FC Chapter 3

Question 1

True or False: If a BD holds a customer’s stock in street name, the BD may vote on behalf of the customer.

Answer 1

False. Without permission, BDs holding a customer’s stock in street name may not vote on behalf of the customer.

Question 2

True or False: If a BD buys its own stock in after-hours trading, it must use the same BD it used during normal hours.

Answer 2

False. One BD may be used during normal hours, and a different BD may be used in after-hours trading.

Question 3

According to Regulation M-A, what information (in plain English) must be provided in a summary term sheet?

Answer 3

Material features and a brief description of the transaction, as well as a summary of disclosures

Question 4

List the types of issuers who are ineligible to use a free writing prospectus.

Answer 4

Penny stock issuers, issuers involved in a bankruptcy within the last three years, and blank-check (shell) companies

Question 5

Schedule ____ must be filed with the SEC within ____ days if a person acquires more than __% of a company’s stock.

Answer 5

Schedule 13D must be filed with the SEC within 10 days if a person acquires more than 5% of a company’s stock.

Question 6

What does the Hart-Scott-Rodino Act require?

Answer 6

The filing of notification reports regarding large merger and acquistion (M&A) transactions

Question 7

True or False: Road shows may be delivered to a group of investors or one-on-one.

Answer 7

True

Question 8

Who is required to file Form 13F?

Answer 8

A mutual fund manager who exercises investment discretion over at least $100 million in equity securities

Question 9

Define prearranged trade.

Answer 9

An offer to sell a security with an agreement to buy it back at the same or an advanced price

Question 10

Define graphic communication.

Answer 10

Communication made using electronic media (e.g., audio / videotapes, e-mail, CDs, text messages, and webcasts)

Question 11

True or False: Written communications only encompass materials in written, physical form.

Answer 11

False. Written communication includes anything written, printed, or broadcast on TV or radio, and graphic communication.

Question 12

When must a reporting company file a Form 10-Q with the SEC?

Answer 12

At the end of the first three fiscal quarters of each year (fourth quarter included in annual report)

Question 13

What is the maximum civil penalty that the SEC may impose under the Insider Trading Act?

Answer 13

Treble damages (three times the profit made/loss avoided) and disgorgement of any profit

Question 14

True or False: Schedule 13D must be filed with the issuer, SEC, and the exchange on which the stock trades.

Answer 14

True

Question 15

True or False: A fairness opinion must disclose any extra payment a BD will receive based on completion of an M&A deal.

Answer 15

True

Question 16

What is the primary purpose of a fairness opinion?

Answer 16

To judge whether the transaction price is fair within a reasonable range of prices

Question 17

Define short-swing profit.

Answer 17

A profit earned on stock held less than six months

Question 18

A corporate officer informs his son of an upcoming earnings report and the son effects trades. Is this a violation?

Answer 18

Yes. Both parties, the tipper (officer) and the tippee (the son), have violated the Insider Trading Act.

Question 19

Three months ago, an insider acquired stock at $12. If she sells the shares today at $15, may she keep the profit?

Answer 19

No. Under the short-swing profit rule, an insider may not keep a profit earned on stock held less than six months.

Question 20

How many times is a quarterly Form 10-Q filed each year

Answer 20

Three times per year since the fourth quarter is included in the annual report.

Question 21

After filing notice of an impending M&A deal, it may not be completed until how many days have elapsed?

Answer 21

30 days

Question 22

True or False: Only individuals who acquire more than 5% of a company’s stock are required to file Schedule 13D.

Answer 22

False. Any person, or group acting in concert, must file Schedule 13D.

Question 23

Issuers/affiliates repurchasing their own shares may not buy the shares in the last ____ minutes of the trading day.

Answer 23

Issuers/affiliates repurchasing their own shares may not buy the shares in the last 30 minutes of the trading day.

Question 24

True or False: The Hart-Scott-Rodino Act deals with corporate governance of listed securities.

Answer 24

False. The Hart-Scott-Rodino Act is an anti-trust rule that applies to large M&A transactions.

Question 25

What is the size of companies test used for determining whether an M&A transaction is reportable under the HSR Act?

Answer 25

One company has assets or net sales of $136.4 million or more AND the other has assets or net sales of $13.6 million

Question 26

Define an insider.

Answer 26

Officers, directors, partners, greater than 10% owners, and immediate family members of all listed

Question 27

When an issuer or an affiliate is repurchasing its own shares, how many BDs may it use in one day?

Answer 27

Issuers or affiliates may use only one BD a day when repurchasing its own stock.

Question 28

True or False: Painting the Tape violates the anti-manipulation provisions of the Securities Exchange Act of 1934.

Answer 28

True

Question 29

What is the general purpose of Regulation M-A?

Answer 29

To relax the communication restrictions between BDs and investors prior to a company's filing of offering statements

Question 30

While waiting for her train, an RR overhears a rumor of an impending corporate takeover. What should she do?

Answer 30

Tips and unverified rumors must be reported to the firm's legal/compliance department.

Question 31

True or False: For insider trading violations, the SEC may file criminal charges against an individual.

Answer 31

False. The SEC may only file civil charges that may result in civil penalties.

Question 32

For what offerings may live, electronic road shows be retransmitted using graphic communication?

Answer 32

IPOs only

Question 33

According to Rule 10b-18, how many BDs may an issuer use to purchase its own common stock during normal market hours?

Answer 33

One

Question 34

When must insiders report their transactions?

Answer 34

Within 2 business days of the trade

Question 35

True or False: According to the Insider Trading Act, both the tipper and tippee may be held liable for a violation.

Answer 35

true

Question 36

True or False: Regulation M-A applies to cash or stock tender offers.

Answer 36

True

Question 37

True or False: A person who owns 11% of a company's common stock is defined as an insider.

Answer 37

True. Insider status is determined by having ownership greater than 10%.

Question 38

What time limit exists for issuers/affiliates of actively-traded securities that are repurchasing their own security?

Answer 38

They may not purchase their security within the last 10 minutes of the trading day

Question 39

What type of issuer may use a free writing prospectus after filing its registration statement with the SEC?

Answer 39

A seasoned issuer

Question 40

Describe the purpose of a road show.

Answer 40

To acquaint investors and BDs with information on a prospective public offering

Question 41

True or False: A market maker's quote represents the maximum number of shares it will buy or sell.

Answer 41

False. A market maker may buy or sell more shares than its bid and offer displays.

Question 42

"For insider trading violations, the SEC can sue for treble damages." What does that statement mean?

Answer 42

The SEC can sue for three times the damage (profit made or loss avoided).

Question 43

Is it acceptable for two market makers to trade a stock repeatedly to increase demand and the appearance of trading?

Answer 43

No. This is considered Painting the Tape.

Question 44

Under Sarbanes-Oxley, how often must a company file reports detailing internal controls over financial reporting?

Answer 44

Annually

Question 45

True or False: The amount of compensation received by the party writing the fairness opinion must be disclosed.

Answer 45

False. The fact that the writer will be compensated must be disclosed, but not the amount of compensation.

Question 46

Who certifies the accuracy of the information contained in a company's annual and quarterly financial reports (10K/10Q)?

Answer 46

The firm's Chief Executive Officer (CEO) and Chief Financial Officer (CFO). The term principal officer may also be used.

Question 47

If an investor acquires 6% of a reporting company's preferred stock, is Schedule 13D required to be filed?

Answer 47

Yes. Filing is required when a person acquires more than 5% of any class of equity security (including preferred stock).

Question 48

Transactions valued at greater than $______ million must file a notice under the Hart-Scott-Rodino Act.

Answer 48

Transactions valued at greater than $272.8 million must file a notice under the Hart-Scott-Rodino Act.

Question 49

Under Sarbanes-Oxley, what is the CEO/CFO of a company required to prohibit?

Answer 49

Personal loans to corporate officers from the issuer

Question 50

True or False: Using nonpublic information to avoid a loss would NOT be a violation of the Insider Trading Act.

Answer 50

False. Using inside information to make a profit or avoid a loss is prohibited.

Question 51

True or False: A fairness opinion must be filed with, and approved by, FINRA.

Answer 51

False

Question 52

True or False: To promote balanced views, the fairness committee must include members from outside the deal team.

Answer 52

True

Question 53

Live, electronic road shows retransmitted using graphic communication meet the definition of _____ communication.

Answer 53

Live, electronic road shows retransmitted using graphic communication meet the definition of oral communication.

Question 54

True or False: Under the Hart-Scott-Rodino Act, a merger may not be completed until 30 days after notification.

Answer 54

True

Question 55

What is the maximum criminal penalty for an individual convicted of insider trading?

Answer 55

$5 million fine, and/or up to 20 years in prison

Question 56

Under Sarbanes-Oxley, what must be included in senior management's annual report?

Answer 56

Its assessment of the effectiveness of internal controls and certification from the accounting firm auditing its records

Question 57

The criminal penalty for insider trading by an individual is a maximum of $_________ and/or ___ years in prison.

Answer 57

The criminal penalty for insider trading by an individual is a maximum of $5 million and/or 20 years in prison.

Question 58

The criminal penalty for insider trading by an individual is a maximum of $5 million and/or 20 years in prison.

Answer 58

To enhance corporate governance and strengthen corporate accountability

Question 59

True or False: A tender offer may be placed by the issuer or a third party and may be full or partial.

Answer 59

True

Question 60

True or False: Regulation M-A applies to going-public transactions.

Answer 60

False. Regulation M-A applies to going-private transactions.

Question 61

According to Sarbanes-Oxley, who is responsible for attesting to corporate financial reports?

Answer 61

The Chief Executive Officer (CEO) and Chief Financial Officer (CFO)

Question 62

For mergers and acquisitions exceeding $272.8 million, with whom must companies file notice?

Answer 62

The Federal Trade Commission (FTC) and the Antitrust Division of the Justice Department

Question 63

True or False: In a partial tender, a person may tender the subject company's convertible bond without converting it.

Answer 63

True. If the tender is accepted, he would then be required to convert.

Question 64

What information is found in a company's Form 10-K?

Answer 64

A list of officers/directors, its business line, risk factors, assets, and an overview of the past year's results

Question 65

Define Painting the Tape (matched sales).

Answer 65

Heavy trading volume between market participants to create a misleading appearance of activity

Question 66

Regarding a proposed M&A transaction, when are the companies planning the transaction required to file notice?

Answer 66

Before the deal is completed

Question 67

The manager or co-manager of an IPO must satisfy a quiet period of _____ calendar days prior to publishing research.

Answer 67

The manager or co-manager of an IPO must satisfy a quiet period of 10 calendar days prior to publishing research.

Question 68

Issuers of nonactively traded securities may not purchase their own shares during the last ____ minutes of trading.

Answer 68

Issuers of nonactively traded securities may not purchase their own shares during the last 30 minutes of trading.

Question 69

What does it mean to be short against the box?

Answer 69

A client sells the security that he owns, but does not intend to deliver his long securities to effect delivery.

Question 70

According to Rule 10b-18, at what price may an issuer purchase its own shares?

Answer 70

At a price not exceeding the higher of the independent bid or the last transaction price

Question 71

If the SEC intends to suspend all trading, who must receive advance notification?

Answer 71

The President of the U.S., who must notify the SEC that he does not disapprove of the decision.

Question 72

Where may investors obtain information regarding SEC filings made by reporting companies?

Answer 72

On the SEC's EDGAR website

Question 73

An _________ is any person who has possession of material non-public information.

Answer 73

An insider is any person who has possession of material non-public information.

Question 74

Must a relationship between the BD writing the fairness opinion and a party subject to the opinion be disclosed?

Answer 74

Yes. Any material relationship that has existed within the last two years must be disclosed.

Question 75

If the terms of a tender offer are changed, for how many additional days must the offer remain open?

Answer 75

For at least 10 business days from the change

Question 76

If a company announces that its CFO has resigned effective today, what form must be filed with the SEC?

Answer 76

Form 8-K. This form is filed for significant changes/events that may impact share price or financial condition.

Question 77

Individuals must register with the SEC within __________ of becoming an insider.

Answer 77

Individuals must register with the SEC within 10 days of becoming an insider.

Question 78

What other term may be used for a company's Chief Executive Officer (CEO) or Chief Financial Officer (CFO)?

Answer 78

Principal Executive Officer (PEO) or Principal Financial Officer (PFO)

Question 79

True or False: Under Regulation M-A, a prospectus, proxy, or tender offer statement must be provided to investors.

Answer 79

TRUE

Question 80

If a mutual fund owns 7.5% of a company's common stock, are all current fund shareholders required to file Schedule 13D?

Answer 80

No. The mutual fund must report its ownership, not the shareholder.

Question 81

What will a firm establish between departments to restrict the flow of potential insider information?

Answer 81

Information barriers

Question 82

When must a company file a Form 10-K with the SEC?

Answer 82

Annually

Question 83

Recorded road shows meet the definition of ________ communication.

Answer 83

Recorded road shows meet the definition of graphic communication.

Question 84

A bounty of up to ____% may be offered to a person who reports an insider trading violation.

Answer 84

A bounty of up to 10% may be offered to a person who reports an insider trading violation.

Question 85

True or False: Regulation M-A applies to equity IPOs and new issues.

Answer 85

False

Question 86

In what forms may road shows be delivered?

Answer 86

Live or electronic

Question 87

When may road shows be conducted?

Answer 87

After filing the registration statement (before the effective date)

Question 88

According to the HSR Act, an M&A deal may not be completed until ____ days after notification.

Answer 88

According to the HSR Act, an M&A deal may not be completed until 30 days after notification.

Question 89

To what types of transactions do Regulation M-A provisions apply?

Answer 89

Cash or stock tender offers, mergers, acquisitions, or going-private transactions

Question 90

A person must register with the SEC within ____ days of becoming an insider by filing Form ___.

Answer 90

A person must register with the SEC within 10 days of becoming an insider by filing Form 3.

Question 91

What is the criminal penalty for insider trading by corporations?

Answer 91

$25 million per violation

Question 92

True or False: When an issuer repurchases its own shares, it may do so at the opening price during a trading day.

Answer 92

False

Question 93

If an insider trading violation occurs within a brokerage firm, what parties may be held liable?

Answer 93

The tipper, tippee, supervisor, and BD may be liable.

Question 94

What SEC form is used to report the restricted stock a corporate officer receives as compensation in his 401(k) plan?

Answer 94

Form 4

Question 95

What is the maximum criminal penalty for a corporation convicted of insider trading?

Answer 95

A $25 million fine

Question 96

Insiders must return short-swing profits, which are profits earned on stock that has been held for less than ___ months.

Answer 96

Insiders must return short-swing profits, which are profits earned on stock that has been held for less than six months.

Question 97

List some reasons for the filing of Form 8-K.

Answer 97

Change in company control, accountant, or fiscal year, or the resignation of a director

Question 98

Name two prohibitions that relate to being an insider.

Answer 98

1. No shorting of the stock and 2. No keeping of short-swing profits

Question 99

What are treble damages?

Answer 99

The civil penalty for insider trading, which is three times the profit made or loss avoided

Question 100

Who has the authority to initiate criminal action related to insider trading?

Answer 100

The U.S. Department of Justice

Question 101

What are the volume limitations on an affiliate or issuer repurchasing its own security?

Answer 101

No more than 25% of the average daily trading volume (ADTV) over a 4-week period in one day

Question 102

Transactions valued at $___ million or less do not have to file a notice under the Hart-Scott-Rodino Act.

Answer 102

Transactions valued at $68.2 million or less do not have to file a notice under the Hart-Scott-Rodino Act.

Question 103

The SEC may suspend trading on an exchange for up to ____ days.

Answer 103

The SEC may suspend trading on an exchange for up to 90 days.

Question 104

What are the four guidelines that must be followed for an issuer to be allowed to purchase its own common stock?

Answer 104

1) One BD used, 2) time of purchase, 3) volume of daily purchase, and 4) price of purchase

Question 105

The SEC may suspend trading for up to ____ business days for an individual issue.

Answer 105

The SEC may suspend trading for up to 10 business days for an individual issue.

Question 106

According to Regulation M-A, where would a summary term sheet regarding an M&A deal be found?

Answer 106

On the first or second page of the disclosure document

Question 107

After attending a board meeting, Jim, the CEO of ABC Inc., sells 1,000 shares of ABC short. Is Jim's action permitted?

Answer 107

No. Jim is prohibited from selling short the stock for which he is an insider.

Question 108

Define reporting company.

Answer 108

One that is SEC-registered, listed on an exchange, and has total assets exceeding $10 MM with 500 or more shareholders

Question 109

For SEC purposes, if an insider purchases or sells his stock, what form is filed and when is it filed?

Answer 109

Form 4 must be filed with the SEC within two business days of the trade.

Question 110

During the registration cooling-off period, what should an agent do if a client sends a check to purchase securities?

Answer 110

Return the check to the customer

Question 111

True or False: The primary purpose of a fairness opinion is to verify the credit rating of the newly merged entity.

Answer 111

False

Question 112

Issuers of actively traded securities may not purchase their own shares during the last ____ minutes of trading.

Answer 112

Issuers of actively traded securities may not purchase their own shares during the last 10 minutes of trading.

Question 113

True or False: A person who supervises an individual who has violated insider trading rules may also be penalized.

Answer 113

True