Unit 4 (1 Of 2)

Front 1

What is a preliminary prospectus (red herring)?

Back 1

Used in the registration phase of a new issue to generate interest in a proposed new offering. Not used to solicit orders.

Front 2

What is a statutory prospectus (effective, final)?

Back 2

This contains the full disclosures required under the Securities Act of 1933. The 1st page contains a summary of key information.

Front 3

What is a summary prospectus (rule 498)?

Back 3

A shorter version of the statutory prospectus. Can be used to make the sale of open-end (mutual) funds, but must make reference to the availability of a statutory prospectus.

Front 4

What is an omitting prospectus (rule 482)?

Back 4

Term used to describe a mutual fund tombstone ad. It cannot contain application to purchase.

Front 5

What section must be included in the statutory prospectus as a part of the sales disclosure w/ a mutual fund purchase?

Back 5

A summary section that includes:

1) investment objectives

2) costs of investing (the fee table)

3) principal investment strategies, risks, & performance

4) investment advisers and portfolio managers

5) brief purchase, sale, & tax information

6) financial intermediary compensation

Front 6

What is the second part to the prospectus?

Back 6

Statement of Additional Information (SAI) - does not have to be a part of the sale, but should be delivered in 3 business days if requested by the purchaser.

Front 7

What documents must the ticker symbol of the fund be disclosed on?

Back 7

Statutory prospectus and SAI

Front 8

What conditions must the omitting prospectus (tombstone ad) meet?

Back 8

1) Must state where to obtain a full prospectus

2) Must urge investors to read the full prospectus before investing

3) Any past performance must be accompanied by disclosures and disclaimers of load, if any

4) Advertisement may not be used to purchase the shares

5) May include info not included in the statutory prospectus

6) Must show avg annual total returns for 1, 5, & 10 year periods

Front 9

Does investor have the option of purchasing fund shares w/ a summary prospectus?

Back 9

Yes, they can use the application found therein or request a statutory prospectus. Statutory prospectus must be received w/in 3 business days or request.

Front 10

What is included on the cover page of the summary prospectus (rule 498) or at the beginning?

Back 10

1) The fund's name and the class or classes to which the summary prospectus relates

2) the ticker symbol of the fund shares

3) if the fund is an Exchange-Traded Fund (ETF), identification of the principal US market on which the fund shares are traded

4) legend that includes a toll free number to request paper delivery of the prospectus or a website to download a copy

Front 11

What is the sequence for information provided in the summary prospectus?

Back 11

1) Risk/Return Summary: Investments, Risks, & Performance

2) Risk/Return Summary: Fee table

3) Investment Objectives, Principal Investment Strategies, Related Risks, & Disclosure of Portfolio Holdings

4) Management, Organization, & Capital Structure

5) Shareholder Information

6) Distribution Arrangements

7) Financial Highlights Information

Front 12

How should a summary prospectus be delivered via regular mail?

Back 12

They cannot be bound with other documents and must be placed on top of any other documents simultaneously.

Front 13

Who can the purchaser of a security containing a false statement to sue?

Back 13

1) every person who signed the registration form

2) all directors of the issuer

3) attorneys

4) appraisers or other experts

5) underwriters

6) parent companies

*Researcher is looking for recovery of consideration paid plus legal expenses, & (sometimes) a reasonable return on the money invested

Front 14

What act provides penalties for false & misleading statements contained in the registration statement or prospectus?

Back 14

The Securities Act of 1933

Front 15

What is SEC Rule 135A - General Advertising?

Back 15

Promotes an investment medium but does not refer to a specific security or the name of an investment company

Front 16

What is included in general advertising?

Back 16

1) the name & address of a registered broker/dealer or other person sponsoring the communication-comp. must have funds available

2) the nature of the investment companies, the types of securities investment companies generally offer, & the services provided in connection w/ the ownership of such securities

3) different types of funds

Front 17

What should not be included in general advertising?

Back 17

1) A description of no-load mutual funds if they do not sell them.

2) May not discuss the desirability of purchasing or owning specific investment co. securities

Front 18

What is sales literature?

Back 18

It is any communication, in writing or by radio or television, that any person uses to offer to sell investment company securities. This includes communication between issuers, underwriters and dealers if it can be provided to customers.

Front 19

What is an SEC Rule 156 - Investment Company Sales Literature?

Back 19

It is unlawful for any person to directly or indirectly use sales literature which is materially misleading in connection w/ the offer or sale of securities issued by an investment company.

Front 20

What defines sales literature as being materially misleading?

Back 20

1) contains an untrue statement of material fact

2) omits material facts regarding statements made

Front 21

What is Section 34b-1 - Sales Literature Deemed to be Misleading?

Back 21

Sometimes referred to as the name rule requires that any investment company whose name implies a certain type of portfolio composition must have at least 80% of its assets invested as implied.

Front 22

What is the statement that should be included in sales literature for money market funds?

Back 22

"An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation of any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund."

Front 23

Are money markets suitable for investors looking for long-term growth?

Back 23

No, because they are comprised of short-term, high-quality debt instruments.

Front 24

What is FINRA rule 2210?

Back 24

Governs communication with the public.

Front 25

What type of communications can principals approve?

Back 25

1) General securities principals (series 24) may review and approve communications for all securities except options

2) Limited securities principals (series 26) may only review and approve communications for investment company products

Front 26

What are institutional communications?

Back 26

Any written communication that is distributed or made available only to institutional investors but does not include a member firm's internal communications. Ex. of institutional investors: A member firm or registered person, bank, S&L, & insurance company

Front 27

What are retail communications?

Back 27

Any written (including electronic) communication that is distributed or made available to more than 25 retail investors w/in 30 calendar-day period. Advertisements and sales literature falls in this group.

Front 28

When does a principal not have to approve retail communications?

Back 28

1) Another member has filed it w/ FINRA's Advertising Department and received a letter stating it's consistent w/ applicable standards

2) the member using it has not materially altered it and will use it in a manner consistent w/ the conditions of FINRA's Advertising Department's letter.

Front 29

Who it a retail customer?

Back 29

Any customer, existing or prospective, that does not fit into the definition of institutional client. All individuals (even accredited investors) are considered retail customers.

Front 30

What is correspondence?

Back 30

Written or electronic communication that is distributed or made available to 25 or fewer retail investors w/in a 30 calendar-day period.

Front 31

What is a public appearance?

Back 31

Participation in a seminar, webinar, forum (including an interactive electronic forum such as a chat room), radio or television interview, or other public appearance or public speaking activity.

Front 32

What is independently prepared reprint?

Back 32

Any article reprint that meets certain standards designed to ensure that the reprint was issued by an independent publisher and was not materially altered by the member. A member can only alter a reprint to make it consistent with regulatory standards.

Front 33

What is a research report?

Back 33

A document prepared by an analyst or strategist, typically as a part of the research team for an investment bank or broker/dealer. May focus on an individual stock or sector and may recommend buying, selling or holding an investment.

Front 34

What should be disclosed on research reports?

Back 34

If within the last 12 months if the firm received fees for investment banking services from or managed or comanaged a public offering for a company that is the subject of a research report.

Front 35

What does FINRA use to determine if a communication (of any kind) is misleading?

Back 35

1) Overall context of the statement

2) Audience to which the communication is directed

3) Overall clarity of the communication

Front 36

What are the requirements for a recommendation in a communication?

Back 36

Member must have a reasonable basis for the recommendation and it must be suitable. If a stock purchase is included in the recommendation, the stock's current price must be included, as well.

Front 37

What references can be included in a retain communication or correspondence?

Back 37

May not refer, directly or indirectly, to past specific recommendations, however, may set out or offer to furnish a list of all recommendations as to the same type, kind, grade, or classification of securities made by the member w/in the immediately preceding period of not less than one year.

Front 38

What must all recommendations to customers disclose?

Back 38

1) All transaction costs

2) The intention of the firm to buy/sell for its own account

3) If the firm is a market maker at the time it was published

4) If the firm own options, rights, or warrants to buy the security

5) if officers are directors for the company being recommended

6) if the firm managed the recommended security w/in the last 12 months

Front 39

What is prohibited with recommendations?

Back 39

1) Imply any guarantees

2) compare the recommended security w/ a dissimilar product

3) make fraudulent or misleading statements

4) make any predictions

5) make statements of advantages stating risks

Front 40

What must be included in a testimonial?

Back 40

1) It may not be representative of the experience of other customers

2) There is no guarantee of future performance or success

3) List that it is a paid testimonial if more than $100 paid for it

Front 41

What is the only form of written communication that does not require the member's name?

Back 41

According to FINRA's rules, blind recruitment advertisements (those that direct the reader to forward a resume to an undisclosed employer) are the only form.

Front 42

What must be included when a member mentions FINRA membership?

Back 42

A hyperlink to the FINRA site.

Front 43

What communications must clearly and prominently name the FINRA member?

Back 43

Retail and other communication (i.e., business cards, letterheads). Does not include blind advertisements.

Front 44

What is a ranking entity?

Back 44

Any entity that:

1) provides general info about investment companies to the public

2) is independent of the investment company and its affiliates

3) has not been procured to assign the investment company a ranking

Front 45

When can retail communications present a ranking?

Back 45

1) created and published by a ranking entity

2) created by an investment company or an investment company affiliate but based on the performance measurements of a ranking entity

Independently prepared reprints (IPRs) are excluded from the ranking rules.

Front 46

What are bond mutual fund volatility ratings?

Back 46

Used by independent third parties to assess the sensitivity of a bond fund's portfolio to changes in market conditions and the general economy.

Front 47

What are the objectives that the bond mutual fund volatility ratings based on?

Back 47

1) Credit quality of the fund's individual portfolio holdings

2) The market price volatility of the portfolio

3) Fund's performance

4) Specific risks (e.g., interest rate risk, prepayment risk, & currency risk)

Front 48

How long should the file containing all retail communications be maintained?

Back 48

Three years from the date of last use

Front 49

How long should each member retain copies of its registered representatives' correspondence according to the recordkeeping rule (Rule 3110) and SEC recordkeeping rules?

Back 49

For at least 3 years

Front 50

How long is outgoing electronic securities business correspondence maintained?

Back 50

Three years

Front 51

What must the member file with FINRA at least 10 business days before first use (pre-filing)?

Back 51

All retail communication for investment companies that include a ranking or comparison that is generally not published or is the creation of the investment company.

Front 52

What does FINRA do if they believe a member's retain communication has departed from acceptable standards?

Back 52

Mandate pre-filing of any communications with the public.

Front 53

What happens if a member files a draft version of retail communication pursuant to a filing requirement?

Back 53

File the final version within 10 business days of first use or broadcast