Securities Act of 1934

Question 1

What is MISS PERMS in the Securities act of 1934?

Answer 1

M - manipulation
I - Insiders
S - SEC created
S - SHO (regulation SHO)

P - Proxy rules
E - Exchanges must register with SEC
R - Reports; annual and quarterly
M - Margin; control over credit is FRB
S - Stabilization; this is allowed for new issues per SEC

Question 2

What is Manipulation?

Answer 2

FRAUD. Sec. Act of 1934 applies to all securities for this one, whether the securities are exempt or non-exempt!

Question 3

What are some examples of manipulation?

Answer 3

• Wash trades
• Trading pools
• Trading by underwriters
• Unlawful tender offers

Question 4

What is a tender offer?

Answer 4

When an outside company or investor wants to buy a company to take control over it

Question 5

What are the rules for a tender offer practices?

Answer 5

• The offer must be outstanding for at least 20 business days
• If insufficient number of shares accepted, tender offer is “sweetened”, extending the offer for another TEN business days

Question 6

What are the rules for Tender Offers on BONDS?

Answer 6

• Only required to be held open for 5 business days

- If the offering is sweetened, the offering window must be extended for another 5 business days

Question 7

What is Rule 10b-5 under the Sec. Act of 1934?

Answer 7

Anything the Act doesn’t specify can still be considered fraud

Question 8

How long do insiders have to report their trades to the SEC?

Answer 8

2 business days

Question 9

What are short swing profits?

Answer 9

Profits derived from trades within a 6 month period must be paid back to the corporation

Question 10

What does the SEC regulate?

Answer 10

SECURITIES. Not insurance, commodities, or future contracts

Question 11

What is proxy solicitation?

Answer 11

Shareholders are given a fair opportunity to vote through the use of proxies

Question 12

When must 8K’s be filed in relation to “big changes”

Answer 12

Within 4 business days of event

Question 13

What is a 13D filing for?

Answer 13

Aggressive. When person accumulates a 5% equity position and intends to exercise CONTROL over the company

Question 14

What is a 13G filing for?

Answer 14

Passive. When person has a 5% equity position but intends to remain a passive investor

Question 15

What is Reg. T?

Answer 15

Controls credit from Broker to Customer

Question 16

What is Reg. U?

Answer 16

Controls credit from Bank to Broker

Question 17

What is Regulation M?

Answer 17

Set of rules to deal with potential market manipulation that occur during the 20 day cooling off period for add–on offerings

Question 18

What are the 3 tiers for Issues under Regulation M?

Answer 18

Tier 1 - actively traded; average trading volume $1MM, market cap of at least $150MM

Tier 2 - Moderately traded; 100K min trading volume, market cap of $25MM - $149.9MM

Tier 3 - Inactively traded; trading volume of less than 100K and market cap of less than $25MM

Question 19

What are the market maker restrictions fore each of the Tiers under Regulation M?

Answer 19

Tier 1 - Market makers are not restricted prior to distribution

Tier 2 - Subject to 1 day restriction period - business day prior to the effective date

Tier 3 - restriction of 5 business days prior to effective date

Question 20

What do Reg. M restrictions apply to?

Answer 20

These apply to ONLY common stock add on offerings

Question 21

What is Rule 105 of Reg M? (push down POP)

Answer 21

Underwriters aggressively short sale the stock during the 20 day cooling period to push down POP and then realize a profit when value is greater in the markets. Broker dealers cannot buy shares from underwriters within 5 days of effective date

Question 22

What is the violation penalty for insider trading?

Answer 22

Penalty can be up to 3 times profit or loss avoided; criminal penalties up to $5MM in fines and 20 years in jail

Question 23

Where are fines from inside trading made payable to?

Answer 23

The Department of Treasury

Question 24

What must an issuer do if it intentionally makes non-public disclosure?

Answer 24

Must immediately disclose info by broad distribution to public

Question 25

What must an issuer do if it un-intentionally make non-public disclosure?

Answer 25

Must promptly (24 hours) disclose info by filing 8K with SEC, or by distribution to public

Question 26

What is Rule 10b5-1? (Pre-arranged trading plan)

Answer 26

A statutory insider is given a safe-harbor from being accused of insider trading the insider establishes a pre-arranged trading plan

Question 27

What is Rule 10b5-2? (Misappropriation theory)

Answer 27

If an individual so-called “fails” on inside info and trade, he cannot be liable. But, if he stole or was told inside information and traded on it, then he violated the rules

Question 28

What is Rule 10b-18? (Issuers buying their own shares in the open market)

Answer 28

• Purchase must be effected through 1 broker dealer on any given day
• Can NOT be opening transaction or within 1/2 hour of market close
• Cannot be effected at a price higher than current bid or last reported sales price (whichever is higher)
• Cannot exceed 25% of the trading volume in the security for that day (excluding block purchases)

Question 29

What is Section 15 of Sec. Act of 1934?

Answer 29

• Requires broker dealers to be registered

- Foreign broker dealers must usually be registered

Question 30

What is Rule 15a-6? (Foreign broker dealers)

Answer 30

• Allows foreign BD’s to engaged in limited transactions with institutions without registering with the SEC. Limited includes:
• trades for US persons in unsolicited trades
• Soliciting business from and providing research to institutional investrors with at least $100M in investments
• Conducting business with foreign nationals temporary in the US

Question 31

What is the requirement for Broker/dealers pre-qualifying new customers for sales of penny stocks?

Answer 31

It targets boiler rooms for penny stock trading. This is defined as firms soliciting penny stock transactions where the penny stock transactions are more than 5% of the firms’ overall revenues. This also only applies to unlisted equities under $5 per share

Question 32

What must happen before a firm sells penny stocks to someone who is not an established customer?

Answer 32

Get detailed customer info and then have a suitability statement signed before any confirmation

Question 33

What is an established customer?

Answer 33

Has securities transaction for more than 1 year previously at that brokerage firm OR has 3 purchases of designated securities of different issuers from that firm

Question 34

What is a Risk Disclosure Document?

Answer 34

Must be provided to a customer who wishes to purchase penny stocks