SIE Part 2, Units 7-15 Flashcards
primary market
where securities are sold to the investing public in what are known as issuer transactions an issuer (corporation or a government) selling a security to raise capital
secondary market
where securities trade between investors
Securities Act of 1933
primary purpose is to require full and fair disclosure in connection with the sale of securities to the public
the act requires that a new issue, unless specifically exempted from the act, be registered with the SEC before public sale. All investors must receive a detailed disclosure document known as a prospectus before purchase.
regulates underwriting and distribution of primary issues
provides criminal penalties for fraud in the issuance of new securities
Initial public offering (IPO)
the first time an issuer distributes securities to the public
Rules and Regulations:
members make a bona fide public offering price (POP)
members do not withhold securities in a public offering for their own benefit
industry insiders, such as member and their associated persons, do not take advantage of their insider status to gain access to new issues for their own benefit at the expense of public customers
Restricted persons
those not allowed to purchase shares at POP include
member firms
employees of member firms
finders and fiduciaries acting on behalf of the managing underwriter
portfolio managers
any person owning 10% or more of a member firm
any immediate family member of any person listed above (does not include aunts, uncles and grandparents UNLESS they live with the restricted person)
Additional Public Offering (APO) / follow-on offering
an offering of securities following a company’s initial public offering (IPO). May be primary or secondary.
characteristics: primary offerings - proceeds go to the issuer and they come after the IPO
Underwriters
groups of broker-dealers (BDs) or investment bankers that work with an issuer to bring its securities to the market and sell them to the investing public
best efforts underwriting
calls for the underwriters (syndicate) to buy securities from the issuer acting simply as an agent, not as the principal.
underwriters are not committed to purchase the shares themselves and are therefore not at risk
All-or-none (AON) underwriting
the issuing corporation has determined that it wants an agreement outlining that the underwriter must either sell all the shares or cancel the underwriting.
Mini-max underwriting
sets a floor or minimum (the least amount the issuer needs to raise to move forward with the underwriting), as well as a ceiling or maximum on the dollar amount of securities the issuer is willing to sell
Firm commitment underwriting
the underwriter buys shares from the issuer and resells the securities to the public at a higher price - the POP - and earns this price differential (spread) for its efforts.
the underwriters are at risk for any shares they cannot sell to the public
syndicate
a group of investment bankers (BDs & banks) formed to distribute a security on behalf of the issuer. Each syndicate member is responsible for the sale and distribution of a portion of the issue.
institutional investor
an entity that pools money to purchase securities and other investment assets
Some institutional investors are called qualified institutional buyers (QIB) - invest a minimum of $100 million in securities on a discretionary basis
accredited investor
a subset of investors made up of all institutional investors and certain retail investors
Retail investors who are considered accredited investors are:
insiders of the security’s issuer (officers, board members, major stockholders) or meet certain financial criteria (an income of at least $200,000 or more the past two years & expected to meet that criteria in the current year or have a net worth of $1,000,000 or more)
this designation is ONLY used in primary market transactions
registration statement
before nonexempt securities can be offered to the public, they require registration under Securities Act of 1933
must disclose pertinent information concerning the issuer and the offering
cooling-off period
a waiting period between a registration statement’s filing date with the SEC and the registration’s effective date
lasts a minimum of 20 days
during this period, no one can solicit sales of the securities
tombstone advertisement
an announcement and description of the securities to be offered
only form of advertising that is permitted during the cooling-off period
limited to the following information:
name of the issuer, type of security being offered, # of shares to be sold, Public offering price (POP) or a range, names of the underwriting members (when placed by the underwriters instead of the issuer)`
preliminary prospectus / red herring
can be used as a prospecting tool, allowing issuers and underwriters to gauge investor interest and gather indications of interest
indications of interest
not a commitment to buy because sales are prohibited until after the registration becomes effective
it is nonbinding to either party
shelf offering
through a shelf offering registration, an issuer who is already a publicly traded company can register new securities without selling any of the shares until a later or some of the shares initially, and waiting to sell the remaining portion of the shares
good for 2 years (can sell shares without reregistering)
An issuer that meets the criteria of a well-known seasoned issuer (WKSI) may extend the shelf offering to 3 years
For securities offered via a shelf registration, a supplemental prospectus must be filed with the SEC before each sale
green shoe option (over-allotment option)
allows the underwriters to increase the number of shares offered up to an additional 15% if there is sufficient demand
nonexempt securities
securities that are required to be registered in order to be sold to the public (not exempt from registration)
exempt issuers
certain securities are exempt from the registration and prospectus requirements of the Securities Act of 1933 because the issuer is the federal government, an agency of the federal government, a municipal government or because another government regulatory agency has jurisdiction over the issuer
includes: US government securities, municipal securities, commercial paper, banker’s acceptances, fixed life insurance policies, fixed annuity contracts (not variable annuities or variable life policies), national and state bank securities, building and loan and savings and loan securities, charitable, religious, educational and nonprofit association securities, and banks
rule 147: the intrastate offering rule
offerings that take place entirely in one state are exempt from registration when the issuer has its principal office (headquarters) in the state and purchasers are residents of the state
must meet one of the following criteria:
it receives at least 80% of its income in the state, at least 80% of the issuers assets are located within the state, at least 80% of the offering proceeds are used within the state, or a majority of the company’s employees must work in the state.
If there is a BD working as underwriter, the BD must be based in the state
other terms for private placement stock
restricted
unregistered
letter stock
legend stock
regulation A+
provides 2 offering tiers for small- and medium-sized companies that will allow them to raise capital in amounts substantially more than $5 million previously allowed under regulation A.
tier 1: offerings of up to $20 million (no investment limits)
tier 2: offerings up to $50 million (investors must be “qualified investors”)
Regulation D: exempt transactions (private placements)
the SEC does not require registration of an offering under Regulation D so long as there are no more than 35 nonaccredited investors.
no limit on the # of accredited investors
The SEC requires that all companies raising capital in a nonpublic offering that qualify under the Regulation D exemption file the information on Form D electronically.
omitting prospectus (Rule 482 prospectus)
the official name for an advertisement for a mutual fund.
not sufficient for soliciting a sale
offering circular
the common term for the disclosure document for other type of exempt securities (private placements, regulation A+, etc)
also known as notice of sale
similar to a prospectus but often not as detailed in its disclosures
timelines for final prospectus in the secondary market
For IPOs of NMS securities - 25 days
For APOs of of NMS securities - zero days (no requirement)
For IPOs of non-NMS securities - 90 days
For APOs of non-NMS securities - 40 days
Securities Exchange Act of 1934
regulates the trading of securities in the secondary market
market centers
the locations, both physical and electronic, where buyers and sellers may gather and place trades
exchange market
all of the exchanges on which listed securities are traded
also known as the auction market
listed security
any securities listed for trading on an exchange
over-the-counter market (OTC)
a negotiated market in which broker-dealers deal directly with one another rather than through an auction on an exchange
the third market (Nasdaq intermarket)
a trading market in which exchange-listed securities are traded in the OTC market
The fourth market (ECNs)
a market for institutional investors in which large blocks of stock, both listed and unlisted, trade in transactions unassisted by broker-dealers.
ECNs are open 24 hours a day and act solely as agents
The dark pools
sometimes called dark pools of liquidity or simply dark liquidity is trading volume that occurs or liquidity that is not openly available to the public
these are generally large volume transactions
institutional investors
a large investor such as a mutual fund, a pension fund, a bank, an insurance company, or some other financial service organization
retail investor
the normal people who are investing their own money to accomplish their own objectives
day trader
a type of retail investor that trades rapidly in and out of positions
fiduciary
a person that manages assets (usually financial) for another person, a beneficiary
they have the legal and moral obligation to perform their duties in the best interest of the beneficiary, placing the beneficiary’s interest before their own
may or may not be a professional, depending on the role and the type of account they oversee
Investment adviser is ALWAYS a fiduciary
custodian
on this exam, custodian refers to a custodian on a minor’s account under the Uniform Transfer to Minors Act (UTMA) or the Uniform Gift to Minors Act (UGMA)
May also refer to a firm that holds assets in a qualified retirement account, such as an IRA
trustee
a fiduciary that oversees a trust
could be a living trust, pension trust, etc
guardians and executors
normally court-appointed custodians over a minor, an incapacitated adult, or an estate (executor in that case)
investment advisers
anyone who gives investment advice as a regular part of their business for compensation
must register as an IA under the Investment Advisers Act of 1940
BDs who provide advice for a fee are subject to registration under this act
When acting as an IA, the IA represents the customer; if the same firm is also a BD, it can also place the trade but is acting in its BD capacity when executing the trade
facilitators
help customers in performing transactions in the secondary market
broker-dealers
FINRA member firms
perform securities transactions for their own accounts or for their customers
carrying firm (clearing firm)
carries customer accounts and accepts funds and securities from customer. have the capability to do trade executions, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks, such as sending trade confirmations and statements must segregate (hold separately) customer funds and securities held in their custody from the firm's capital and securities
a fully disclosed (introducing) firm
a firm that introduces its customers to a clearing firm
the clearing firm acts as the back-office for introducing firms (they hold the funds, securities, send the trade confirms, etc)
net capital requirements are lower for introducing firms
may take orders from customers and pass those orders to a fully disclosed firm for execution
does have the ability to execute the trade, but the settlement of the trade falls to the carrying firm
prime account
type of account that allows a customer, usually an institution, to select one member firm (the prime broker) to provide custody and other services, while other firms (called executing brokers) handle all trades placed by the customer
key advantage is that it provides a client with the ability to trade with multiple brokerage house while maintaining a centralized master account with all of the client’s cash and securities
transfer agents
a trust or a bank engaged by a company to maintain records of investors
responsible for ensuring that its securities are issued in the correct owner’s name; canceling old and issuing new certificates; maintaining records of ownership; and handling problems relating to lost, stolen, or destroyed certificates
registrar
licensed by the states and provide audit and oversight services for the transfer agents
ALWAYS a separate firm than the issuer or a transfer agent
clearing agency
an intermediary between the buy and the sell sides of a transaction
receives and delivers payments and securities on behalf of both parties
The Depository Trust & Clearing Corporation (DTCC)
world’s largest securities depository
provides custody services for virtually all securities except those subject to transfer or ownership restrictions (restricted securities)
member of the Federal Reserve System - not a retail bank
automated clearing and settlement services in book entry format to banks and BDs for stock and bond trades
employs a continuous net settlement (CNS) system
