The trade comparison details the specifics of the trade: trade date, settlement date, size of trade, security traded, execution price, CUSIP number.

What information is not included?

There is no customer information or commission information, since this is a dealer to dealer "trade comparison."

272

For good delivery, registered securities must be endorsed by who?

The registered owner in exact name

The endorsement is called an "assignment"

273

True or False

The signature (assignment) on the stock certificate needs to match exactly with the name on record if it is a corporation. With individuals, the name doesn't have to be exact.

False.

Names of individuals must be exact.

Corporations names don't have to match exactly.

274

Regarding the delivery of bonds, what is the difference between registered to principal bonds versus bearer bonds?

Registered to principal bonds must have a proper assignment and a signature guarantee. These bonds have bearer coupons attached, and since only the face amount is registered, all unpaid coupons must be attached.

Bearer bonds must be delivered with all unpaid coupons attached (even if the bond is in default). No assignment or signature guarantee is required since the bonds are held by the "bearer."

275

"Baby" bonds of $100 denomination can be delivered if they aggregate at least the $_____ minimum face amount.

1,000

276

Municipal bonds must be delivered with a legal opinion unless identified at the time of the trade as "________" - meaning coming without the opinion.

Ex-legal

277

True or False

Good delivery rules apply to all domestic secmities and ADRs. The rules do not apply to deliveries of "Foreign Internal Securities," in which case the delivery rules of the foreign market apply.

True

278

Delivery of book-entry securities, where no physical certificates are issued, must be settled using what system?

The Direct Registration System

279

What entity does the DTC (depository trust corporation) clear and settle their trades through?

National Securities Clearing Corporation (NSCC)

280

What do income bonds, zero coupon bonds, and commercial paper all have in common?

They all trade flat - meaning they do not pay periodic interest payments.

281

True or False

If a bond trade settles on the interest payment date, no accrued interest is due since this is the exact cut-off date for the seller to receive his 6-month payment.

True

282

True or False

Government bonds never trade flat.

True.

Government bonds never trade flat.

If they default, a financial crisis of major proportions would occur. Treasury Bills trade flat since they don't make interest payments. The increase in the value of the bill is the "interest."

283

True or False

The ex-date for stock splits and stock dividends is handled differently because no cash payment is being made - only additional securities are issued.

In this case, the ex-date is set at two business days after the payment date.

False.

The ex-date is set at the business day after the payment date.

284

Which order types are adjusted after cash dividends?

Open stop sell orders and open limit buy orders


(Orders below the market)

285

Which order types are adjusted for stock splits and stock dividends?

All order types (above and below the market).



This is in contrast to order adjustments for cash dividends. When a cash dividend is paid, only the orders below the market (open sell stops and open buy limits are adjusted.

286

How are open orders adjusted for stocks going through a reverse split?

They are all cancelled - above and below the market.

287

What is the longest time-in-force (TIF) allowed by the NYSE?

One day

288

True or False

Member firms holding orders on their books are permitted to make their own rules on order adjustments for stock splits and dividend payouts.

True

289

When a mark to market is demanded, it must be met by when?

The close of the next business day.

290

If securities are not delivered on settlement, how soon may the seller "sell out" the position without giving prior notice?

The day after settlement.

291

What is the difference between reclamation and rejection?

A rejection occurs when securities arc delivered to a brokerage firm upon settlement and are refused for a valid reason.

A reclamation occurs when a brokerage firm accepts delivery of securities on settlement and later determines that the delivery was not "good."

292

True or False

If any securities are determined to not be of good delivery in a shipment of securities, the entire shipment is reclaimed.

False.

If a large shipment of securities is made to a firm and accepted, and it is later determined that some of the securities are not "good delivery," only those defective securities are reclaimed. The entire shipment is not reclaimed.

293

Reclamation for minor irregularities must be made within what time-frame?


What about major irregularities?

Reclamation for minor irregularities or where the certificate was not a good delivery must be made within 15 days from date of delivery.

Reclamation because of major irregularities, because the transfer agent refused the security, or because the security is lost/stolen must occur within 30 months of settlement date.

294

Should a member want to have an obviously erroneous trade cleared through ACT (Automated Confirmation of Trade system) nullified or adjusted based on an obvious error in number of shares or price, who must the member notify?

NASDAQ MarketWatch

295

Should a member want to have a trade cleared through ACT (Automated Confirmation of Trade system) nullified or adjusted based on an obvious error in number of shares or price, the member must notify NASDAQ MarketWatch and provide the relevant details within how long after execution?

30 minutes

296

The "obvious price error" table states the % away from the last reported trade that would be considered an obvious price error. What are the percentages for stocks priced:

a. $25 or less

b. $25 - $50

c. $50+

a. 10%

b. 5%

c. 3%

297

True or False

Only the contra-broker may appeal the NASDAQ's decision on how to handle an "obviously erroneous" trade.

False.

Either side can appeal NASDAQ's written determination within 30 minutes of receipt.

The appeal is made to the NASDAQ Market Operations Review Committee ("MORC"). Their decision is final and binding.

298

True or False

Customer confirmations must disclose the commission in an principal trade.

False

Customer confirmations must disclose the commission in an agency trade.

299

True or False

Customer confirmations must disclose the commission in an agency trade.

True

300

When is the mark-up required to be disclosed for principal transactions?

The mark-up is required to be disclosed for principal transactions in NASDAQ stocks only.

It is not disclosed and is included in a net price for principal transactions in non-NASDAQ (OTCBB or Pink Sheet) stocks

301

Which information would be included on a When, As and If Issued trade confimmtion for a bond trade?

a. settlement date
b . amount of accrued interest
c. total transaction cost
d. agent or principal transaction

d.

302

A mutilated security is a "good delivery" if it is accompanied by a letter of validation from the either of which two entities?

1. The issuer

or

2. The transfer agent

303

Cash settlement is same-day settlement, before __:____pm.

2:30pm

304

The ex-date for stock splits and stock dividends is unusual because it is set at the business day after the __________ date.

Payable

305

Marks to Market (select all that apply):

i. May be claimed by the secured party

ii. May be claimed by the unsecured party

iii. Are based on the difference between the contract price and the market price prior to settlement

iv. Must be paid promptly

ii , iii, and iv

306

True or False

An issuer will not be considered to be manipulating the price of its stock if:

1. it's trades are placed through 1 market maker

2. Trades are placed at least 30 min before market close (10min for very actively traded issues)

And

3. Trades cannot be for greater than 25% of trading volume for the day

True

307

The NASDAQ system fills orders based on:

A. Price/Time priority

B. Price/Size priority

C. Time/Price priority

D. Size/Time priority

A. Price/Time priority

308

The issuer of a private placement sold under Reg D must ascertain that each "non-accredited" investor is:

i - sophisticated, in that he understands the merits of the issue

ii - financially capable to bear the economic risk of the investment

iii - purchasing the issue for investment - not speculation

i and iii

309

Quotes placed by market participants in unlinked ECNs can be accessed through what system?

ADF - alternate display facility

310

To find the best market for a NASDAQ stock, which two systems must be checked?

NASDAQ system and ADF (alternate display facility)

311

How are restricted shares typically acquired?

Through private placements

312

Disclosure of mark-ups or commissions is required for:

i. Riskless or simultaneous trades

ii. Agency transactions

iii. Principal transactions in NASDAQ stocks

iv. Principal transactions in non-NASDAQ stock

i, ii, and iii

There is no requirement to disclose markups for principal transactions effected in OTC stocks not included on NASDAQ.

313

True or False

The maximum contribution to a KEOGH is 20% of income or $53,000, whichever is less.

True

314

True or False

To adopt a 12b-1 advertising plan, 3 levels of approval are required. To do so requires majority vote of the outstanding shares, majority vote of all directors, and majority vote of all uninterested parties.

True.

Majority vote of investment advisory board is not required.