Series 79 Cibc G&s

Front 1

A Suspicious Activity Report (SAR) must be filed within:

Back 1

30 days

1-15

Front 2

According to the Securities Act of 1933, when determining liability associated with untrue statements and material omissions, information conveyed to the purchaser after the contract for sale:

Back 2

Not taken into Account.

Any information conveyed to a purchaser after the time of sale is not taken into account when determining whether a prospectus included an untrue statement, or omitted to state a material fact.

7-24

Front 3

An investment banking firm is assisting an issuer in raising capital through an offering of securities where investors will have returned all, or a portion, of their investment, if some of the securities are not sold. Is this practice permissible? What type of offering is this?

Back 3

If the numbers of units, the price, and the completion date of the offering are specified. Best-Efforts Offering.

The type of offering described is a best-efforts underwriting. This type of offering is permitted if the numbers of units, the price, and the completion date of the offering are specified.

8-2

Front 4

An investment banking principal has received a letter from a customer complaining about a recent new issue that declined substantially on its first day of trading. The client purchased the shares based on a recommendation by an associated person of the firm. The customer contends that the recommendation was unsuitable. Is someone required to review it? Must they respond to customer? How is it documented and kept and for how long?

Back 4

All written complaints must be reviewed by a principal and must be kept in a file, along with a memo describing any action taken in response to the complaint. There is no requirement to respond to the client in writing or to enter into arbitration or mediation. Under FINRA rules, records of complaints must be kept for a minimum of four years.

1-19

Front 5

This style of investing combines value and growth investing objectives. The investor is seeking companies that have good growth potential and appear to be undervalued. Characteristics of these companies may include low P/E ratios, low PIE-to-growth (PEG) ratios, and low price-to-book ratios.

Back 5

Growth at a reasonable price, also known as GARP,

4-18

Front 6

An IPO is being priced by a syndicate that consists of five large broker-dealers. 80% of the issue is being allocated to institutions on a jump ball basis. If the offering is oversubscribed, the managing underwriter's most FAIR course of action is to:

Back 6

If an offering is oversubscribed, the best course of action would be to allocate the shares pro rata based on a fair allocation system. Although there is no regulatory requirement on how to allocate an oversubscribed issue, a fair system would be the best method for the manager to follow. 8-20

When a syndicate uses an institutional pot in which shares will be available on a jump ball basis, it is setting aside shares for institutional clients and allowing all members to compete for orders. 8-11

8-11 & 8-20

Front 7

An issuer would like to buy back shares under SEC Rule 10b-18. The last transaction was $36.12 and the current bid/ask quote is $36.10 - $36.15. Which TWO of the following statements are TRUE concerning the issuer buyback?
-The highest price the issuer could buy at would be $36.10.
-The highest price the issuer could buy at would be $36.12.
-The maximum number of shares the issuer could buy in a day is 25% of the ADTV for the previous four weeks.
-The maximum number of shares the issuer could buy in a day is 25% of the ADTV for the previous four months

Back 7

When an issuer buys back shares under SEC Rule 10b-18, purchases may not exceed the higher of the independent bid or last transaction, in this case $36.12. Daily purchases may generally not exceed 25% of the average daily trading volume (ADTV) in the previous four weeks.

1-9 (Test Question)

Front 8

An underwriting gross spread is defined as:

Back 8

The term underwriting spread refers to the difference between the amount paid by the investing public and the amount received by the issuing corporation. The (underwriting) spread represents the syndicate's gross profit. For example, if the public offering price on a new issue is $20 and the corporation receives $18.60, the spread is $1.40.

8-4

Front 9

List the following activities from FIRST to LAST, in the order of occurrence, when an initial public offering is registered.
File a registration statement
Determine the IPO price
Begin the due diligence process
Conduct road show presentations

Back 9

III, I, IV, II

The underwriters will first start the due diligence process (as opposed to the due diligence meeting) (7-9), then the registration statement will be filed (7-7). The issuer and underwriters will then begin road show presentations (8-7), and finally, based on the indications, the underwriters and company management will set the IPO price (7-7).

Test Question (7-7) & (7-9) & (8-7)

Front 10

Quincy's Pet Emporium is having short-term liquidity problems and is in technical default of a covenant on short-term debt it has outstanding. The long-term business prospects are still viewed favorably by creditors and owners. The company maintains good relationships with both customers and suppliers. The company has several options to attempt to rectify the problem. If undertaken as the first step, which of the following activities would most likely cause the greatest damage to the business prospects of the company? WHY?
-Attempting to negotiate with creditors to temporarily waive the covenant
-Filing Chapter 11 to reorganize while in bankruptcy protection
-Negotiating with lenders to accept new longer-term debt with a payable-in-kind (PIK) option for the issuer
-Exploring raising additional capital through an equity issue

Back 10

Bankruptcy.

The option that would most likely cause the greatest damage to the business prospects of the company would be filing under Chapter 11 to reorganize while in bankruptcy protection. The would likely cause the greatest damage because forced asset sales may occur or the entire business may cease to exist. (9-23)

Before undertaking this drastic step, the company may have other options:
-The company may attempt to negotiate with creditors to waive the covenant temporarily. If the long-term prospects of the company are viewed favorably, creditors may feel this is in their best interests. (3-21)
- Creditors may also accept new longer-term debt with a payable-in-kind (PIK) option for the issuer. A PIK option allows the issuer to make its interest payments through paying additional principal on the debt, rather than a payment in cash. (3-26)
- If the long-term business prospects are still viewed favorably by the owners, they could also explore raising additional capital through an equity issue.

Test Question. (3-21) & (3-26) & (9-23)

Front 11

Name the two main advantages for an issuer raising capital through a private placement, as opposed to a public offering.

Back 11

The legal and registration expenses are lower.
The issuer is able to raise capital quicker.

7-28

Front 12

Which TWO of the following choices are types of yield curves?
1) Inverted
2) Laddered
3) Barbell
4) Flat

Back 12

1&4

If different maturities are plotted against the corresponding yield for each maturity, the resulting graph is a yield curve. A yield curve is also called the term structure of interest rates. When the curve inverts, yields are the highest for the shortest maturity and decrease as the maturity increases. An inverted yield curve is also referred to as being a negative, descending, or downward sloping curve and is relatively rare. A flat yield curve reflects similar demand and supply and, therefore, similar yields across all maturities. 4-11 & 4-12

Laddering and barbell are strategies employed by some bond investors. When laddering, an investor could construct a portfolio of bonds with maturities distributed over a given period. The purpose of this strategy is to reduce interest-rate risk, since the portfolio is typically having some maturities each year and the proceeds are being reinvested at prevailing rates. Investors employing a barbell strategy buy bonds at the two ends (long and short maturities) of the yield curve. The strategy seeks to capture the high coupon interest from the long-term bonds as well as retain the ability to reinvest quickly when the short-term bonds mature. In this way, if the investor anticipates a shift in interest rates, only a portion of the portfolio needs to be changed. 4-13

(4-11) - (4-13)

Front 13

Which TWO of the following expenses are considered compensation items for underwriters?

State blue-sky filing fees
Wholesaler's fees
Finder's fees
Printing costs

Back 13

Wholesaler's fees
Finder's fees

When assessing the amount of compensation that an underwriter receives, the Corporate Financing Department includes reimbursement of finder's and wholesaler's fees. Bona fide expenses related to the issuance that are reimbursed, such as state filing fees (blue-sky fees), printing costs, and accounting fees paid by the issuer, are not considered compensation.

8-13

Front 14

Zippity Investments has decided to terminate its research coverage on Veggie Soda. Which TWO actions must Zippity take to be in compliance with industry rules?

Back 14

They must provide (1) final research report similar in scale and scope to its past reports-if practical to do so and (2) final recommendation - if available.
***(otherwise it must disclose its reason(s) for terminating research on the issuer/security.)

when a broker-dealer that publishes research reports on issuers and the issuer's securities decides to terminate coverage on that issuer, the broker-dealer must publish a final research report and provide it to its customers in the same manner ordinarily used when presenting its findings.

The final report must be similar in depth compared to its past reports and must include a recommendation, unless it is impractical to do so.

In the event that a final recommendation is not available, the broker-dealer must disclose its reason(s) for terminating research on the issuer/security.

A broker-dealer is not required to discontinue market making in the issue. It is not required to notify the media.

8-10

Front 15

When an issuer repurchases its own stock in the marketplace, how many broker-dealers can be used? Are afterhours tradin allowed?

Back 15

Under 10b-18 Safe Harbor, the issuer uses only one broker-dealer or ECN to execute the transactions on any single day. That broker-dealer may execute transactions with any number of other market participants.

After-hours trading is allowed and the issuer is permitted to use a broker-dealer that is different from the one used during normal business hours

1-9

Front 16

When an issuer repurchases its own stock in the marketplace, what is the limit of purchases?

Back 16

According to Safe Harbor 10b-18, the total volume on any single day may not exceed 25% of the ADTV for that security.

1-8

Front 17

A positively sloped yield curve would show? What else are postively sloped yield curves called?

Back 17

lower yields in the shorter maturities and higher yields in the longer maturities. This increasing term structure of rates exists under most market conditions. Positive yield curves are also referred to as a normal, ascending, or upward sloping.

4-11

Front 18

When switching from FIFO to LIFO in an inflationary environment, what happens to COGS and Income Tax?

Back 18

When switching from FIFO to LIFO in an inflationary environment, COGS will increase and income tax would decrease.

5-1

Front 19

____ copies of each form of the PRELIMINARY prospectus must be filed with the SEC no later than the date it is first sent to investors.

Back 19

Five copies of each form of the preliminary prospectus must be filed with the SEC no later than the date it is first sent to investors.

7-6

Front 20

What kind of indicator?

• Commercial and industrial loans outstanding

Back 20

Lagging Indicator

4-4

Front 21

What kind of indicator?

• Contracts and orders for plant and equipment

Back 21

Leading Indicator

4-3

Front 22

What kind of indicator?

• Employees on nonagricultural payrolls

Back 22

Coincident Indicator

4-4

Front 23

What kind of indicator?

• Interest rate spreads, 10-year Treasury bonds less federal funds

Back 23

Leading Indicator

4-3

Front 24

What kind of indicator?

• Labor cost per unit of output for manufactured goods

Back 24

Lagging Indicator

4-4

Front 25

What kind of indicator?

• Manufacturing and trade sales

Back 25

Coincident Indicator

4-4

Front 26

What kind of indicator?

• New building permits for private housing units

Back 26

Leading Indicator

4-3

Front 27

What kind of indicator?

• New orders for consumer goods and materials

Back 27

Leading Indicator

4-3

Front 28

What kind of indicator?

• Personal income less transfer payments (Transfer payments represent aid for individuals in the form of Medicare, Social Security, and veteran's benefits, to list a few.)

Back 28

Coincident Indicator

4-4

Front 29

What kind of indicator?

• The average duration of unemployment

Back 29

Lagging Indicator

4-4

Front 30

What kind of indicator?

• The average prime rate charged by banks

Back 30

Lagging Indicator

4-4

Front 31

What kind of indicator?

• The average weekly initial claims for state unemployment insurance

Back 31

Leading Indicator

4-3

Front 32

What kind of indicator?

• The average workweek for production workers in manufacturing

Back 32

Leading Indicator

4-3

Front 33

What kind of indicator?

• The change in credit outstanding for business and consumer borrowing

Back 33

Leading Indicator

4-3

Front 34

What kind of indicator?

• The consumer price index for services

Back 34

Lagging Indicator

4-4

Front 35

What kind of indicator?

• The index of consumer expectations

Back 35

Leading Indicator

4-3

Front 36

What kind of indicator?

• The Index of Industrial Production

Back 36

Coincident Indicator

4-4

Front 37

What kind of indicator?

• The Money Supply (M2)

Back 37

Leading Indicator

4-3

Front 38

What kind of indicator?

• The prices for the S&P 500 common stocks

Back 38

Leading Indicator

4-3

Front 39

What kind of indicator?

• The relationship of consumer installment credit to personal income

Back 39

Lagging Indicator

4-4

Front 40

What kind of indicator?

• The relationship of inventories to sales, manufacturing, and trade

Back 40

Lagging Indicator

4-4

Front 41

What kind of indicator?

• Vendor performance (companies receiving slower deliveries from suppliers)

Back 41

Leading Indicator

4-3

Front 42

A broker-dealer owns 60% of the Sloan Corporation which, in turn, owns 70% of Pirelli Industries. If the broker-dealer arranges a private placement for Pirelli Industries, it is:
A) Exempt from filing a disclosure document with the Corporate Finance Department
B) Required to file a disclosure document with the Corporate Finance Department, but is not required to provide this document to investors
C) Exempt from filing a disclosure document with the Corporate Finance Department, but is required to provide this document to investors
D) Required to file a compensation disclosure document with the Corporate Finance Department, but is not required to provide this document to investors

Back 42

Since the broker-dealer owns 60% of 70%, it would have only a 42% interest in Pirelli Industries and would be exempt from the filing requirements of the rule. Therefore A) Because it doesn't own more than 50% (controlling)

FINRA Rule 5122 relates to a private placement of securities where a member firm issues the securities and conducts the placement on its own behalf. It is also referred to as a Member Private Offering (MPO). Due to potential conflicts of interest when a member firm attempts to raise capital for itself, or for a firm it controls, the member firm is required to provide a term sheet, or a private placement memorandum, or a disclosure document that contains certain disclosures. The member firm is also required to file this document with the Corporate Finance Department. Control is defined as ownership of more than 50% of the company. With multiple levels of ownership, the rule uses a flow-through concept to determine control.

Test Question 7-34

Front 43

A client has a 4% interest in a company, which is a Subchapter S Corporation. A distribution is made that reduces the client's basis, but not below zero. The distribution is:

Back 43

A nontaxable return of capital

For most businesses, the major advantage of forming an S Corporation rather than a regular C Corporation is that an S Corporation may elect to be taxed like partnerships under Subchapter S of the Internal Revenue Code. Distributions that reduce the client's basis are considered a nontaxable return of capital. Distributions in excess of a client's basis are treated as capital gains. If a minority shareholder buys a stake in an S Corporation and sells her shares, the gain would be taxable as a capital gain, based on the amount above her basis. If the shares were held for more than one year, the capital gain would be long-term. The gain would be taxable immediately in the year of the distribution or sale.
It is important to understand that, if an S Corporation sells an asset at a gain, this would not trigger a taxable event. If the S Corporation was profitable as a whole, that may trigger a taxable event.

7-2

Front 44

An advertisement mentions the nature of investment companies and refers to generic types of funds, such as balanced funds, growth funds, income funds, etc.. What sort of advertising is this and does it need to be registered as a prospectus under the Securities Act?

Back 44

SEC Rule 135a permits the use of advertising that describes, in general terms, how investment companies work. The communication must be limited to information about investment companies in general, or to the nature of investment companies. The material may refer to different generic types of funds, such as balanced funds, growth funds, income funds, etc. The ad may not discuss the desirability of owning or purchasing
a particular investment company's shares. These are not considered a prospectus under the Securities Act.

7-18

Front 45

A company in bankruptcy would like to sell major assets of the firm outside the normal course of its business. Who must approve?

Back 45

This may be accomplished with the approval of the bankruptcy court.

9-25

Front 46

A company repurchasing its own shares could bid:

Back 46

A company repurchasing its own shares could bid the greater of the current bid or the last sale price.

1-9

Front 47

A corporation is about to go public. Its shares will be quoted on the OTCBB. A broker-dealer selling the securities in the aftermarket is required to deliver a prospectus to purchasers for how many days following the effective date of registration?

Back 47

90 days.

A dealer selling securities in the secondary market must provide prospectuses to customers if new securities of that class were recently sold by the issuer under a registration statement. Prospectuses must be delivered for 40 days after the effective date in the case of issuers with publicly traded securities already outstanding, or 90 days for IPOs.

There are two exceptions.
1) If an issuer was subject to the reporting requirements of the Securities Exchange Act of 1934 prior to the filing of the registration statement, there is no prospectus delivery requirement for dealers.
2) If the issuer was not a reporting company prior to filing, but will be listed on an exchange or on Nasdaq as of the effective date, the requirement applies for 25 days.
The main purpose of this rule is to provide investors with information concerning an issue of securities. If the issuer was already a reporting company, information is readily available to the public through the SEC's EDGAR system. The OTCBB is not an automatic quotation system and, therefore, the delivery requirement is 90 days for an IPO.

7-10

Front 48

A corporation is planning to issue $20,000,000 face value of corporate bonds with a 6.4% coupon. The bonds will have a ten-year maturity. Expenses associated with the underwriting total 5.2% and are broken down as underwriting fees of 3.5%, advertising costs of 1.2%, and legal and accounting costs of 0.5%. What is the issuer's cost of captial for this debt issue?

Back 48

6.75%

The cost of capital on the debt issue is calculated by dividing the interest expense by the net proceeds of the issue. The flotation costs include underwriting fees, advertising, legal, and accounting costs totaling $1,040,000 (5.2% x $20,000,000). The interest of $1,280,000 (6.4% x $20,000,000) is divided by the net proceeds of the issue which is $18,960,000 ($20,000,000 - $1,040,000). $1,280,000 / $18,960,000 = 6.75%.

Read example on 6-14 & 6-15

Front 49

A distribution of an S Corp that reduces an investor's basis is considered ________________. If it does not reduce the investor's basis, it considered __________________.

Back 49

A distribution of an S Corp that reduces an investor's basis is considered a non-taxable return of capital. If it does not reduce the investor's basis, it is taxable as a capital gain.

7-2

Front 50

A FINRA member intends to stabilize a Nasdaq-listed issue. The managing underwriter must provide prior electronic notification of this proposed activity to:

Back 50

The FINRA Market Regulations Department

Rule 104 of Regulation M requires any party that intends to engage in stabilization to provide prior electronic notice of its intent to the market where stabilization will occur, no later than the day prior to the commencement of the restricted period. If the security is listed on Nasdaq, the FINRA Market Regulations Department would be notified by way of the Restricted Period Notification Form (a.k.a. a regulatory wire). The SEC receives prior notice in written form through the disclosures contained in the registration documents.

8-25

Front 51

A flat yield curve reflects:

Back 51

A flat yield curve reflects similar demand and supply and, therefore, similar yields across all maturities.

4-12

Front 52

A major difference between futures contracts and forward contracts is:

Back 52

The major disadvantage of forward contracts is that they are not transferable. Generally, the buyer and the seller must give permission if one party wants to transfer the contract.

In contrast, futures contracts can be readily bought and sold on the exchange on which they trade. Some futures contracts are extremely liquid while others are less so. Futures contracts are cleared through a clearing corporation which guarantees the contract and eliminates counterparty risk. Forwards are individual contracts between the buyer and seller and have the risk that the counterparty may default.

3-37

Front 53

A member firm is participating in a distribution of its own stock to the public. If the stock is in great demand, the member firm may place the stock into a discretionary account of a customer if…?

Back 53

If the customer approves the transaction in writing

If a member firm is participating in a distribution of its own securities to the public and it wishes to place some of the stock into the account of a customer for whom the member firm holds discretionary authorization, the member firm must obtain prior written approval from the customer before it may sell the stock to the customer.

8-30

Front 54

A method of voting that gives smaller, less substantial stockholders a greater degree of voting power over the larger, more substantial stockholders is:

Back 54

In cumulative voting, shareholders may multiply the number of shares they own by the number of directors being elected and cast all the votes any way they want. They may cast all their votes for one individual director or divide them among various directors. Cumulative voting tends to favor smaller shareholders, since it gives them a better chance of electing at least one director who is sympathetic to their interests.

3-5

Front 55

A mutual fund (open-end fund) is exempt from the entirety of the corporate financing rule? T/F?

Back 55

True.

Securities of open-end investment companies (mutual funds) are exempt from the entirety of the corporate financing rule.

8-13

Front 56

A person who has sold a security based on untrue statements faces liabilities based on:

Back 56

The investment amount, a reasonable amount of interest on the investment, MINUS any amount of income received from the investment.

7-24

Front 57

A placement agent in a private offering is a firm that assists an issuer by finding both institutional and retail investors to purchase its securities? True?

Back 57

FALSE.
The term placement agent refers to a firm, usually a broker-dealer that agrees to
find institutional investors who, in turn, will purchase securities of an issuer in a private placement.

7-29

Front 58

A private equity company, or any company that is filing for an IPO to become publicly traded, would most likely file what Form?

Back 58

S-1

2-5 or 7-6

Front 59

A prospectus that is filed as part of an automatic shelf registration may omit which pieces of information? What must it have?

Back 59

A prospectus that is filed as part of an automatic shelf registration may omit information
- that is unknown, or is not available to the issuer.
- information as to whether the offering is a primary offering, or an offering on behalf of persons other than the issuer, or a combination of the two.
- plan of distribution for the securities;
- a description of the securities registered, other than an identification of the name or class of such securities
- identification of other issuers

7-14

Front 60

A record of written customer complaints must be maintained by each:

Back 60

Members are required to maintain a separate file of all written complaints (e.g., a letter) in each office of supervisory jurisdiction.

1-19

Front 61

A representative may guarantee a customer against a loss in an IPO when:

Back 61

He can't

1-18

Front 62

A small change in basis (yield/interest rates) has the greatest effect on the price of ….

Back 62

Longer Maturity Bonds

3-18

Front 63

A Suspicious Activity Report (SAR) is also called:

Back 63

A Suspicious Activity Report (SAR) is also called a FinCEN Form 101.

1-15

Front 64

A suspicious activity report is filed within __________ days of learning of suspicious activity, not necessarily receiving a mandate from the company.

Back 64

A suspicious activity report is filed within 30 calendar days of learning of suspicious activity, not necessarily receiving a mandate from the company.

1-15

Front 65

Abram and Lincoln Securities, an investment banking firm, has a controlling interest in Iron and Steele Savings. A customer of Abram and Lincoln has placed an order to purchase 5,000 shares of Iron and Steele Savings. Is this executed and, if so, how?

Back 65

FINRA Rule 5122. A broker-dealer that owns a controlling interest in a company has a control relationship. Abram and Lincoln must disclose this relationship if it solicits orders for the shares of Iron and Steele Savings. This written disclosure would be documented on the customer's confirmation.

7-34

Front 66

According to Corporate Financing Rule, the managing underwriter is required to file certain information with FINRA. This includes:

Back 66

According to Corporate Financing Rule, the managing underwriter is required to file certain information with FINRA. This includes:

-An estimate of the maximum offering price
-An estimate of the maximum underwriting discount, or commission, underwriters' counsel fees, maximum finders' fees, and a statement of any other type of compensation that may accrue to the underwriter
-A statement concerning the affiliation with any member firm of an officer or director of the issuer, or a beneficial owner of 5% or more of the issuers securities
-A detailed statement explaining any other arrangement entered into during the 180-day period prior to the filing date of the offering, where the firm received items of value, warrants, or options from the issuer
-A statement demonstrating compliance with any exception from what constitutes underwriting compensation

8-12

Front 67

According to industry rules, the managing underwriter must disclose all of the following information to FINRA or the exchange:

Back 67

According to Regulation M, a managing underwriter must disclose all of the following information:

- whether it intends to effect syndicate short covering transactions
- impose a penalty bid, or place a stabilizing bid.
- The name of The security, The stock symbol, type and number of shares being offered, date and time of The pricing
-names of The managing underwriter and syndicate members (but NOT The selling group members)
- if applicable, The beginning and ending of The Regulation M restricted period.

8-25

Front 68

According to the FINRA Corporate Financing Rule, what types of compensation to underwriter is prohibited? List them.

Back 68

FINRA describes prohibited terms and conditions within the Corporate Financing Rule. Some of the prohibited arrangements include:

-Reimbursement for miscellaneous expenses
-Reimbursement for salaries of investment banking personnel
-Commissions paid by an issuer to a member firm prior to the commencement of the public sale of the securities being offered
-The payment of any compensation by the issuer to a member firm in connection with an offering that was not completed
-The receipt of a security, warrant, or option that has a duration exceeding five years and has more favorable terms than those that were offered to the public
-Any nonaccountable expense allowance exceeding 3% of the offering proceeds.

8-14

Front 69

According to the FINRA Corporate Financing Rule, which entities must file the required compensation disclosures?

Back 69

The compensation disclosures contained in the FINRA Corporate Financing Rule may be submitted by the:
- issuer
- managing underwriter
- member of the underwriting syndicate.

8-13

Front 70

According to the New Issue Rule, employees of a broker-dealer are restricted from purchasing which offerings?

Back 70

All initial public offerings of equities

Under the New Issue Rule, restricted persons (including employees of a broker-dealer) may not purchase shares of initial public offerings of equities. New issues are defined as initial public offerings of equity securities sold under a registration statement.

8-28

Front 71

According to the Rule 101 of Regulation M, what types of securities are on prohibition for purchases or bids during the restricted period?

Back 71

The prohibition on purchases or bids during the restricted period applies not only to the subject security, but also to any reference security.

A reference security is a security into which the subject security can be converted, exchanged, or exercised, or which, to a significant extent, determines the value of the subject security.

For example, if a convertible bond is being distributed, the underlying common stock is a reference security subject to the restrictions of Rule 101. Together, subject and reference securities are called covered securities in Regulation M. Note that, while common stock would be a reference security if a derivative such as a convertible, right, or warrant, were the subject security, the reverse is not true. For example, if FLPO is issuing common stock, FLPO convertibles are not reference securities.

8-18

Front 72

According to the Securities Exchange Act of 1934, an institutional investment manager who trades with discretionary authority is required to file a form with the SEC if the holdings are:

Back 72

Rule 13f-1 of the Securities Exchange Act of 1934 requires quarterly filings when an institutional investment manager exercises investment discretion over at least $100,000,000 in equity securities during any month of the calendar quarter.

2-4

Front 73

Advantage of S Corporation over a C Corporation?

Back 73

May elect to pass through expenses and revenue directly to owners, thus avoiding federal taxation for the corporation


For most businesses, the major advantage of forming an S Corporation (a limited liability corporation) rather than a regular C Corporation is that S Corporations may elect to be taxed like partnerships under Subchapter S of the Internal Revenue Code. Shareholders report the income or loss reported by the S Corporation on their individual tax returns.
S Corporations must meet certain restrictions in order to qualify for this special treatment.

7-2

Front 74

After failing to negotiate a merger with Company B, Company A has launched a public tender offer for all of Company B's outstanding common stock. How many days must the tender offer be kept open?

Back 74

Tender offers generally must be held open for at least 20 business days from the time they are announced to security holders.

9-26

Front 75

What is the weighted average cost of capital (WACC) and how do you calculate it?

Back 75

Since many companies will raise capital through various methods including long-term debt, preferred stock. and common stock, the weighted average cost of capital provides an appropriate valuation for all these methods.

WACC is the sum of these methods' cost times the weight.

Read example at bottom of 6-21

Front 76

What is normally included in a placement agent agreement?

Back 76

The placement agent agreement specifies all the terms and conditions between a company that is planning on issuing securities in a private placement (the issuer) and the investment bank that has been hired to act as its agent. The role of the investment bank is to find institutional investors to purchase the securities. This agreement normally includes the following features.

-The issuer agrees to provide business and financial information.
-Both the issuer and the investment bank agree not to disclose confidential information unless they receive prior approval.
-The amount of cash and/or securities the issuer agrees to pay as compensation
-The fee could be based on a percentage of the securities, or may include warrants to purchase the company stock.
-Other legal terms and conditions, including:
-The length and termination date of the offering
-Which state law governs the agreement
-Expenses to be reimbursed by the issuer
-The fact that each party agrees to comply with all applicable federal and state regulations


-Since this agreement is normally used for a private placement, the issuer will not be required to file a registration statement with the SEC. If the securities are later resold to the public, a registration statement may need to be filed.

7-29

Front 77

FINRA rules require registered representatives to report to their firm any outside business activities other than what exceptions?

Back 77

FINRA rules require registered representatives to report to their firm any outside business activities for which they earn compensation. However, a passive investment would generally not need to be reported, nor would participation in charitable activities for which no compensation is received.

1-17

Front 78

All of the following registrants would be classified as an ineligible issuer regarding the use of a free writing prospectus EXCEPT:
-A penny stock issuer
-A shell company
-An unprofitable company
-A blank check company

Back 78

A penny stock issuer, a shell company and a blank check company are ineligible issuers regarding the use of a free writing prospectus. (7-15)

Additionally, companies that have filed for bankruptcy protection within the past three years are ineligible issuers. (7-13)

(7-13) & (7-15)

Front 79

An entire class of creditors is considered to have accepted the plan in a Chapter 11 bankruptcy if it is accepted by:

Back 79

Creditors holding at least two-thirds of the dollar amount of the claims and more than 50% of the total number of creditors

9-25

Front 80

An equity IPO may not be purchased by ____________, including:_______. Is there an exception?

Back 80

An equity IPO may not be purchased by restricted persons, including: 8-28

FINRA member firms and any associated person (i.e., an employee) of the member firm
-An immediate family member of an employee of a member firm. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other persons who are materially supported by an employee of a member firm. 8-28
-The definition of a restricted person also includes finders and fiduciaries (such as attorneys and accountants) involved in the new issue, and portfolio managers, who buy and sell securities on behalf of institutional investors who are buying for their own account. (8-29)
- Persons who own a broker-dealer (8-29)

The aforementioned immediate family members would only be considered restricted persons if any one of the following three conditions apply.
• The employee gives/receives mate rial support to/from the immediate family member. Material support is defined as providing more than 25% of the person's income or living in the same household as the person associated with the member firm.
• The employee is employed by the member firm that is selling the new issue.
• The employee has the ability to control the allocation of the new issue.

8-28 & 8-29

Front 81

An individual convicted of insider trading 4 years ago has served time in federal prison. She arrives at your office looking for a position as an investment banker. You would inform her that:

Back 81

A convicted felon is barred from the securities business for 10 years from the time of conviction. This type of ban is referred to as a statutory disqualification. A disqualified person may apply to an SRO to enter or reenter the securities industry before the 10-year period has elapsed. If the SRO grants the waiver, it must notify the SEC, which can overturn the waiver if it chooses.

1-2

Front 82

An individual owns restricted stock. He would not be required to file a Form 144 for a sale of less than:

Back 82

An individual is allowed to sell restricted stock without filing under Rule 144 or reporting the sale if the sale is for less than 5,000 shares and $50,000.

(7-37)

Front 83

An individual who is CE inactive could still work in a _________ role.

Back 83

An individual who is CE inactive could still work in a clerical or ministerial role. 1-1

Note that if the registration of an associated person is suspended, canceled, or revoked, that person may not be associated with a member firm in any capacity, including clerical or ministerial positions. 1-21

Front 84

An investment banking representative employed in the M&A department of a member firm has committed an offense that makes the person subject to statutory disqualification. What happens next?

Back 84

As a general rule, a person subject to statutory disqualification may not be associated with a FINRA member firm in any capacity, even in a nonregistered capacity. The firm is also required to report the event to FINRA. The member firm may request an eligibility hearing by filing a Form MC-400, but there is no guarantee the request will be granted. If the employee is terminated, the firm would file a U5.

1-2

Front 85

An investment banking representative has been accused of violating an SRO rule. The complaint is heard by a Hearing Panel of FINRA. All of the following outcomes are possible EXCEPT the investment banking representative:
-Is fined
-Is sentenced to two years in prison
-Settles the complaint by agreeing to a censure
-Is suspended from associating with a member firm for 90 days and appeals the decision

Back 85

A self-regulatory organization (SRO), such as FINRA, does not have the authority to sentence anyone to prison. SROs may fine, censure, suspend, or expel members. Findings of a Hearing Panel of FINRA may be appealed to the National Adjudicatory Council (of FINRA).

1-21 Test Question.

Front 86

An investment banking representative leaves his current firm and is given a copy of his Form U5. When applying for a new position at another broker-dealer, his potential employer asks for a copy of the document. The applicant should supply this document within

Back 86

Form U5 should be supplied to the new employer within 2 business days, provided the applicant has received a copy. If the former employer failed to provide the Form U5 to the applicant for registration, it should be provided within 2 business days of the request.

1-1

Front 87

An investment banking representative sent a private equity client written information concerning the oil and gas sector. The representative followed up with an e-mail to see if the client had any interest in meeting to discuss possible acquisitions in this sector. The investment banking representative's broker-dealer is required to:

Back 87

Industry rules classify e-mail as a form of correspondence. All correspondence sent by representatives to customers is subject to review by a supervisor. The record-keeping requirement for correspondence is three years.

1-14

Front 88

An investment banking representative wishes to sell interests in a private placement to his clients. The private placement is not being offered through his firm. If he will be compensated for the transactions, which TWO of the following actions must he take?
-Written notice must be provided to FINRA.
-Written notice must be provided to his firm
-Verbal notice must be provided to his firm.
-He must receive written approval from his broker-dealer to participate.

Back 88

2&4.

The SRO rule on private securities transactions requires a registered person to notify his firm if he will be engaging in securities transactions that are not within the scope of his firm's business. If he will be compensated for the transactions, he must also receive written permission from his firm to participate. If he will not be compensated, his firm still has the right to impose conditions on his participation.

1-18

Front 89

An investment banking representative's registration has been deemed inactive since he has failed to complete the Regulatory Element of Continuing Education. How much time does he have to complete the CE requirement before he is required to retake the Series 79 Examination?

Back 89

If the person does not complete the training within the prescribed time frame (120 days after the anniversary date), that person's registration will become inactive. A representative with an inactive registration is prohibited from performing any activity, or receiving any compensation, that requires securities registration. If this inactive status exceeds a two-year period, a person must requalify for registration by passing the appropriate examination.

1-6

Front 90

Under Section 4(6) of the Securities Act, an offering by an issuer may be considered exempt if what conditions are met?

Back 90

According to Section 4(6) of the Securities Act, an offering by an issuer may be considered an exempt transaction if certain conditions are met:

1)The amount of the offering may not exceed $5,000,000.
2) No advertising or public solicitation may be used to offer the securities
3) the offering may be sold only to accredited investors.

7-30

Front 91

An investor who wants to purchase securities for growth but doesn't want to overpay would use a __________________ strategy.

Back 91

An investor who wants to purchase securities for growth but doesn't want to overpay would use a Growth at a Reasonable Price (GARP) strategy.

4-18

Front 92

An issuer is likely to continue to file financial statements with the SEC following a restructuring based on which of the following?
-Leveraged buyout
-Management buyout
-Split-off
-Reduction to 250 shareholders after a partial tender offer

Back 92

Split-off

In many leveraged buyouts (LBOs) and management buyouts (MBOs), the target company is taken private and ceases to be a reporting company. 6-44 & 9-4

A split-off separates an issuer into two components; however, the original company remains intact and continues to file financial statements following the transaction. (9-9)

Generally, companies with fewer than 300 shareholders do not need to file SEC reports. 9-32

6-44, 9-4, 9-9, 9-32

Front 93

An issuer is required to furnish an annual proxy statement to shareholders at least how many days? (business or calendar days?) IS there any exception to rule?

Back 93

According to SEC Rule 14c-2, an issuer is required to furnish an annual proxy statement at least 20 calendar days prior to the meeting date

An exception to this rule is granted if the issuer sends shareholders a notice of Internet availability at least 40 days prior to the meeting date. The notice will identify to shareholders how they may obtain the proxy materials free of charge through a Web site.

2-5

Front 94

An issuer would like to repurchase its shares in the market under the safe-harbor provisions of Rule 10b-18. You would advise the issuer that it should limit the amount of stock purchased on any single day to no more than what percent of the ADTV for that security?

Back 94

Under the safe-harbor provisions of Rule 10b-18, an issuer should limit its purchases for that security to no more than 25% of the average daily trading volume (ADTV) on any single day.

1-9

Front 95

Is an LOI associated with an acquisition binding?

Back 95

Although letters of intent are not typically binding, these documents do specify the terms that have already been agreed to by both the buyer and seller.

9-13

Front 96

An offering of securities that are sold into the secondary market, but are not sold at a fixed price is called

Back 96

At the market offering. An at the market offering of securities is sold (at the prevailing market price) directly into the secondary market through a designated broker-dealer at prevailing market prices, rather than through a traditional offering of a fixed number of shares at a fixed price. Issuers may utilize a shelf registration to initiate an at the market offering, where securities are sold at various prices during the day, reflecting the supply/demand profile for that issuer. Only those issuers registering under Form S-3 or Form F-3 may engage in this type of offering.

7-14

Front 97

What does an OSJ stand for? What activities are involved with an OSJ?

Back 97

Under industry rules, a member finn must appoint a principal to supervise the activities of any location defined as an Office of Supervisory Jurisdiction (OS]). An OS] includes any location at which one or more of the following activities takes place.
• Market-making and/or order execution
• Structuring of public offerings or private placements
• Maintaining custody of customers' funds and/ or securities
• Final acceptance (approval) of new accounts
• Review and endorsement of customer orders
• Final approval of advertising or sales literature
• Responsibility for supervising other branch offices

1-13

Front 98

An underwriter who will be engaging in stabilization must maintain files containing all of the following information:

Back 98

According to SEC Rule 17a-2, an underwriter who will be stabilizing an issue, effecting a syndicate short covering, or implementing a penalty bid, must maintain a record of the following information:

--The percentage participation or commitment of each member of the syndicate
--The names and addresses of the members of the syndicate
--The dates when the penalty bid was in effect
--The name and class of any security stabilized or any security in which a syndicate short covering transaction was effected
--The price, date, and time at which each stabilizing purchase or syndicate short covering transaction was effected

In addition, each syndicate member must receive information from the manager relating to the name, date, and time at which the first stabilizing purchase was effected, and the time that stabilizing was terminated. These records must be kept for a minimum of three years.

8-26

Front 99

Any announcement of the signing of a definitive agreement is considered _______________ and must be filed with the _________ no later than _________.

Back 99

Under SEC Rule 165, any announcement of the signing of a definitive agreement is considered a prospectus and must be filed with the SEC no later than the date of first use.

9-34

Front 100

Any transaction involving a transfer of funds from a country with whom the U.S. does not do business or has embargoes or sanctions in place (e.g. ____, _____, ______, etc.) must be blocked and reported to ______ within _____ days.

Back 100

Any transaction involving a transfer of funds from a country with whom the U.S. does not do business or has embargoes or sanctions in place (e.g. Cuba, North Korea, Iran, etc.) must be blocked and reported to OFAC within 10 days.

1-16

Front 101

Are GNMA bonds backed by US govt?

Back 101

Yes.

The Government National Mortgage Association (Ginnie Mae) is part of the Department of Housing and Urban Development and is, therefore, a true government agency, backed by the full faith and credit of the U.S. Treasury.

3-30

Front 102

Are New building permits a leading indicator?

Back 102

Yes

4-3

Front 103

Are personal loans to directors or officers permitted? Under what Regulation?

Back 103

NO

The Sarbanes-Oxley Act amended the SEC 1934 Act by prohibiting personal loans or other extensions of credit by publicly traded companies to executive officers and directors.

7-25

Front 104

Are Road shows and filings with FINRA's corporate finance department crucial in a private placement process?

Back 104

THEY WOULD NOT HAPPEN

General solicitations are not permitted in a private placement; therefore, a road show would not be part of this process. 7-29

FINRA Rule 5122 relates to a private placement of securities where a member firm issues the securities and conducts the placement on its own behalf. It is also referred to as a Member Private Offering (MPO). Due to potential conflicts of interest, when a member firm attempts to raise capital for itself (or for a firm it controls), the member firm is required to provide a term sheet, or a private placement memorandum, or a disclosure document that contain certain disclosures. The member firm is also required to file this document with FINRA's Corporate Financing Department. 7-34

7-29 & 7-34

Front 105

Are there specific qualifications for a person to act as purchaser representative?

Back 105

Yes.

To avoid conflicts of interest, there are certain restrictions placed on purchaser representatives. They may not own 10% or more of the stock of the issuer, nor be an affiliate, director, officer, or employee of the issuer unless they are a close relative of the offeree. Purchaser representatives must be knowledgeable and experienced in financial and business matters. The potential purchaser must designate an individual to be a purchaser representative in writing for each individual offering. Blanket approval to represent a potential purchaser in all Regulation D offerings is not permitted.

7-32

Front 106

Are Treasury STRIPS backed by govt credit?

Back 106

Yes

STRIPS are backed by the full faith and credit of the U.S. Treasury and are quoted on a yield basis rather than as a percentage of their par value.

3-29

Front 107

As a Series 79 investment banking representative, you would like to show your appreciation to an attorney who referred your firm to issuers. What can you NOT do?

Back 107

FINRA members are permitted to pay nonmembers firms for services rendered such as accounting or legal services in the connection to its business, but are not permitted to make payments for referring business.

A Series 79 representative may not offer to pay underwriting fees, or make any other financial arrangements to pay for referrals.

1-19

Front 108

At what price point can stabilization be initiated?

Back 108

The maximum price at which a stabilizing bid may be initiated is the last independent sale price or the highest bid in the market.

8-22

Front 109

What is a balance sheet? What is the formula?

Back 109

The balance sheet (also called a statement of financial condition) represents the financial picture of a company on a specific date.

Assets= Liabilities+ Stockholders' Equity (Net Worth)

5-1

Front 110

What is Basic EPS? How do you calculate it?

Back 110

Basic earnings per share indicates the amount of profit generated by the company that is allocated to each share of common stock outstanding. EPS is calculated by subtracting preferred dividends from the net income of the company and dividing the result by the number of shares outstanding.

Earnings Available to the Common Shareholders (Net Income - Preferred Dividends) DIVIDED BY Weighted Average Number of Shares of Common Stock Outstanding

5-19

Front 111

Binion & Cortez Group is participating as an underwriter in the IPO of Thirteenth Century Beagle Studios. Geoffrey is a research analyst at Binion & Cortez Group. If there is an internal meeting regarding the offering, Can Geoffrey attend and, if so, under what stipulations:

Back 111

Geoffrey is permitted to attend the meeting and discuss the offering only if there are no personnel from the investment banking department or personnel from the issuing company present.

A research analyst may educate personnel and clients of his firm about a particular investment banking transaction as long as his presentation is fair, balanced, and not misleading and there are no members of the investment banking department or issuing company present.

Without members of the investment banking department or the issuing company present, the research analyst is under less pressure to give an overly optimistic review of the transaction.

8-8 & 8-9

Front 112

What is Book Value and Book Value per Share?

Back 112

This is the total equity of the firm (shareholder equity) divided by the number of shares outstanding and includes intangible assets and goodwill.

5-2

Front 113

By signing a U4, you are agreeing to what? Is there an exception?

Back 113

By signing a U4, the registrant agrees to use arbitration as a means of resolving disputes involving the employer, other members, customers, or associated persons. By agreeing to arbitration the registrant waives his right to civil litigation. However, according to SRO regulations, predispute arbitration agreements found in the Form do not apply to claims involving employee discrimination or sexual harassment.

1-22

Front 114

What does CAGR stand for? What is it? How do you calculate it?

Back 114

The CAGR (compound annual growth rate) is the year-overyear growth over a specified period. It is calculated by taking the nth root of the total percentage growth rate, where n is the number of years for the period being considered.

***IMPORTANT***: This cannot be calculated using the simple calculator that is provided at the testing center. A method to approximate the CAGR is to calculate the growth from every period and compute an average. Then, look at the choices that are close to the average calculated for a value slightly lower

6-8

Front 115

Calculate conversion ratio bond--> stock?

Back 115

You can determine the conversion ratio by dividing the par value of the preferred bond ($100) by the conversion price. For example, if the conversion price is $25, then the conversion ratio is 4-for-1 ($100 par value divided by $25). The preferred stockholder would receive four shares of common stock for each share of preferred stock.

3-7

Front 116

Can a Broker-dealers pay another party to buy, or pay another party to solicit others to buy, securities of the same issuer on the exchange.

Back 116

No.

8-4

Front 117

Can an individual be part of a private placement? If so, what are requirements?

Back 117

YES - must be accredited investor. Regulation D.

To qualify as an accredited investor, an individual must have $1,000,000 net worth or $200,000 annual income ($300,000 for a MARRIED couple) in each of the last two years, with the anticipation that income will continue at that level.

The type of security offered is not relevant to the classification of accredited investor.

7-31

Front 118

Can companies issue stock with out a business plan? What are they called?

Back 118

Companies are permitted to conduct offerings of securities without a specific business plan. Such entities are called blank-check companies. There is no requirement for a company to have an operational history, or to be profitable prior to registering securities.

7-6

Front 119

Can Road shows be one on one?

Back 119

Yes.

It is generally held by investment bankers and an issuer, before a securities offering. Road shows may be attended by retail and institutional investors. The presentations may be made to groups of investors, or conducted one-on-one (generally for institutions).

8-7

Front 120

Can securities that are received as part of a merger be sold right away? What rule applies?

Back 120

Securities that are subject to Rule 145 may not always be resold freely. If the shares that were held prior to the business combination were restricted, then the shares received as a result of the business combination would be restricted and subject to resale under Rule 144. These securities are usually received by affiliates of one of the companies involved in a merger, reclassification, consolidation, or transfer of assets.

The securities can be resold according to any one of the following three conditions.
-The person sells the securities in accordance with the conditions prescribed in Rule 144 for public information, limitations on the amount sold, and the manner of sale (through a broker's transaction, or directly with a market maker).
-The person is not an affiliate of the issuer, has held the securities for at least six months, and the public information condition is met.
-The person has not been an affiliate of the issuer for at least three months and has held the securities for at least one year.

9-33

Front 121

Casa de Tofu, Inc. has issued a number of forward-looking statements regarding its business prospects. In hindsight, the majority of the projections have been glaringly inaccurate. What are repurcusions?

Back 121

Forward-looking statements provide a safe harbor from liability for issues, provided the statements were made in good faith. If the statements were made without a reasonable basis, the statements may be deemed to be fraudulent.

7-19

Front 122

CF Eye Care is filing an S-1 shelf registration statement with the SEC. The securities are to be issued in connection with a business combination. The shelf registration will be valid for:

Back 122

2 years

For securities that are to be used in connection with business combinations, or securities that are being sold for the benefit of the issuing company or a subsidiary, registration is allowed only for an amount that may reasonably be expected to be sold within two years after the initial date of registration.

A shelf registration statement for offerings that fit the following criteria may be used for three years after an initial effective date of a registration statement.
• An offering that will begin immediately and last for a period greater than 30 days from the effective date,
or
• An offering that is for securities registered on Form S-3 or F-3, offered and sold on an immediate, continuous, or delayed basis by or on behalf of the registrant or a majority-owned subsidiary of the registrant

7-13

Front 123

CIP: What does it stand for? What is it?

Back 123

As part of its AML compliance procedures, member firms are required to have a written customer identification program (CIP). For U.S. citizens, the member is required to obtain the client's name, date of birth, address, and taxpayer identification number. Additionally for non-U.S. citizens, the member is required to obtain at least one of the following: taxpayer identification number, passport number and country of issuance, or any government issued document with a picture that provides evidence of the individual's nationality. Members are also required to verify the identity of any new customer, usually by asking the customer to provide a government-issued identification document, such as a driver's license or passport.

1-16

Front 124

Company A buys Company B for 2 times book value and purchases and redeems all of its outstanding debt in an all stock transaction. The number of shares issued to execute this transaction =formula?

Back 124

Company A buys Company B for 2 times book value and purchases and redeems all of its outstanding debt in an all stock transaction. The number of shares issued to execute this transaction = (2 x book value + net debt) / Company A stock price.

6-43

Front 125

Company AZX has announced a partial tender offer for Company BHQ. A stockholder of Company BHQ is long 1,000 shares of stock, and is short 5 BHQ calls and long 2 BHQ puts. For the purpose of tendering shares, the stockholder may tender:

Back 125

500 Shares

An investor who holds stock in a company that is the subject of a tender offer may only tender stock that he holds long. Short tendering is not permitted. If a shareholder has written call option positions against the long stock, the options positions will reduce his net-long holdings in the stock. The long puts do not affect the client's net-long position.

9-29

Front 126

Does Convertible debt have an accretive or dilutive effect on the company's common stockholders?

Back 126

Convertible debt would have a dilutive effect on the company's common stockholders.

6-38 (Read example)

Front 127

Correspondence between underwriting group members, information used for road shows, and copies of underwriting materials must be maintained by a broker-dealer for a minimum of:

Back 127

Under SEC and FINRA rules, all forms of marketing materials must be retained for three years and be readily accessible for the two most recent years.

8-27

Front 128

What does CAPM stand for? What is it? How is it calculated?

Back 128

CAPM (Capital Asset Pricing Model) is an important tool used to analyze the relationship between risk and rates of return. The model is based on the proposition that a company's rate of return is equal to the risk-free rate plus the risk premium of the stock.

KS = KRI + [ ( KM - KRI ) X B ]
where KS = required rate or return (cost of equity)
KM = the expected return on the market
KRI = the risk-free rate
B =a measure of the sensitivity of the firm's stock returns relative to those of the market assuming the absence of diversifiable risk (Beta)

6-18

Front 129

What is the Gordon Growth Method? What is the formula? Define the variables.

Back 129

A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends.

P0 =D1/(k - g)

P0 = intrinsic value of the security
d1 = projected dividend
k = discount rate
g = rate of constant growth

http://www.investopedia.com/terms/g/gordongrowthmodel.asp and (6-27) - (6-29)

Front 130

CRD: What does it stand for? What is it?

Back 130

Central Registration Depository – The CRD is a computerized information system maintained by FINRA that provides registration information
regarding broker-dealers and registered representatives (RRs) to state regulators, other SROs, and the SEC.

1-1

Front 131

What is Current Ratio? How is it calculated?

Back 131

The current ratio calculates the ratio of current assets to current liabilities. This measure indicates how many dollars of current assets are available to pay each dollar of current liabilities.

Current Assets/Current Liabilities

5-18

Front 132

What is Current Yield (Dividend Yield)? How is it calculated?

Back 132

Current yield measures the annual income an investor receives from an investment compared to its current market price. Current yield is calculated by dividing the annualized dividend by a stock's current market price.

3-8

Front 133

What does DSO stand for? What is it? How is it calculated?

Back 133

Days Sales Outstanding, DSO, is calculated as year-end trade receivables net of allowance for doubtful accounts, plus financial receivables, divided by net sales per day. A decrease in DSO represents an improvement and an increase is considered a deterioration in net sales.

Accounts Receivable DIVIDED BY [ Total Credit Sales + Number of days in the period being analyzed (usually 360) ]

5-24

Front 134

Debt to EBITDA Ratio:

Back 134

(Short + Long Term Debt)/EBITDA

5-26

Front 135

Debt to Equity Ratio:

Back 135

Total Debt/Total Shareholder Equity

5-25

Front 136

Debt to Total Cap. Ratio:

Back 136

Total Debt/Total Capital

5-25

Front 137

Difference between 13d and 13g?

Back 137

Schedule I3G is an alternative to Schedule 13D and is usually filed by institutional investors (for example, a mutual fund company) that have no intention to influence or control the issuer.

2-4 & 9-32

Front 138

Difference between Chapter 7 bankruptcy and Chapter 11 bankruptcy?

Back 138

Chapter 11 bankruptcy is often referred to as reorganization bankruptcy. Chapter 7 is a liquidation bankruptcy. In a Chapter 11 bankruptcy, the firm would continue operating, while it attempts to have a reorganization plan approved. There may be a trustee appointed, but usually the debtor operates the business as a debtor in possession (DIP). This term refers to a debtor that maintains possession and control of assets, while undergoing the reorganization under Chapter 11. Generally, there is an automatic stay preventing foreclosures, repossessions, and collection activities for a given period.

9-23

Front 139

What does DPP stand for? What is it?

Back 139

A direct participation program, DPP, is an investment that provides for flow-through tax consequences (single level taxation) to the investors in this security. A DPP may be structured as a limited partnership, joint venture, Subchapter S Corporation, and similar programs.

8-30

Front 140

Dividend Payout Ratio:

Back 140

The dividend payout ratio is the calculation of the percentage of earnings paid to shareholders in the form of dividends. This measure provides an indication of the level of earnings that are used to support dividend payments.

Annual Dividend/Net Income

5-26

Front 141

Dividend Yield:

Back 141

The dividend yield would be found by taking the annual (not quarterly) dividend and dividing it by the current market price of the stock.

Annual Dividend/Market Price Common

5-26

Front 142

Do hedge funds have to registered with SEC?

Back 142

No.

Although hedge funds are not required to register with the SEC, funds of hedge funds typically must register with the SEC.

7-4

Front 143

Do investors of a limited partnership rollup have similar voting rights? What does typically include as well?

Back 143

Generally, investors in the new entity should have voting rights that are similar to the ones that they had in the original entity, including the right to remove the general partner, or board of directors

8-31

Front 144

Do you deduct preferred dividends before tax-effected income or after in Basic EPS?

Back 144

After. You work with net income for Basic EPS.

5-19

Front 145

Do you include Preferred Shares and cost in WACC?

Back 145

Yes. Many companies will raise capital through various methods including long-term debt, preferred stock. and common stock.

6-20

Front 146

Do you need approval from seller to use a certain financing? Is stapled financing a requirement to be used or can you use an alternative?

Back 146

The financing is attached (stapled) to the acquisition term sheet. There is no requirement that the bidders use this financing or obtain permission from the seller to use alternative funding sources.

9-19

Front 147

Does a FWP have to be filed with SEC?

Back 147

A free writing prospectus must be filed with the SEC.

7-16

Front 148

Does a road show have to be live?

Back 148

No may be either live or recorded.

7-19

Front 149

Does Regulation M-A elimnate need for disclosure document?

Back 149

Regulation M-A does not eliminate the requirement for holders of a security involved in a cross-border M&A transaction to receive a disclosure document, such as a prospectus, proxy statement, or a tender offer statement.

9-35

Front 150

During a repurchase, how does the increase in the market value of shares affect companies ROE?

Back 150

The return on equity would increase if the company reduced the number of shares outstanding since this action would reduce the value of the common equity. This reduction in shares might occur if the company had a stock buyback program (assuming the earnings remain unchanged). If the common equity remained constant, the ROE would increase if the company either increased its earnings or experienced a gain on the sale of an asset.

5-23

Front 151

What is EBITDA Margin? How do you calculate it?

Back 151

EBlTDA can be used to analyze the profitability between companies and industries. This measure eliminates the effects of financing and accounting decisions and allows comparisons between companies to be made on a more equitable basis. The EBITDA margin indicates operating profits as a percent of sales providing a stable indication of operating income to each dollar of sales.

EBITDA DIVIDED BY Sales

5-22

Front 152

What does EBITDAR stand for? What is it used for?

Back 152

Earnings before interest, taxes, depreciation, amortization, and rent is used in sectors that rely heavily on leases, or sale and leaseback arrangements. Since different companies within the same sector may have different lease or rental agreements, the use of EBITDAR as a measure is preferable to EBITDA.

5-22

Front 153

What is Enterprise Value (EV) to EBITDA?

Back 153

EV/EBITDA

It is one method used in valuing a firm, under the "relative valuation" attempt.

6-1; Look at table on page 6-36

Front 154

Enterprise Value (EV) to Sales:

Back 154

EV/Sales or Revenue

Look at table on page 6-36

Front 155

What is Enterprise Value (EV)? How do you calculate it?

Back 155

The enterprise value (EV) of the company is the real, tangible price at which a company may be purchased. However, EV is not necessarily the amount that a buyer is willing to pay, or a seller is willing to accept. It is calculated by starting with the market capitalization of the common stock and preferred stock and adding the debt (long-term and short-term), capital leases, minority interest and subtracting cash and cash equivalents. This value represents the actual purchase price that someone might pay to acquire the company on the day ofthe calcuJation.

Market Cap Com. and Pref. + LT and ST Debt + Cap. Leases + Minority Interest – Cash and Equivalents

6-11

Front 156

Explain Rule 144a? What is the holding period under 144A?

Back 156

Rule 144A permits the sale by an issuer of an unlimited dollar amount of restricted securities to qualified institutional buyers (QIBs). The securities offered under Rule 144A may be debt or equity, may be offered by either a domestic or foreign issuer, and may be resold immediately to another QIB. There is no six-month holding period, as with restricted stock. A private placement under Regulation D may be offered to an unlimited number of accredited investors. An accredited investor is defined as a person with either a net worth of $1,000,000, or annual income of $200,000.
Investors, must pass a three-part test in order to be considered QIBs. (1) Only certain types of institutions are eligible, including insurance companies, registered investment companies, pension plans, corporations, and registered investment advisers. (2) The buyer must be purchasing for its own account or the account of other QIBs. (3) The buyer must own and invest at least $100 million of securities of issuers not affiliated with the buyer.

(7-33)

Front 157

Explain amendments to the effective date?

Back 157

As a general rule, the effective date of a registration statement is the twentieth day after the filing date. Any amendment filed to a registration statement prior to the effective date will initiate the 20-day period. If amendments are made under certain limited conditions, it will not delay the effective date. These conditions are:

The registration statement is for registering additional securities of the same (not a different) class as were included in the original registration statement.
The new registration statement registers additional securities in an amount and price that represent together no more than 20% of the maximum offering price included in an earlier registration statement.

7-7

Front 158

Explain Regulation D. Go through the main rules.

Back 158

SEC Regulation D exempts registration for private placements of securities by an issuer if several conditions are met.

According to Rule 504, for offerings not exceeding $1,000,000 within a 12-month period, an issuing corporation is permitted to offer and sell the securities to an unlimited number of
investors without regard to their experience and sophistication. (Meaning it doesn't matter if you are accredited or not.)

According to Rule 505, for offerings not exceeding $5,000,000 within a 12-month period, an unlimited amount of accredited investors are allowed to purchase the security.

For offerings exceeding $1,000,000 within a 12-month period, Regulation D allows an unlimited amount of accredited investors and up to 35 nonaccredited
investors to purchase the offering.

According to Rule 506, nonaccredited investors who purchase Regulation D offerings exceeding $5,000,000 must be restricted to those who, either alone or with their purchaser representative, have the knowledge and experience in financial and business matters to be able to evaluate the merits and risks of the investment.

Securities issued under Regulation D are not registered and are, therefore, restricted. The securities may not be sold unless they become registered, or they are sold under a registration exemption.

If nonaccredited investors are offered the securities, the issuer must furnish specified written information, called an offering memorandum, to all purchasers (both accredited and nonaccredited) disclosing detailed financial information.

7-31 & 7-32

Front 159

Explain written communication as it results to an annoucement of a takeover without registration? With whom must registration be made?

Back 159

Under SEC Rule 165, written communications are permitted once there is a public announcement of a business combination (a merger, acquisition, exchange, or reclassification). If securities will be issued in connection with this transaction, the acquiring company will be required to register the offering with the SEC, usually on Form S-4.
Any written communication made in connection with, or relating to, the transaction must be filed with the SEC according to SEC Rule 425. If both companies are publicly traded, each must file with the SEC.

9-34

Front 160

Final settlement of a syndicate account must be made no later than how many days following the syndicate settlement date?

Back 160

90 Days

According to FINRA rules, the final settlement of the syndicate accounts by the syndicate manager is required no later than 90 days following the syndicate settlement date. Any delay beyond the 90-day settlement date requires the syndicate manager to provide notification to FINRA.

8-17

Front 161

FINRA: What does it stand for? What is it?

Back 161

Financial Industry National Regulatory Association – the new organization created based on the merger of the NASD and NYSE regulatory authorities

http://www.investopedia.com/terms/f/finra.asp

Front 162

Following an IPO, a security can trade away from its primary exchange (e.g. NYSE or Nasdaq) only after the shares _________________.

Back 162

Following an IPO, a security can trade away from its primary exchange (e.g. NYSE or Nasdaq) only after the shares have traded on the primary exchange. For example, an NYSE stock can be traded on the third market after it has traded on the NYSE.

8-34

Front 163

Form 144:

Back 163

Filed at the time for resale of restricted and control stock

7-35

Front 164

Form 14D-9:

Back 164

Issuer’s opinion of a tender offer. (a) recommend that shareholders accept or decline the tender
offer, (b) express that it has no opinion and remains neutral, or (c) state that it is unable to take a
position on the tender offer.

9-29

Front 165

Form 8-K:

Back 165

If an event occurs that would materially affect the issuer's financial condition or share price, a report must be made to the SEC on Form 8-K. The form is broken down into nine sections.
• Business and Operations- Termination of a material definitive agreement or bankruptcy or receivership
• Financial Information-Completion of an acquisition or disposition of an asset, results of operations and financial condition, an off-balance-sheet arrangement, and material impairment
• Securities and Trading Markets- Notice of delisting, unregistered sale of equity securities
• Accountants and Financial Statements- Change in the certifying accountant
• Corporate Governance and Management-Change in control of the company, the resignation or election of a director, amendments to corporate bylaws, code of ethics, and change in shellcompany status
• Asset -Backed Securities-Securities Act updating disclosures, failure to make a required distribution, and change in servicer or trustee
• Regulation FD-(covered next)
• Financial Statements and Exhibits-The latest financial statement, which is included in the press release announcing the company's latest financial results
• Other Events-Material events not listed in the form

2-3

Front 166

Form D:

Back 166

A uniform notice of sale, under Regulation D, that must be filed with the SEC no later than 15 days after the first sale of the securities.

7-31

Front 167

Form F-1:

Back 167

Registration form used for foreign IPOs and small issuers

2-5

Front 168

What is Form F-3:?

Back 168

Registration form used by foreign WKSIs and seasoned issuers. Form F-3 may only be used by foreign private issuers that have reported under the 1934 Act for a minimum of 12 months and that have a (worldwide) public market float of more than $75 million.

2-5

Front 169

What is Form S-1>

Back 169

Form S-1 (an F-1 in the case of a foreign private issuer) is the registration form that is used for most initial public offerings. It includes all the relevant information concerning the issuer's business, competition, use of proceeds, risk factors, financial statements, and other important disclosures.

2-5

Front 170

What is Form S-3?

Back 170

Registration form used by seasoned issuers and has a requirement of $75 million of public float in voting and nonvoting common equity.

2-5

Front 171

Form S-4

Back 171

In situations where securities are offered as a result of business combinations due to mergers, acquisitions, consolidations, reclassifications of securities, or transfers of corporate assets, the SEC requires the issuer to file Form S-4. The SEC believes that investors should be afforded the protection of securities laws when securities are offered in this manner. (7-6)

This is an important source of information, detailing the cash and/or stock the shareholders of the target company will receive from the acquirer. Other information included is the purpose of the merger, the tax implications of the transaction, the conditions for the completion of the merger, termination fees (if applicable), whether the target is permitted to solicit other offers, historical financial information, risk factors of the merger, overall business risk of the industry, recommendations of the target company's board of directors, the fairness opinion rendered by the target's financial adviser, the merger agreement. and historical price ranges for the common stock of both companies. (9-34)

7-6 & 9-34

Front 172

Form U4:

Back 172

Registration form for individuals in the securities industry

1-1

Front 173

Form U5:

Back 173

Form used to notify the FINRA of an individual’s withdrawal of registration

1-2

Front 174

How do you calculate Free Cash Flow to Firm (FCFF)?

Back 174

EBIT x(1-Tax Rate) + Deprc. and Amort. – Capital Exp. +/- Change to Working Capital

6-23

Front 175

Free Cash Flow Yield:

Back 175

Free Cash Flow per Share/Market Price Common

The reciprocal of the price-to-free-cash-flow
ratio.

6-9

Front 176

Full Throttle Semiconductors is currently going public. The issuer has required its employees and venture capital participants to sign lock-up agreements. How long does the lockout restrict sales?

Back 176

Although the shares are typically locked up for a period of 6 months from the public offering, there is no statutory time period. Additional limitations on the quantity of shares permitted to be sold may be detailed in these agreements. While federal laws do not govern the terms of lock-up agreements (duration and quantity), the resale provisions must still be disclosed in the initial registration documents and prospectus. (7-11)

Additionally, although the lock-up period may expire after 180 days, insiders may be bound by additional restrictions regarding the timing and volume of sales as codified under Rule 144 of the 1933 Act (7-36).

7-11 & 7-36

Front 177

FWP: What does it stand for? What is it?

Back 177

Free writing prospectus

A FWP is any written communication that constitutes an offer to sell or a solicitation to buy the securities related to a registered offering that is used after the registration statement has been filed. It may be used as a disclosure document for new issues by seasoned issuers and well-known seasoned issuers. Examples include term sheets, marketing materials, and press releases.

7-15

Front 178

Generally, companies with fewer than 300 shareholders do not need to file SEC reports. True or false?

Back 178

True.

9-32

Front 179

Gross Profit Margin:

Back 179

The gross profit margin is an indication of the amount of each dollar of sales that is available to cover operating expenses and profit. Gross profit is calculated by subtracting the cost of goods sold from net sales and this figure is divided by net sales to determine the margin.

Gross Profit/Sales or Revenue

5-21

Front 180

High level steps in a friendly merger?

Back 180

A friendly merger transaction between two public companies typically begins with a vote by the respective boards of directors to approve the proposed merger. This occurs prior to a public announcement. Since this is a material event, Form 8-K must be filed at the time of the announcement of the merger. A press release will be issued. (9-33)

According to SEC Rule 165, any written communication after the public announcement, and until the filing of a registration statement, must be filed with the SEC. These communications are referred to as Form 425 filings. For example, a joint press release by the boards of directors of both companies announcing a merger, or an e-mail message from the CEO of the acquiring firm sent to the employees of the target company, would be filed with the SEC. Each document must contain a prominent legend that urges investors to read all relevant information concerning the offering on the SEC's Web site. (9-34)

Since securities will be issued in connection with this merger, the acquiring company is required to file a registration statement with the SEC, usually on Form S-4. (9-34)

The shareholders will then vote on the proposed merger. (9-34)

9-33 & 9-34

Front 181

How are bonds accounted for in the Statement of Cash Flows?

Back 181

The Statement of Cash Flows begins with operating activities. The first entry is net income. This entry would reflect bond interest expenses as interest that has been deducted in the calculation of net income. The sale of the debentures would be reflected under Financing Activities (not investing). Financing Activities reflect the net proceeds (a source of funds) obtained from the issuance of bonds.

5-4

Front 182

How are CMOs taxed?

Back 182

Interest payments are generally paid monthly and are taxable on the federal, state, and local level. The principal payments are considered return of capital and are not taxable.

3-31

Front 183

How are dissenting partners (who vote against rollup) compensated in a limited rollup?

Back 183

Dissenting limited partners (investors who vote against the rollup transaction) must receive compensation that is based on an appraisal of the partnership's assets conducted by an independent appraiser, rather than by the general partners or an affiliate.

8-31

Front 184

How are extraordinary charges reconciled in the P/E ratio?

Back 184

The P/E ratio using Leading EPS is based on earnings before extraordinary charges are added to reported earnings.

6-2

Front 185

How are most Hedge Funds structured and how do they raise capital?

Back 185

Most hedge funds are structured as limited partnerships and raise capital short selling, the use of leverage (borrowed funds) and placing large bets on individual companies or sectors of the market.

7-4

Front 186

What is a spinoff? Why is it done? What are the tax implications?

Back 186

In a spinoff, each shareholder retains shares in the parent corporation and is also granted shares in the newly created entity.

Spinoffs are used by sellers in the hopes that the combined valuation assigned by the market to the two (now) separate companies will be greater than that of the single combined entity.

There are no immediate tax consequences to the recipient of the new shares.

9-9

Front 187

How are unsubstantiated rumors handled in a research report by an analyst?

Back 187

Generally, the circulation of rumors is prohibited by NYSE Rule 435(5). However, unsubstantiated rumors published in a widely circulated media may be discussed if the source of the information and the fact that they are unsubstantiated is disclosed.

1-8

Front 188

How can a company seeking control avoid risk of not getting it in a tender offer?

Back 188

At the very least, the tender offer must specify the period the offer is extended for, the price, and the quantity
of shares the buyer wants to purchase. A company avoids risk by being able to say how many shares it wants to buy. Often this tender offer is part of a takeover strategy or, at a minimum, an attempt to get sufficient votes to gain representation on the target's board (BOD).

9-26

Front 189

How can free cash flow analysis be used to calculate the amount of additional leverage or borrowing a company can incur?

Back 189

Since free cash flow to the firm equals the cash a company has available after paying its operating expenses and capital expenditures, the present value for the company's cash flows for the payback period may be used as a proxy to estimate the additional amount of debt the company can incur. The after-tax cost of debt is used as the discount rate. A company with high free cash flow has the capacity to issue additional debt.

6-29

Front 190

How do each of these support Automatic Order Execution?

NYSE
Nasdaq Global Market
Nasdaq Capital Market
OTCBB

Back 190

The OTCBB (OTC Bulletin Board) is a quotation system. It does not support automated electronic execution.

The NYSE offers electronic execution through NYSE Direct+.

Nasdaq provides electronic execution through the Nasdaq Market Center Execution System.

(8-33)

Front 191

How do REITs generate profits?

Back 191

Their profit is derived from the rental income received from tenants and property management fees, as well as the difference between the purchase and sales prices of portfolio properties.

7-3

Front 192

How do you calculate Free cash flow from net income?

Back 192

To calculate free cash flow to common stockholders, depreciation and amortization are added to net income (or earnings available to common if the company has preferred stock in its capital structure). Capital expenditures for the year are then deducted. If working capital has increased, free cash flow is reduced by the amount of the increase. If working capital has declined, free cash flow will be increased by the amount of the decline.
Working capital (current assets minus current liabilities) was $175,000,000 in 2007 . Working capital declined to $160,000,000 in 2008. The decline of $15,000,000 in 2008 would be an addition to free cash flow.

6-23

Front 193

How does Accelerated depreciation affect earnings (GAAP vs. tax reporting) and which one does GAPP generally use?

Back 193

Many firms use accelerated depreciation for tax reporting, while using straight-line for GAAP reporting to shareholders. Accelerated depreciation provides a larger level of expenses in the earlier years of an asset's life, creating a lower earnings level reported for tax purposes. The difference in the taxes reported to the shareholders and the taxes paid is treated as a deferred tax liability on the report to shareholders. Straight-line depreciation is used for reports to shareholders; therefore, the reported earnings are unaffected by the use of accelerated depreciation for tax purposes.

5-7

Front 194

How does Rule 144 treat resticted and control stock differently? Holding period? And volume limitations?

Back 194

Rule 144 requires that restricted (unregistered) stock be held for 6 months before it can be resold. Control stock (registered stock purchased by insiders) is not subject to a holding period requirement under Rule 144. (7-36)

Both restricted and control stock are subject to the volume limitations. The maximum that may be sold is the greater of 1% of the total shares outstanding or the average weekly volume of the past four weeks. (7-37)

Front 195

How long is a convicted felon is barred from the securities business? Can he apply for waiver?

Back 195

A convicted felon is barred from the securities business for 10 years from the time of conviction. This type of ban is referred to as a statutory disqualification. A disqualified person may apply to an SRO to enter or reenter the securities industry before the 10-year period has elapsed. If the SRO grants the waiver, it must notify the SEC, which can overturn the waiver if it chooses.

1-2

Front 196

How long must Blotters be kept on file?

Back 196

6 years at least

8-27

Front 197

How long must broker-dealer's Articles of Incorporation be kept on file?

Back 197

Life of entity

8-27

Front 198

How long must Copies of confirmations sent to customers be kept on file?

Back 198

3 years

8-27

Front 199

How long must Correspondences between a broker-dealer and an investment banking services client be kept on file?

Back 199

3 years

8-27

Front 200

How many copies of the preliminary prospectus must be included in filing of a registration statement?

Back 200

Five copies of the preliminary prospectus must be included in the filing of a registration statement.

7-6

Front 201

How many round-lot shareholders is required for listing on NYSE, Nasdaq Global Select Markets and Nasdaq Capital Markets?

Back 201

The NYSE requires 400 US round-lot shareholders. (8-33)

Nasdaq Capital Market requires a minimum of 300 round-lot shareholders to apply for initial listing

Nasdaq Global Select Market is 450 round lot shareholders.

(http://www.cooley.com/58763)

Front 202

In a distribution that isn't a firm-commitment underwriting, what must the broker-dealer do with with the funds?

Back 202

If a broker-dealer is participating in a distribution other than a firm-commitment underwriting, it must either promptly forward funds to the issuer or establish an account with an escrow agent who has agreed in writing to hold such funds.

8-2

Front 203

How often must AML program be tested?

Back 203

Testing of the AML program must be conducted annually. More frequent testing is required if circumstances warrant it. If the member does not execute transactions for customers, or otherwise hold customer accounts, or acts as an introducing broker with respect to customer accounts (e.g., engages solely in proprietary trading or conducts business only with other broker-dealers), then independent testing is required every two years.

1-15

Front 204

How would rising/falling interest rates affect the dollar and import/exports?

Back 204

Foreign exchange rates also have an impact on foreign trade. If the U.S. dollar is strong, U.S. consumers can purchase more foreign goods. Thus, imports into the U.S. (exports from foreign countries) will increase. Conversely, foreign consumers (with weaker foreign currencies} will be unable to purchase the relatively more expensive U.S. goods. This causes exports from the U.S. to decrease, leading to a trade deficit for the U.S. (imports exceeding exports).

To correct a trade deficit, the dollar must fall. U.S. goods will become cheaper (more competitive) abroad and foreign goods more expensive in the U.S. This would lead to more U.S. exports and fewer U.S. imports, which should help to alleviate the trade imbalance. In summary, U.S. importers (and consumers) prefer a strong dollar while U.S. exporters (producers) prefer a weak dollar.

4-13 & 4-14

Front 205

As an investment banking representative, what do the regulators that oversee the Series 79 examination expect from you?

Back 205

To have a thorough understanding of the legal, regulatory, and accounting issues associated with a merger or acquisition transaction.

9-4

Front 206

If 3 shareholders each owning 3% of the voting shares of a company agree to vote their shares together, they would need to file a _____?

Back 206

If 3 shareholders each owning 3% of the voting shares of a company agree to vote their shares together, they would need to file a 13D.

Section 13(D) of the Securities Exchange Act requires any person or group of persons who acquires more than 5% of an issuer's equity securities to notify the issuer, the exchange where the securities are traded, and the SEC.

2-3

Front 207

If a bond is selling at a premium and is callable at par, how is the yield calculated?

Back 207

To the call date

The yield for a bond that is selling at a premium and is callable at par is calculated to the call date. The yield to call measures the yield that would be earned if the bonds were called at the call price, rather than held to the maturity date. Industry rules require broker-dealers to quote the lower estimate of the yield to call or the yield to maturity. If the bond had been selling at a discount, it would have been quoted on a yield to maturity basis. If a bond is selling at a premium and callable at a premium, the yield may be to the final maturity or the call date, whichever is less.

In each case, the investor would receive a quote based on the MOST CONSERVATIVE SCENARIO. This is referred to as the YIELD TO WORST.

3-15

Front 208

If a business is being liquidated under a Chapter 7 bankruptcy, which of the following claims would generally have the LOWEST priority?
-Wages of employees
-Providers of debtor-in-possession financing
-Debenture holders
-Administrative expenses of the bankruptcy

Back 208

Debenture holders

A debenture is a general unsecured claim and would have the lowest priority of the choices listed. Wages of employees (subject to dollar and timing limits) and administrative expenses of the bankruptcy are considered priority claims. Debtor-in-possession financing is a special financing for companies in bankruptcy. The bankruptcy code may provide incentives for lenders to provide new capital while the debtor attempts to reorganize the business. The incentive often includes a superpriority that grants a higher priority to these creditors than other unsecured creditors. This financing generally must be approved by the bankruptcy court.

9-24

Front 209

If a company is willing to pay a certain multiple of EBITDA to make an acquisition but can recognize expense synergies, the effective multiple recognizing the synergies would be =

Back 209

If a company is willing to pay a certain multiple of EBITDA to make an acquisition but can recognize expense synergies, the effective multiple recognizing the synergies would be (EBITDA multiple x TargetCo EBITDA)/(EBITDA + synergies). For example, if Company S is willing to pay 9.6x EBITDA for Company Y, which has EBITDA of $17mm, but can recognize $3mm in synergies, the effective EBITDA multiple would be (9.6 x $17mm)/($17mm + $3mm) = 8.16x.

6-43

Front 210

If a company issues a PIK bond, where does the PIK accrued interest show up ?

Back 210

Although the PIK interest is not paid in cash, the accrued interest is added to the interest expense on the income statement. Subject to certain limitations, this allows the issuer to claim an interest deduction on the payments, therefore reducing its taxes.

3-26

Front 211

When declaring a cash dividend, _____________ increase and _____________ are reduced. When the dividend is paid, _____________ is reduced and _____________ are also reduced. _____________ is, therefore, reduced when a company declares a cash dividend, not when the dividend is paid.

Back 211

When declaring a cash dividend, dividends payable increase (a current liability) and retained earnings (stockholders' equity) are reduced. When the dividend is paid, cash (a current asset) is reduced and current liabilities (dividends payable) are also reduced. Working capital is, therefore, reduced when a company declares a cash dividend, not when the dividend is paid.

5-10

Front 212

If a company sells securities in multiple states, the issuer must ___________ and the representative selling the securities must _______________

Back 212

If a company sells securities in multiple states, the issuer must comply with blue sky laws in all three states and the representative selling the securities must be appropriately registered in all the states where the securities are being sold.

7-9

Front 213

If a company's financial statements indicate a negative P/E, an investment banking representative may use alternative methods. Name TWO methods that would be appropriate considerations when a company has a negative P/E ratio.

Back 213

If the company is showing a negative P/E ratio, an analyst may use forward EPS rather than trailing EPS. A negative P/E ratio could be caused by non-recurring items, while in a forward EPS, non-recurring items aren't used, as it is based on projections of future earnings. (6-2)

The use of earnings yield rather than the price/earnings ratio is also a viable alternative. (6-5)

EV/EBITDA (6-12)

Test Question.

Front 214

If a corporation is in liquidation, the holder of subordinated debt would be paid:

1) Before bank loans and before accounts payable
2) Before bank loans and after accounts payable
3) After bank loans and before accounts payable
4) After bank loans and after accounts payable

Back 214

4

In a liquidation of a corporation, the subordinated debt holders would be paid after bank loans and after accounts payable or other creditors. The subordinated debenture holders are paid after everyone except preferred and common stockholders.

9-24

Front 215

If a member firm is participating in a distribution of a public offering of its own securities, or of a firm that controls the member firm, what conditions must be met?

Back 215

Since this is a conflict of interest in the participation of this public offering, the offering must comply with either one of the following two conditions:

1) Any conflicts of interest must be prominently disclosed in the prospectus. In addition, one of the following three conditions must be met. (l) The member primarily responsible for managing the offering does not have a conflict of interest or is not an affiliate of any member that does have a conflict, or (2) the securities offered have a bona fide public market, or (3) the securities offered are investment-grade.

2) A qualified independent underwriter (Q!U) must participate in the preparation of the offering documents, and must have served as a manager or comanager in at least three public offerings of a similar size and type during the three-year period preceding the filing of the registration statement. If a QIU is used, there must be a prominent disclosure in the prospectus or offering document. The disclosures must explain the conflicts of interest, the name and the role of the qualified independent underwriter, and a brief statement regarding the role and responsibility of the qualified independent underwriter. The member firm is also required to notify FINRA when the offering is completed.

8-16

Front 216

If a member firm will be imposing a penalty bid or engaging syndicate covering transactions, what must it do? What does this include?

Back 216

The syndicate manager must provide written notice to FINRA if it intends to impose a penalty bid on a subject or reference security under Rule 10 l, or if it intends to engage in syndicate covering transactions under Rule l 04. The notice must be provided prior to the start of either of these activities.
The notice must include (i) the identity of the security and its Nasdaq symbol, and (ii) the date the member intends to impose the penalty bid and/ or conduct syndicate covering transactions.

8-23

Front 217

If a new issue is not expected to close on the settlement date, the lead manager must notify________________ no later than____________.

Back 217

If a new issue is not expected to close on the settlement date, the lead manager must notify Uniform Practice Department no later than the expected closing date.

FINRA rules require the syndicate manager of a firm-commitment public offering to immediately but, in any event, no later than the scheduled closing date, notify the Uniform Practice Department of any anticipated delay in the closing of an offering beyond the closing date in the offering document.

8-17

Front 218

If a public announcement of an acquisition has been made, written communications are permitted as long as _____________________

Back 218

If a public announcement of an acquisition has been made, written communications are permitted as long as they are filed with the SEC.

Under SEC Rule 165, written communications are permitted once there is a public announcement of a business combination (a merger, acquisition, exchange, or reclassification). According to SEC Rule 165, any written communication after the public announcement, and until the filing of a registration statement, must be filed with the SEC on the date of first use. These communications are referred to as Form 425 filings.

9-34

Front 219

If a registered rep participates in a securities transaction outside the jurisdiction of their firm, but does not receive compensation, _____ is still required, but _____ is not

Back 219

If a registered rep participates in a securities transaction outside the jurisdiction of their firm, but does not receive compensation, written notice is still required to the firm but permission is not.

1-18

Front 220

If a rep is busted for shop lifting but not yet charged, it would be:

Back 220

Since the person has not been convicted, he is not subject to statutory disqualification and may stay employed at a member firm. If the person is later convicted of this crime, he is subject to statutory disqualification and may not be associated with a FINRA member firm in any capacity, even in a nonregistered capacity.

1-4

Front 221

If an investment banking representative would like to become familiar with the required content of nonfinancial disclosures in registration statements filed under the Securities Act of 1933, what regulations/rules should the representative peruse?

Back 221

Regulation S-K is a crucial component of the SEC disclosure system. It sets forth many of the disclosure requirements for registration statements filed under the '33 Act and other reports filed under the Securities Exchange Act of 1934. Some of the reports include going-private statements, tender offer statements, and proxy statements. Some of the issues addressed include material contracts, executive compensation and management reports on internal controls.

7-20

Front 222

If an issuer pays PIK interest (“payment-in-kind”) it appears on the ________as ____________, just as if interest were actually _______.

Back 222

If an issuer pays PIK interest (“payment-in-kind”) it appears on the income statement as interest expense, just as if interest were actually paid in cash.

3-26

Front 223

If an issuer sells securities that are to be issued for such entities as employee benefit plans, securities to be issued upon conversion of other securities, and securities to be issued in connection with business combination transactions, at various times over a 3 year period it is a _____________.

Back 223

If an issuer sells securities that are to be issued for such entities as employee benefit plans, securities to be issued upon conversion of other securities, and securities to be issued in connection with business combination transactions, at various times over a 3 year period it is a shelf registration.

7-13

Front 224

If an issuer updates the financial statements in a preliminary prospectus (i.e. red herring), it must be :

Back 224

If an issuer updates the financial statements in a preliminary prospectus (i.e. red herring), it must be refiled with the SEC.

7-7

Front 225

If an options contract is exercised, which of the following statements is TRUE?
-The buyer of a call must deliver the underlying stock.
-The buyer of a put will receive the underlying stock.
-The seller of a put will be required to buy stock.
-The seller of a call will lose the premium.

Back 225

The seller of a put will be required to buy stock.

If a put option is exercised, the buyer has the right to put (deliver) the underlying stock to the seller at an agreed-upon price. The seller or writer has the obligation to accept delivery of the stock at the exercise or strike price.

3-32

Front 226

If interest rates change, which bond (in terms of maturity) would be expected to have the greatest dollar change in price?

Back 226

When the general level of interest rates changes, long-term bonds have greater price fluctuations than short-term bonds.
A change in interest rates will affect the prices of 30-year bonds more dramatically than five-year bonds. In periods of rising interest rates, the prices of long-term bonds will decrease more than the prices of short-term bonds, but when interest rates decrease, the prices of long-term bonds will increase more than those of short -term bonds.

3-18

Front 227

If the (omitted) information is not contained in a subsequent prospectus, what should they do?

Back 227

If the (omitted) information is not contained in a subsequent prospectus filed with the Commission under the '33 Act; the omitted information must be disclosed in a POST-EFFECTIVE AMENDMENT to the registration statement.

7-8

Front 228

If the Federal Reserve Board decreased the discount rate, you would expect:

Back 228

By decreasing the discount rate, the FRB encourages borrowing, which expands the money supply. Conversely, the money supply will contract with an increase in the discount rate. A change in the discount rate is usually taken as a very strong sign that monetary policy has shifted.

4-8

Front 229

If two companies have a similar P/E but one company has a higher EV/EBITDA, a difference in _______ might account for the difference.

Back 229

If two companies have a similar P/E but one company has a higher EV/EBITDA, a difference in depreciation or amortization might account for the difference.

Test Question. 6-12

Front 230

If using a purchaser representative, can you allow them to authorize every transaction automatically?

Back 230

No.

The potential purchaser must designate an individual to be a purchaser representative in writing for each individual offering. Blanket approval to represent a potential purchaser in all Regulation D offerings is not permitted.

7-32

Front 231

If yields (interest rates) are rising, what are the effects on DCF, WACC, risk-free rates, and cost of debt?

Back 231

If rates are rising, the cost of debt capital would increase (6-14).
If the COST of debt increases (meaning the cost of capital of debt in the formula INCREASES), the weighted average cost of capital will increase (6-20 - 6-22).
And, if WACC increases DCF will decrease (6-13).

If WACC increases, the risk-free rate increases as well (6-18).

6-16, 6-14, 6-18, 6-20 - 6-22

Front 232

In a bankruptcy proceeding, administrative claims (e.g. lawyers' fees, trustee expenses), are paid _______ any recently unpaid wages.

Back 232

In a bankruptcy proceeding, administrative claims (e.g. lawyers' fees, trustee expenses), are paid before any recently unpaid wages.

9-24

Front 233

In a Chapter 11 bankruptcy, what are duties of a debtor-in-possession?

Back 233

In a Chapter 11 bankruptcy, the firm is operated by existing management as a Debtor-in-Possession (DIP).
-It will arrange to obtain financing, which is called DIP financing, and will conduct Section 363 sales. (9-25)
-Acts in the capacity of a fiduciary and must act in the best interests of the creditors. (9-24)
-The DIP must file tax returns and operating reports (in most cases, monthly) and is responsible to make payments to professionals in a timely manner. (9-24)

9-24, 9-25

Front 234

In a Chapter 7 bankruptcy, a creditor must always file:

Back 234

In a Chapter 7 bankruptcy, a creditor must always file a proof of claim to be eligible to recover any funds owed.

9-23

Front 235

In a contingency offering, what must the underwriter do?

Back 235

A broker-dealer managing an offering sold as a contingency underwriting must deposit the funds PROMPTLY in a separate bank account. Funds for these types of offerings must be placed promptly in a bank that would act as escrow agent.

8-2

Front 236

In a distribution of securities related to M&A activity, the Regulation M restricted period begins ________________

Back 236

In a distribution of securities related to M&A activity, the Regulation M restricted period begins the day proxy materials are first disseminated to holders of the securities and ending on the completion of the distribution.

8-18

Front 237

In a limited partnership rollup, how are the assets valued?

Back 237

Independent appraiser

8-31

Front 238

In a friendly merger between two companies, the companies would file ______, the initial regulatory document. To register securities, an SEC Form _____ would be used.

Back 238

In a merger between two companies, the companies would file Form 8-K as the initial regulatory document (9-33). To register securities, SEC Form S-4 would be used (9-34).

9-33, 9-34

Front 239

In a one step merger, which (target or acquiror) shareholders need to vote and approve? Is proxy filed? Explain process.

Back 239

In a one-step merger process the target company obtains approval from its shareholders through a vote at a special meeting. Prior to the vote, the target company would first file a preliminary proxy statement with the SEC. Once SEC approval is received, the definitive proxy statement is sent to shareholders, providing the information on the proposed transaction. In most cases a simple majority of the target company is required.

9-27

Front 240

In a registration statement for non-WKSI & unseasoned issuers, financial statements become outdated if they are more than ___ days old at the time of filing.

Back 240

In a registration statement for non-WKSI & unseasoned issuers, financial statements become outdated if they are more than 135 days old at the time of filing.

7-22

Front 241

In a registration statement for WKSIs or seasoned issuers, financial statements become outdated if they are more than ____ days old at the time of filing.

Back 241

In a registration statement for WKSIs or seasoned issuers, financial statements become outdated if they are more than 130 days old at the time of filing.

7-22

Front 242

When is a transaction complete under SEC regulations?

Back 242

When purchasing a security, the transaction is normally completed when the customer makes payment of any part of the purchase price to the broker-dealer, assuming the customer pays on the date due. lf payment is made by a bookkeeping entry on the broker-dealer's records, completion occurs when the entry is made. However, if the customer pays prior to the time the payment is due, completion occurs when the broker-dealer delivers the securities to the customer's account, which is usually on the settlement date.

1-8

Front 243

In a tender offer where shareholders offer more than the number of shares being purchased, how are tendered shares accepted?

Back 243

In a tender offer where shareholders offer more than the number of shares being purchased (oversubscribed), tendered shares are accepted on a pro rata basis from only those shareholders who offered their shares.

9-32

Front 244

In a tender offer, who files a proxy statement?

Back 244

Since the shareholders of the target company will be voting on the terms of the acquisition, the target company is required to file this information, regardless of whether the offer consists of cash, cash and securities, or securities.

9-36

Front 245

In a txn, when must a written disclosure of a conflict of interest be made?

Back 245

Written disclosure of a conflict of interest must be made no later than completion of a transaction.

8-16

Front 246

In an S corp and in terms of taxes, distributions in excess of a client's basis are treated as

Back 246

Distributions in excess of a client's basis are treated as capital gains.

7-2

Front 247

In an S corp, Distributions that reduce the client's basis are considered

Back 247

Distributions received by shareholders reduce the client's basis and are considered a nontaxable return of capital.

7-2

Front 248

In bankruptcy, what is the sale of assets outside the normal course of business called? Who must approve? What are the high-level steps?

Back 248

The sale of assets outside the normal course of business can be accomplished through a Section 363 sale.
This may be accomplished with the approval of the bankruptcy court.
The trustee, or debtor, must file a motion with the bankruptcy court seeking the court's approval. Opponents of the sale will have a period of time to object to the proposed sale. If approved, the debtor or trustee can proceed with the sale.

9-25

Front 249

In Chapter 11, how many days does the Debtor-in-possession have to file an exclusive plan?

Back 249

120 Days.

Creditors may submit a reorganization plan, but the debtor generally has a 120-day period during which it has an exclusive right to file a plan.

9-25

Front 250

In dividend discount model (DDM), what type of growth is assumed in dividend?

Back 250

The projection may show a constant growth rate, a variable growth rate, or no growth at all.

6-27

Front 251

In easy money periods, bonds of similar quality will generally have which two and why?:

1.Short-term yields lower than long-term yields
2.Long-term yields lower than short-term yields
3.Both short-term and long-term yields below normal
4Both short-term and long-term yields higher than normal

Back 251

1&3

In periods of easy money, there is availability of money. Therefore, interest rates will decline (be lower). In these periods of easy money, bonds of similar quality will generally have short-term yields lower than long-term yields. Both short-term and long-term yields will be below normal. This situation would create a positively sloped yield curve where yields rise from short- to long-term.

4-9 (test question)

Front 252

In what situations can a registered individual borrow money (or lend money) to a customer? Is firm approval required?

Back 252

1. The customer and the registered person are immediate family members.
2. The customer is a financial institution regularly involved in the business of extending credit or providing loans.
3. Both parties are registered with the same firm.
4. The loan is based on a personal relationship between the customer and the registered person.
5. The loan is based on a business relationship independent of the customer-broker relationship.

lf the loan is based on provision 1, firm notification or firm approval is not required. If the conditions indicated in provisions 3, 4, or 5 prevail, the firm must approve the lending activity prior to the execution of the loan.

1-18

Front 253

If a syndicate decides to stabilize, what must be done?

Back 253

If a syndicate decides to stabilize, it must notify the market in which stabilizing will occur, and must disclose the purpose of the stabilizing bid to the person with whom the bid is entered.

8-24

Front 254

In periods of easy money, when interest rates are declining, yield curves would tend to:

Back 254

In periods of easy money when interest rates are declining, yields on shorter maturities would be less than that of longer maturities. Yield curves would tend to slope upward from the shorter to the longer maturities.

4-11

Front 255

In requirements for NYSE listing, can outside-U.S. public offerings be considered in the market valuation of shares? Are there any exemptions for this?

Back 255

Only U.S. public offerings are considered in the market valuation of shares. The NYSE will not provide a waiver of this requirement.

8-33

Front 256

When is a proxy statement required to be sent to shareholders?

Back 256

SEC Rule 14a-6 requires a company to provide shareholders with a proxy statement prior to its annual meeting. The proxy statement contains information that will be voted on during the annual shareholder meeting. Detailed information concerning proposed executive compensation and ownership percentages is required in this document. (2-4)

The proxy statement would also be provided if shareholders would be voting on an M&A transaction. 9-36

2-4 & 9-36

Front 257

In which order, from first to last, are the following actions performed in the M&A process?
1) Sending the Confidential Information Memorandum (CIM)
2) Signing the confidentiality agreement
3) Provide access to the data room
4) Creation of the teaser

Back 257

4,2,1,3

Concerning the auction process in an M&A transaction, one of the first steps taken by the seller's banker is the creation of the teaser. Teaser is the slang term for a business profile. It is usually jointly prepared by the seller and its investment banker. It is a marketing piece distributed to prospective counterparties and is constructed to pique interest in the transaction, without necessarily (or typically) disclosing the identity of the seller. A teaser does not disclose confidential information regarding the business to be auctioned. The profile is often only a few pages in length and provides a synopsis to potential buyers. Information included usually comprises a business summary and a description of the company's financial and operational history.

Once a potential bidder expresses interest after receiving the teaser, and wants more detailed information on the target, the seller's banker would deliver a confidential information memorandum (CIM). This would provide more detailed information and disclose the identity of the target (9-17). The seller's banker would not distribute the CIM unless the bidder signs a nondisclosure agreement. A nondisclosure agreement (NDA) is also known as a confidentiality agreement. This document is used when one company is planning to disclose confidential or proprietary information to another party, in connection with a potential sale or merger (9-16).

In order for potential bidders to view detailed materials relating to the business of the target, a data room is set up. A data room is a secure, confidential location where all participating dealmakers (investment bankers, lawyers, and accountants) gather for a certain period to perform due diligence activities relating to an investment banking transaction. It may entail reviewing, indexing, photocopying, and finalizing the required due diligence documentation. Many firms now use a virtual (i.e., electronic) data room as an alternative to a physical location, which is set up by private data management companies. This is a secure site which is designed to speed up the due diligence process.

The next steps would be obtaining indications of interest (IOIs), a bidder submitting a letter of intent (LOI), and then closing the deal.

(9-16) - (9-20)

Front 258

What is the Interest Coverage Ratio? How do you calculate it?

Back 258

Interest coverage is an indication of how many dollars of earnings (before interest and taxes) are available to meet interest expenses. The ratio indicates how many times during the year the company can meet its interest payments. A low ratio would indicate a high debt burden, while a high ratio indicates low levels of debt to earnings.

EBITDA/Interest Expense

5-25

Front 259

Inventory Turnover Ratio:

Back 259

The inventory turnover ratio indicates how often the company sells the goods that it produces. A longer time for processing materials indicates a greater amount of capital being tied up in the processing stage, while a lesser time frame would indicate that the company is selling its inventory faster.

Cost of Goods Sold/Average Inventory

5-17

Front 260

IPO: What does it stand for? What is it?

Back 260

Initial public offering. An IPO refers to the first time an issuer is selling securities to the public. Most issuers that conduct an IPO sell common stock or equity securities in order to raise capital.

7-5

Front 261

Does an unseasoned issuer have to file reports?

Back 261

Yes

An issuer that is required to file reports under Section 13 or Section 15(d) of the Securities Exchange Act of 1934, but does not meet the requirements to file on Form S-3 or Form F-3 for a primary offering of its securities.

7-13

Front 262

Is blanket approval in Regulation D permitted?

Back 262

Blanket approval to represent a potential purchaser in all Regulation D offerings is not permitted

7-32

Front 263

Is M2 money supply a leading indicator?

Back 263

Yes

4-3

Front 264

Is the consumer price index a leading indicator?

Back 264

No, it is a lagging indicator.

4-4

Front 265

Is the S&P500 index a leading indicator?

Back 265

Yes

4-3

Front 266

Is there a conflict when providing a fairness opinion and stapled financing in an acquisition?

Back 266

NO. The fairness opinion is rendered to determine whether the proposed transaction price is fair (within a reasonable range of prices). (9-20)

When preparing a fairness opinion that will be distributed to public shareholders, regulators require that any existing conflicts of interest be revealed. Any material relationship must be disclosed, such as those that include contingent compensation from related transactions. (9-21)

When an investment bank advising the seller in an M&A transaction has agreed to provide financing to the firm that wins the bid, it is known as stapled financing. Stapled financing is an acceptable business practice. The origin of the name for this practice is based on the stapling of the loan commitment to the offering documents provided to potential bidders. (9-19)

(9-19) - (9-21)

Front 267

Is there a tax liability created in a split-off?

Back 267

No tax liability is created for either group.

9-9

Front 268

Is trustee always appointed in bankruptcy?

Back 268

A trustee is usually appointed to handle the liquidation of the firm in Chapter 7 bankruptcy. In a Chapter 11 filing, the debtor will typically continue to operate the business and prepare a reorganization plan (i.e. “debtor-in-possession”).

9-23

Front 269

LamoNate is a plastics company. It issued a communication 45 days before filing a new issue registration statement. Its communication failed to mention the future securities offering. Did they violate the SEC's gun-jumping provisions to the Securities Act of 1933?

Back 269

No.

Any communication made more than 30 days prior to the filing of the registration statement and does not make reference to the offering. Therefore, a company that is planning an IPO is permitted to communicate with the public at least 30 days prior to the filing of a registration statement, not make a reference to an offering, and would not violate the SEC's gun-jumping provisions.

7-19

Front 270

What is an LBO Firm?

Back 270

One type of financial buyer, the leveraged buyout (LBO) firm, borrows a significant amount of funds (often 80-90% of the deal size) when acquiring targets. The LBO firm often attempts to use the assets of the acquired company as collateral, and often partners with public or private lenders to finance the transaction. The objective of the buyer is to (typically) retain an equity interest in the deal, which will (hopefully) prove valuable once the debt holders are paid off. The goal of LBO firms is to grow cash flow, either through revenue enhancement and/ or expense reductions, and eventually resell some or all of the target's assets to de-lever the capital structure.

9-3

Front 271

Lear, Kaplan and Simon, a small boutique investment banking firm, is discussing the possibility of a Regulation A offering for Big Apple Sound Studios. Some of the officers of Big Apple would like to sell a portion of their equity interest in the company. Under Regulation A, what is the maximum amount that may be sold on behalf of selling shareholders?

Back 271

A Regulation A offering is a small-dollar OFFERING of no more than $5,000,000 over a 12-month period; however, the maximum amount that may be sold on behalf of existing shareholders is $1,500,000.

7-27

Front 272

List the following activities from FIRST to LAST, in the order of occurrence, when an initial public offering is registered.
1) Distribute the red herring
2)Create an indication of interest book
3)Assist the issuer in drafting the road show presentation
4)Stabilize the issue

Back 272

3,1,2,4.

The underwriters will normally begin drafting the road show presentation with the issuer, before distributing the red herring (preliminary prospectus). Once the registration statement is filed, distribution of the red herring may begin. While the issue is with the SEC, road shows are conducted to obtain indications of interest. Orders and funds may not be accepted until the issue is granted an effective registration date by the SEC.
Stabilization occurs in the secondary market after the issue is declared effective.

(8-22)

Front 273

M&A Order?
-CIM
-Confidentiality Agreement
-Definitive Agreement
-final bid
-final bid procedures letter
-Initial Bid (i.e. indication of interest)
-Initial Procedures Letter
-letter of intent
-Teaser

Back 273

M&A Order - Teaser, Confidentiality Agreement, CIM, Initial Procedures Letter, Initial Bid (i.e. indication of interest), letter of intent, final bid procedures letter, final bid, Definitive Agreement

(9-16) - (9-20)

Front 274

What is market capitalization is calculated as:

Back 274

One way of categorizing a stock is according to the value of all the company's outstanding common shares, otherwise called its market capitalization.

Market capitalization is calculated as: total shares outstanding x current stock price.

4-5

Front 275

Market Value per Share:

Back 275

The market value per share can be determined by dividing the equity value of common shares by the number of common shares outstanding.

Market Cap Com./Number Com. Shares Outstanding

6-11

Front 276

The Company is about to lower its bid in compliance with Rule 103 of Regulation M. What is the highest price to which the Company may drop its bid?

Back 276

The company may not enter a bid or effect a purchase at a price that exceeds the highest independent bid on Nasdaq.

8-21

Front 277

Name the types of accredited investors.

Back 277

The definition include institutional investors

• A bank
• A savings and loan association
• An insurance company or registered investment company
• An investment adviser registered with the Securities and Exchange Commission under Section 203 of the Investment Advisers Act of 1940 or registered with a state securities commission
• Any other entity (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million, a government agency, or a subdivision of one
• A 403(b) employee benefit plan or a plan that meet the guidelines of Section 457 of the Internal Revenue Code-excluding the individual plan participants
• A member or an associated person of that member, or a person acting on behalf of an institutional investor (7-4)

• Financial institutions (such as banks, insurance companies, and investment companies), large
tax-exempt plans, and private business development companies
• Any director, executive officer, or general partner of the issuer
• Those individuals who meet certain financial tests (The first test is that the person must have a net worth at the time of the purchase, individually or with a spouse, of at least $1,000,000. The second test is that the individual's gross income for each of the last two years was at least $200,000 ($300,000 with spouse), with the expectation of at least the same income in the current year.)

(7-4), (7-31)

Front 278

NASDAQ Global Select Standard and Enhanced Requirements for listing?

Back 278

There are three standards that can be used when applying for Nasdaq Global Select listing. Of the seven requirements only three must be satisfied under all three standards in order to be listed. These would include:

REQUIRED
-A $4 minimum bid price
-3 or 4 market makers
-Subject to corporate governance


The following four requirements may not be applicable, depending on which of the three standards is used in the issuer's application.
-Pretax earnings
-Cash flow
-Market capitalization
-Revenue

8-33

Front 279

Nasdaq: What does it stand for? What is it?

Back 279

NASD Automated Quotation System. The Nasdaq System provides quotes on equity securities.

8-32

Front 280

What is Net Profit Margin? How is it calculated?

Back 280

The net profit margin is the relationship of net income to sales. The ratio indicates the amount of income (after operating expense, interest, and taxes) available per dollar of sales.

Net Income DIVIDED BY Sales

5-22

Front 281

NYSE Rule 77, addressing Prohibited Dealings and Activities, states that a member on the Floor may not:

Back 281

NYSE Rule 77, addressing Prohibited Dealings and Activities, states that a member on the Floor may not:

Buy or sell securities "on stop" above or below the market
Buy or sell securities "at the close"
Buy or sell dividends
Bet on the course of the market
By or sell privileges to receive or deliver securities

Placing an order with the specialist and acting as a dual agent in a cross transaction are acceptable practices.

1-10

Front 282

There are two principal trading markets for equity securities, the New York Stock Exchange and Nasdaq. The NYSE is referred to as an _____________, while Nasdaq is referred to as a _________________.

Back 282

There are two principal trading markets for equity securities, the New York Stock Exchange and Nasdaq. The NYSE is referred to as an auction market, while Nasdaq is referred to as a negotiated market.

8-32

Front 283

OFAC: What does it stand for? What is it?

Back 283

The Office of Foreign Assets Control (OFAC) administered U.S. economic sanctions and embargoes with a number of countries such as Cuba, North Korea, fran, and Syria.

1-16

Front 284

One of your firm's investment banking clients, Orchid Stationers, is considering the repurchase of a portion of its outstanding debt. The company has WACC of 8% and a debt to total capitalization ratio of 25%. Which of the following changes would result if Orchid repurchases its debt? What would happen to WACC? What would happen to ROA? Why?

Back 284

Usually Wacc increases (6-22), and ROA increases (5-23), since debt cost is usually lower (however, it can be higher! See below…in this case…it is lower).

Read pages 6-21 and 6-22. If debt after-tax cost of capital is lower than equity, and you buy debt with equity, obviously your WACC goes up. If debt after-tax cost of capital is higher than equity, and you buy debt with equity, your WACC goes down.

A repurchase of debt outstanding will reduce the asset base of the company and the interest expenses. Due to the interest tax shield of the debt interest payments, the percentage reduction of net income will be less than the percentage reduction of assets. This will cause the ROA (Rate on Assets) to increase. (6-22)

TEST QUESTION 5-23, 6-21, 6-22

Front 285

What is Operating Income (EBIT)?

Back 285

Operating income is adjusted for other income (or expense) not generated by normal operations, leaving earnings before interest expense and taxes (EBIT).

5-3

Front 286

Operating Profit Margin:

Back 286

The operating profit margin is the relationship of income from operations (operating profit) to net sales. It is calculated by dividing the operating income (gross profit less administrative, selling, and other operating expenses) by net sales.

Income from operations DIVIDED BY sales

5-21

Front 287

OTCBB: What does it stand for? What is it?

Back 287

Over The Counter Bulletin Board -
The OTC Bulletin Board (OTCBB) is an electronic quotation medium. The system will display real-time quotes, last sale information concerning OTC equity securities. An OTC equity security is a security that is not listed or traded (having been delisted) on the NYSE or Nasdaq. It enables market makers to post quotes on a voluntary basis for OTC equity securities.

8-32

Front 288

P/E Ratio:

Back 288

Market Price Common/EPS

6-2

Front 289

P/E to Growth (PEG) Ratio:

Back 289

P/E Ratio/Annual Growth Rate note: Growth Rate is an integer. When using PEG, investors will normally look for a ratio of 1.0 or less.

6-6

Front 290

PDQ Corporation is the subject of an initial public offering and will be listed on the New York Stock Exchange. When can trading of PDQ away from the NYSE occur?

Back 290

A broker-dealer may not execute a trade in PDQ away from the NYSE until an opening transaction occurs on the NYSE.

8-34

Front 291

PE: What does it stand for? What is it?

Back 291

Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet.

The majority of private equity consists of institutional investors and accredited investors who can commit large sums of money for long periods of time. Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as an IPO or sale to a public company.

http://www.investopedia.com/terms/p/privateequity.asp

Front 292

POP: What does it stand for? What is it?

Back 292

Public Offering Price. The price at which new issues of stock are offered to the public by an underwriter.

http://www.investopedia.com/terms/p/publicofferingprice.asp

Front 293

What is the Price-to-Book Value? How do you calculate it?

Back 293

The price-to-book (P/B) ratio is a measurement that looks at the value the market places on the book value of the company. It is calculated by taking the current price per share and dividing by the book value per share.

Price-to-Book Value = Share Price/Book Value Per Share

6-10

Front 294

What is the Price to Sales Ratio? How do you calculate it?

Back 294

The price-to-sales ratio is found by dividing the market value of the equity by the sales (revenue) of a company, or by dividing a stock's current price by its revenue per share. The price-to-sales ratio is most appropriate when evaluating companies that are unprofitable, have low profit margins, or are start-ups, since such companies do not have a useful price/earnings ratio.

6-10

Front 295

A dealer selling securities in the secondary market must provide prospectuses to customers if new securities of that class were recently sold by the issuer under a registration statement. What is the prospectus delivery requirement (in days) for IPO by a company on Nasdaq?

Back 295

90 days for IPOs.

7-10

Front 296

A dealer selling securities in the secondary market must provide prospectuses to customers if new securities of that class were recently sold by the issuer under a registration statement. What is the prospectus delivery requirement (in days) for new issue by a company on Nasdaq?

Back 296

Prospectuses must be delivered for 40 days after the effective date in the case of issuers with publicly traded securities already outstanding, or 90 days for IPOs.

7-10

Front 297

QIB: What does it stand for? What is it? What can they do?

Back 297

Qualified Institutional Buyer.
Investors, must pass a three-part test in order to be considered QIBs. (1) Only certain types of institutions are eligible, including insurance companies, registered investment companies, pension plans, corporations, and registered investment advisers. (2) The buyer must be purchasing for its own account or the account of other QIBs. (3) The buyer must own and invest at least $100 million of securities of issuers not affiliated with the buyer.
These institutions may buy and sell directly with one another without meeting the requirement of Rule 144.

7-33

Front 298

What is the Quick Ratio? How do you calculate it?

Back 298

The quick ratio is a refined measure of current assets to current liabilities.

(Cash + Cash Equiv. + Account Receivables)/Current Liabilities

5-18

Front 299

Quotes for non-Nasdaq, over-the-counter-traded equities can be obtained from the:

Back 299

Quotes for non-Nasdaq, over-the-counter-traded equities can be found on the OTC Bulletin Board (OTCBB).

8-32

Front 300

Regulation A:

Back 300

Regulation A offers an exemption from the registration requirements ofthe Securities Act of 1933 for small issues of securities if certain conditions are met. The maximum amount of securities that may be sold pursuant to Regulation A is $5,000,000

7-27

Front 301

Regulation D, Rule 506

Back 301

According to Rule 506, nonaccredited investors who purchase Regulation D offerings exceeding $5,000,000 must be restricted to those who, either alone or with their purchaser representative, have the knowledge and experience in financial and business matters to be able to evaluate the merits and risks of the investment.

7-32

Front 302

Regulation FD applies to what type of players in securities? What does it mean?

Back 302

Regulation FD applies to issuers of securities. It requires companies to disseminate quickly nonpublic, material information that has been disclosed to securities professionals or shareholders. In the event of an accidental leak of information, the company has 24 hours to release the information to the public. This regulation was designed to protect individual investors by requiring issuers to disseminate in a timely manner material information. The company may fulfill its disclosure requirements by filing Form 8-K.

7-24

Front 303

Regulation FD:

Back 303

Regulation FD bars issuers from selectively disclosing non public, material information to securities professionals (including employees of broker-dealers and investment advisers), or to shareholders if it is "reasonably foreseeable" that they will trade on the information.

7-24

Front 304

Regulation M-A requires that a summary term sheet be provided to investors as part of the disclosures made in a merger. What is included in this sheet?

Back 304

-a brief description of The transaction
-The consideration offered to security holders
-The reasons for engaging in The transaction
-The vote required for approval of The transaction
-An explanation of any material differences in The rights of security holders as a result of The transaction
-a brief statement as to The accounting treatment of The transaction, if material
-The federal income tax consequences of The transaction, if material

(9-35)

Front 305

Regulation M-A:

Back 305

Regulation M-A is designed to facilitate communications and disclosures made by companies engaged in cash and stock tender offers, or mergers and acquisitions.

9-35

Front 306

Regulation S-K:

Back 306

Regulation S-K establishes guidelines for the format employed when presenting projections (estimations) used in nonfinancial statements contained in registration statements.

7-20

Front 307

What is Regulation S-X? Explain it.

Back 307

Regulation S-X sets forth the form and content for financial statements filed under the Securities Act of 1933 and for reports filed under the Securities Exchange Act of 1934. The regulation requires that an attestation report be prepared by an independent accountant.

Within Regulation S-X, rules for the form and content of financial statements are described in detail, such as:
• Pro-Forma Financial Information
• Form and Content of Schedules
• Interim Financial Statements
• Qualifications and Reports of Accountants
• Consolidated and Combined Financial Statements
• Employee Stock Purchase, Savings and Similar Plans

According to Regulation S-X. financial statements in a registration statement become stale and cannot be used, based on the number of days between the date of the statements in the filing and the effective date of the registration statement. For most issuers, this period may not exceed 135 days and, in the case of an accelerated filer {a WKSI or seasoned issuer), the period is 130 days.

7-21

Front 308

Regulation T:

Back 308

The Federal Reserve Board regulation that governs customer cash accounts and the amount of credit that brokerage firms and dealers may extend to customers for the purchase of securities.

http://www.investopedia.com/terms/r/regulationt.asp

Front 309

Regulation U:

Back 309

The Federal Reserve Board regulation that governs loans by banks for the purchase of securities on margin. Regulation U limits the amount of leverage a bank or brokerage can extend to a borrower for the purposes of puchasing stocks, mutual funds and other market-traded securities.

http://www.investopedia.com/terms/r/regulationu.asp

Front 310

Relative to a corporate bond purchased at a discount, place the following in the proper order from lowest to highest yield.
- Current yield
- Nominal yield
- Yield to maturity

AND WHY?

Back 310

A bond trading at a discount has a nominal yield that is less than its yield to maturity. Current yield falls between the nominal yield and yield to maturity.

A bond trading at a premium has a nominal yield which is higher than the yield to maturity, with the current yield in between the other two yields

3-13

Front 311

Requirements for an S Corp?

Back 311

There may be no more than 100 shareholders.
All shareholders must be U.S. citizens or resident aliens.
The shareholders must all be individuals, estates, or certain types of trusts.
The corporation must be domestic.
The company may not be part of an affiliated group of corporations.
The company may have only one class of stock outstanding.

7-2

Front 312

Return on Assets:

Back 312

The return on assets is an important indicator of the profits of the company in relationship to its total assets. It is calculated by dividing net income by total average assets. The calculation is an indication of the earnings generated to invested capital.

Net income DIVIDED BY average assets

5-23

Front 313

What is return on common equity and how is it calculated?

Back 313

The return on common equity indicates the rate of return that is available to the providers of common equity capital to the company. The return on equity would increase if the company reduced the number of shares outstanding since this action would reduce the value of the common equity. If the common equity remained constant, the ROE would increase if the company either increased its earnings or experienced a gain on the sale of an asset.

Net Income Available to Common / Average Common Equity

5-23

Front 314

Rule 101 of Regulation M generally prohibits those interested in a distribution from:

Back 314

Manipulating secondary market trading for their own benefit. (8-18)

Distribution participants (syndicate members, selling group members, and any other broker-dealers helping to sell the security being offered to the public) may not bid for or purchase the subject security (the security being distributed) during the restricted period. The restricted period generally begins with the later of five business days prior to pricing, or whenever the broker-dealer becomes a participant. It ends when the broker-dealer participation is over. However, if the subject security has an average daily trading volume (ADTV) value of at least $100,000 and the issuer's public float value is $25 million or more, the five-business-day standard is reduced to one business day. (8-18)

Exceptions to Rule 101 include the following.
-Transactions involving government and municipal bonds, nonconvertible investment-grade debt and preferred stock, and registered investment company securities
-Actively traded securities, which are those with an ADTV value of at least $1 million, where the public float value of the issuer's common stock is at least $150 million
-Odd-lot transactions
-The exercise of any option, warrant, right, or similar instrument during the restricted period, regardless of when it was acquired
-Unsolicited brokerage transactions and unsolicited purchases as principal
-Securities of domestic and foreign issuers eligible for a 1933 Act exemption under Rule 144A if sold to qualified institutional buyers (QIBs), and certain Regulation S transactions
-Transactions in the subject security that are part of a basket strategy, if the basket is not used for manipulation -- the subject security must be no more than 5% of the basket, which must contain at least 20 securities
-Inadvertent (de minimis) transactions

(8-18), (8-19)

Front 315

Rule 104 of Regulation M defines stabilizing as:

Back 315

The SEC defines stabilizing as the placing of any bid or the effecting of any purchase for the purpose of pegging, fixing, or otherwise maintaining the price of a security. As its definition implies, the act of stabilizing is manipulative. However, if performed in accordance with Rule 104 of Regulation M, stabilizing is allowed so that the benefits of an orderly distribution of securities can be realized. Purchases by the syndicate that are solely manipulative, rather than assisting in the distribution, are illegal.

8-22

Front 316

Rule 10b-18:

Back 316

Rules for issuers purchasing their own securities in the secondary market:
1) Use one broker-dealer to place bids and make purchases on any trading session. The rule does pennit an issuer to use one broker-dealer during normal business hours and a different brokerdealer during after-hours trading.
2) Avoid making purchases at certain times of the day. Issuers may not make purchases that are the first transaction reported that day, nor may purchases be made during the last half-hour of the normal trading day. If the securities are actively traded, the prohibition is within the last 10 minutes of the trading day.
3) Limit the bid or purchase price of securities at certain prices. The price may not be higher than the highest independent bid or the last independent transaction price, whichever is higher, for securities quoted or reported in the consolidated system or interdealer quotation system that displays at least two quotations. For example, if the last transaction was $23.53 and the current bid/ ask spread is $23.50 - $23.60, the highest price at which they could buy the stock would be $23.53. For all other securities, purchases must be effected at a price no higher than the highest independent bid obtained from three independent dealers.
4) Limit the amount of stock purchased on any single day. The total volume on any single day may not exceed 25% of the ADTV for that security. However, once each week in lieu of purchasing less than the 25%, the issuer may effect one block purchase if no other 10b-18 purchases are made that day. Note that the block purchase is not included when calculating a security's four week ADTV under this rule.

1-9

Front 317

Rule 135:

Back 317

According to SEC Rule 135, an issuer is permitted to publish a notice that contains only limited information. Such notices are not required to be filed with the SEC. The notice must have a legend explaining that it does not contain an offer to sell securities.

9-34

Front 318

Rule 137:

Back 318

A broker-dealer may distribute or publish research reports for securities that are in the registration process if the
broker-dealer is not a participant in the distribution (meaning the broker-dealer may not receive or have received payment from the issuer, a selling security holder, or another participant in the distribution). Additionally, the issuer, in the previous three years, may not have been a blank-check company, a shell company, or an issuer for a penny stock offering.

7-22

Front 319

Rule 138:

Back 319

If a registration statement has been filed for a nonconvertible debt security or a nonconvertible preferred stock, a broker-dealer may, even if it is a participant in the distribution, publish or distribute in the normal course of business a research report regarding the common stock and convertible securities of the issuer. If the registration statement covers common stock, convertible debt or convertible preferred stock of an issuer, a research report may be published or distributed regarding the non convertible debt or nonconvertible preferred stock of the issuer.

7-23

Front 320

Rule 139:

Back 320

If an issuer is subject to the 1934 Act reporting requirements or is a well-known seasoned issuer, a broker-dealer may publish or distribute a research report regarding the issuer's securities, even if it is a participant in the distribution, if certain conditions are met:

-For research reports regarding a specific issuer, the report must be distributed by the dealer with reasonable regularity in the normal course of coverage of the issuer or its securities.

-For research reports regarding a specific industry, the report must contain information about a substantial number of issuers in the industry and a comprehensive list of securities currently recommended by the broker-dealer publishing the research report.

Under this rule, a research report published or distributed by a broker-dealer in conjunction with a Rule 144A offering by a well-known seasoned issuer is not considered an offer for the sale of the security, or advertising.

7-23

Front 321

Rule 144:

Back 321

Covers the resaling of restricted and control stock

7-35

Front 322

Rule 144A:

Back 322

Sale of restricted securities to qualified institutional buyers

7-33

Front 323

What is Rule 147? What conditions must be met to be excluded?

Back 323

SEC Rule 147 covers the exemption from registration under the Securities Act of 1933 for the sale of securities on an intrastate basis. If securities are sold only to residents of a state, by an issuer that is also a resident of the same state, the securities are exempt from the registration and prospectus requirements of the Act.

Rule 147 of the 1933 Act provides an exclusion from federal registration, if certain conditions are met.
• The corporation selling the securities must be domiciled within the state where the securities will be sold.
• 80% or more of the corporation's assets must be located within the state.
• 80% or more ofthe issuer's gross revenues are derived from activities within the state where the issuer is domiciled.
• 80% or more of the sales proceeds from the new issue must be used within the state where the issuer is domiciled.
• 100% of the sales of the new issue are made to residents of the state where the issuer is domiciled.

7-26 & 7-27

Front 324

Rule 415:

Back 324

Allows issuers to file registration documents and offer the subject securities on a delayed or continuous basis.

7-13

Front 325

Sebastian is an investment banking representative who works in the Red Bank branch of RBR Brokerage, Inc. He has received a text message from a client who is claiming that unfair allocations occurred in connection with a recent IPO. A record of this correspondence must be maintained by:

Back 325

The Office of Supervisory Jurisdiction responsible for the supervision of the branch.

Each OSJ is responsible for maintaining a customer complaint file and for taking appropriate action on complaints. Under FINRA rules, records of complaints must be kept for a minimum of four years. Complaints may be delivered through instant messages, text messages, and e-mails as well as through physical notes and letters.

1-19. Test Question

Front 326

SEC Rule 10b-18, regarding purchases of equity securities by issuers, places limits on which factors in conjunction with such purchases?

Back 326

-The prices of purchases
-The time of day purchases are made
-The number of broker-dealers who may make purchases for the issuer in any particular day
-The number of shares purchased on any single day

Rule 10b-18 places limits on all these factors in order to balance the interests of the issuer in repurchasing its stock because of the concern that this activity might manipulate the price of the security. Purchases may be made through only one broker-dealer on any single day. The restrictions on time, price, and volume depend on the nature of the security.

1-9

Front 327

SEC Rule 145

Back 327

Applies to situations in which securities are offered as a result of business combinations due to mergers, acquisitions, consolidations, reclassifications of securities, or transfers of corporate assets. Securities issued under this rule are required to be registered with the SEC, usually
on Form S-4.

9-33

Front 328

SEC rules related to record keeping require that broker-dealers whose primary business is investment banking….must maintain how and for how long?

Back 328

According to SEC rules, all records, whether maintained for a minimum of six years, or three years, must be kept for AT LEAST first two years in an easily accessible place. Records may be kept in electronic storage media or microfilm if a backup copy of the microfilm is maintained in a separate location. When using electronic storage, the electronic media must be in a nonrewritable format and be nonerasable.

(8-26)

Front 329

What is the Securities Exchange Act of 1934? What activities does it cover? What did it create?

Back 329

The main federal law covering the operation of the secondary markets is the Securities Exchange Act of 1934 (the Exchange Act).

The Securities Exchange Act of 1934 covers many activities in the securities markets, including:
• Regulation of transactions in the secondary market, including anti manipulation rules and regulation of the extension of credit in securities transactions
• Registration and regulation ofbroker-dealers
• Oversight of industry self-regulatory organizations (SROs)
• Registration and regulation of companies with securities trading in the secondary market, including regular financial disclosures, proxy rules, and insider reporting

The Exchange Act authorized the creation of the Securities and Exchange Commission (SEC). The SEC is charged with enforcing the securities laws and with creating rules to implement those laws.

1-6, 1-7

Front 330

Selling concessions and discounts for a public offering may only be granted to whom?

Back 330

Selling concessions and discounts for a public offering may only be granted to broker-dealers that
are engaged in the investment banking or securities business and may only be granted for bona fide
services rendered in the distribution.

8-15

Front 331

Shortcut to compute CAGR?

Back 331

To apply a shortcut to estimate the compounded annual growth rate (CAGR), add the percentage changes and then divide that figure by the periods of change. This would slightly overestimate the CAGR.

6-8

Front 332

Structured products may:
1) Offer returns linked to a basket of securities
2) Not offer returns linked to commodities
3) Not offer returns linked to interest rates
4) Be formulated to provide principal protection

Back 332

1 & 4

Structured products are prepackaged securities that often combine securities, such as a bond with a derivative. The structured security may be linked to equity securities, commodities, or interest rates. The products may also be structured to provide principal protection.

3-38

Front 333

What is a Supermajority vote requirement?

Back 333

Issuers often require a vast majority of board members to agree on significant issues, such as mergers, or the sale of a firm. These supermajority provisions are outlined in the corporate charter. These types of provisions are often part of antitakeover strategies, since a hostile shareholder who has acquired minority representation on a board would still need to convince a significant majority of the other board members that a corporate transaction is in the best interests of shareholders.

9-14

Front 334

T/F? The creditors' committee in a bankruptcy acts to protect the interests of the secured lenders during the reorganization.

Back 334

In order to protect the interests of unsecured lenders during the reorganization, a Creditors' Committee is appointed. It plays a major role in the bankruptcy process by acting as a fiduciary for the other unsecured creditors.

9-25

Front 335

T/F? 10-Q does includes a list of the company's directors and executive officers.

Back 335

This information is then available to the public. Some of the information includes: the business line and assets of the company, any legal proceedings in which the company is involved, risk factors, footnotes of accounting policies, the market for the company's equity securities, and a list of the company's directors and executive officers.

2-3

Front 336

T/F? A company delisted for the NYSE or Nasdaq can subsequently be quoted on the Pink Sheets or OTCBB.

Back 336

True. A company delisted for the NYSE or Nasdaq can subsequently be quoted on the Pink Sheets or OTCBB.

8-32

Front 337

T/F? A fairness opinion makes a recommendation to shareholders as to whether or not to accept a deal.

Back 337

A fairness opinion does not make a recommendation to shareholders as to whether or not to accept a deal. The fairness opinion is rendered to determine whether the proposed transaction price is fair (within a reasonable range of prices), not necessarily the highest offered.

9-20

Front 338

T/F? An increase in net working capital (which is a use of cash) would lead to a higher valuation under a discounted cash flow model.

Back 338

False. An increase in net working capital (which is a use of cash) would lead to a LOWER valuation under a discounted cash flow model.

If working capital has increased, the free cash flow to the firm is reduced by this change. If working capital has declined, the change is added. (6-23)

Since DCF is calculated by FCFF / (1 + WACC), if FCFF goes down, obviously DCF goes down. (6-13 equations)

Test Question. 6-13, 6-23

Front 339

What must a seasoned issuer do in order to use a free writing prospectus? What must an unseasoned and non-reporting issuer do to use a free writing prospectus?

Back 339

Seasoned issuers may use a free writing prospectus but only after a registration statement has been filed.
Unseasoned and nonreporting issuers are also permitted to use a free writing prospectus after the filing of a registration statement, but they are also required to include a statutory prospectus.

7-16

Front 340

T/F? An underwriter could use the due diligence defense to avoid liability for untrue information in a registration statement if it could prove it could not have known the information was untruthful.

Back 340

True.

An underwriter could use the due diligence defense to avoid liability for untrue information in a registration statement if it could prove it could not have known the information was untruthful.

7-24

Front 341

T/F? There is a price/book value requirement to list on Nasdaq.

T/F? There is a price/book value requirement to list on the NYSE.

Back 341

There is no price/book value requirement to list on Nasdaq.
There is a required market value of $140 million to list on the NYSE.

8-33

Front 342

Tangible Book Value:

Back 342

A more conservative valuation that is used is tangible book value, which is equal to the total assets of the company minus liabilities less intangibles and goodwill.

5-2

Front 343

The accounting process of modifying financial statements in pro forma analysis is referred to as? What factors are considered?

Back 343

Recasting.

The process of creating hypothetical post-deal financial statements is referred to as recasting. When using this valuation approach, several factors are considered.

-Potential headcount reductions of employees
-Potential facilities closures
-Enhanced bargaining power (and pricing concession) available from suppliers
-Potential pricing power if the merger reduces competition
-Revenue synergies available to the combined entity
-The tax status of the combined entity
-Savings related to regulatory compliance
-Costs associated with long-term employee retention

9-6

Front 344

If the Fed buys securities, does this increase reserves? Why? What type of policy is this known as?

Back 344

If the Fed buys securities, it pays for these securities with funds that are ultimately deposited in commercial banks. This causes deposits at banks to increase and thus adds to the funds available for loans. The result is an increase in reserves. Money becomes more available and interest rates tend to move downward. This is referred to as an easy money policy.

4-9

Front 345

The formula MOST LIKELY to be applied to determine a company's enterprise value for mergers and acquisitions is equity value of the company, plus total debt and:
1) Preferred stock, less minority interest, cash, and cash equivalents
2) Preferred stock, minority interest, cash, and cash equivalents
3) Preferred stock, minority interest, less cash, and cash equivalents
4) Minority interest, less preferred stock, cash, and cash equivalents

Back 345

3) Preferred stock, minority interest, less cash, and cash equivalents

A company's enterprise value in mergers and acquisitions is likely to be determined as follows: equity value of the company, plus total debt, preferred stock, minority interest, less cash and cash equivalents.

6-40

Front 346

The maximum underwriting compensation associated with the sale of a limited partnership public offering is

Back 346

The maximum amount of compensation to the underwriters may not exceed 10% of the gross dollar amount of the securities sold plus .5% of the proceeds for the reimbursement of bona fide due diligence expenses.

8-31

Front 347

The Packard Computer Company wants to purchase Four Par Storage through a two-step merger process. In order to retain the senior management, changes in compensation arrangements are offered to senior management of Four Par tied to their division's profitability. Is this type of arrangement permitted? Conditional to what?

Back 347

It is if Four Par's compensation committee approves the bonus.

SEC Rule 14d-10 provides for equal treatment of shareholders in a tender offer, and is also called the best-price rule. A bidder is required to treat shareholders equally by making the offer open to all shareholders (retail and institutional) for the same period, and at the same price.

An EXCEPTION (which this is) TO THE BEST-PRICE RULE is granted for changes in compensation arrangements for executives of the company, provided the arrangements are approved by the compensation committee of the target company's board of directors (Four Par), regardless of whether the target company is a party to the arrangement or not. Alternatively, if the bidder is a party to the arrangement, the arrangement may be approved by a compensation committee of the bidder's board of directors. Since approval is always permitted by the target's committee, it is the best choice in answering this question. This committee must be made up solely of independent directors. It will perform this function and approve additional bonuses or other employment compensation paid to the target company's management.

9-31

Front 348

The parties that may be sued for untrue statements and material omissions from a registration statement according to the Securities Act of 1933 include:

Back 348

--Every person who signed The registration statement
--Every director or partner of The issuer at The time of The filing
--Every accountant, engineer, or appraiser named as having prepared or certified any part of The registration statement
--Every underwriter of The security

7-23

Front 349

The President of Little Fish Inc. has a golden parachute agreement that becomes payable in the event of a change in corporate ownership. What is a trigger point for excess parachute payment under IRC 280G? What is a penality?

Back 349

Under Internal Revenue Service rules (IRC Section 280G), companies paying excess golden parachute payments (defined as those greater than three times the individual's average annualized compensation as computed over the prior five years) could potentially lose the corporation's tax deduction for such payments, and expose the recipient to an excise tax.

9-14

Front 350

When would the sale of restricted securities by an officer of the issuer be in compliance with SEC Rule 144? How does the broker-dealer handle the sale under Rule 144?

Back 350

Restricted stock may be sold if it has been held for at least 6 months and was paid for in full at least 6 months prior to sale.
The broker-dealer handling the sale under Rule 144 may do so through brokers's transactions or in transactions made directly with market makers.

7-36

Front 351

Under the Securities Exchange Act of 1934 which of the following isn't completely prohibited due to price manipulation?
--Wash sales
--Matched orders
--Pool activities designed to raise or depress prices
--Stabilizing at the offering price by an investment banker distributing a new issue of stock

Back 351

All of the choices, including stabilizing, are forms of manipulation. However, only wash sales, matched orders, and pool activities designed to raise or depress prices of securities are prohibited. Stabilization is controlled by SEC rules, but is not prohibited.

1-7

Front 352

The tendering of securities is permitted if an individual is:

Back 352

Short tendering of stock (i.e., tendering stock that one does not own) is prohibited. Securities may be tendered only if the investor is long the stock, or long an equivalent security. Equivalent securities include rights, warrants, and other securities issued by the company that is the subject of the tender offer. All of these are immediately convertible into, or exchangeable or exercisable for, the subject security. Standardized call options are not equivalent securities, unless the option has been exercised.

9-29

Front 353

The Wohl Ice Cream Corporation, a Nasdaq listed company, is selling additional shares of stock that will be priced on Wednesday, July 15. A person purchasing the additional shares would NOT be in violation of Rule 105 of Regulation M if she sold short the stock of Wohl on which of the following dates?

Back 353

More than 5 business days before! Wed, July 7

Test Question. 8-24

Front 354

Time required for: Restitution after arbitration proceedings ?

Back 354

Within 30 days:

1-23

Front 355

Time required for: Cooling off period for new issues ?

Back 355

20-days

Generally, the effective date of the registration statement is 20 days after the last amendment filed in response to a deficiency letter. The effective date represents the end of the cooling-off period and the beginning of the posteffective period.

7-9

Front 356

Time required for: Filing deadline to FINRA corp. finance review for listed securities ?

Back 356

One business day.

If the securities are to be registered, the required disclosures must be filed with FINRA no later than one business day following the filing of the issuer's registration statement with the SEC (or any state securities commission).

8-11

Front 357

Time required for: Filing deadline to FINRA corp. finance review for un-listed securities ?

Back 357

15-days prior:

If the issue is exempt from registration, the disclosures must be filed with FINRA at least 15 business days prior to the anticipated offering.

8-11

Front 358

Time required for management to notify shareholders in response to a tender offer ?

Back 358

Within 10 days:

9-29

Front 359

Time required for: Maximum time allowed for a shelf-registration ?

Back 359

3 Years

Registration is allowed only for an amount that may reasonably be expected to be sold within two years after the initial date of registration. 7-13
Large public companies, such as Well-Known Seasoned Issuers (WKSis), would use an S-3 to file a shelf registration that will permit an issuer to sell securities over a 3-year period. 2-5

2-5 & 7-13

Front 360

Time required for: Maximum time to settle syndicate accounts ?

Back 360

90-days

Syndicate managers must, no later than 90 days following the syndicate settlement date, provide each syndicate member with an itemized statement of syndicate expenses.

8-17

Front 361

Time required for: Minimum duration of tender offer ?

Back 361

20-business days:

9-26

Front 362

Minimum time to keep open a revised tender offer ?

Back 362

10-business days:

9-27

Front 363

A dealer selling securities in the secondary market must provide prospectuses to customers if new securities of that class were recently sold by the issuer under a registration statement. What is the prospectus delivery requirement (in days) for an IPO by a non-reporting company, but will be listed on an exchange or on Nasdaq as of the effective date?

Back 363

If the issuer was not a reporting company prior to filing, but will be listed on an exchange or on
Nasdaq as of the effective date, the requirement applies for 25 days. This is the most typical
situation.

7-10

Front 364

When does the restricted period begin if market cap < $25MM ?

Back 364

The restricted period begins five business days prior to pricing, or whenever the broker-dealer becomes a participant, whichever comes later.

8-18

Front 365

When does the restricted period begin if market cap > $25MM and the subject security has a value of average daily trading volume of at least $100,000 ?

Back 365

The restricted period generally begins five business days prior to pricing, or whenever the broker-dealer becomes a participant, whichever comes later. It ends when the broker-dealer's participation ends. However, if the subject security has a value of average daily trading volume (ADTV) of at least $100,000 and the issuer's public float value is $25 million or more, the five-business- day standard is reduced to one business day.

8-18

Front 366

Time required for: Statutory disqualification if convicted of a securities related misdemeanor or any felony ?

Back 366

10-years:

1-2

Front 367

How long must a resident of a state who acquires securities under Rule 147 wait before being able to sell the securities to a nonresident of the state?

Back 367

A resident of a state who acquires securities under Rule 147 is not allowed to sell the securities to a nonresident of the state for a period of nine months following the last date of sale by the issuer. This restriction is removed after nine months. Individuals who wish to sell the securities prior to nine months may do so only to a resident of the same state.

7-27

Front 368

Under Rule 144, after notifying the SEC that a sell order is placed with a broker or when an order is executed directly with a market maker, what is the time period during which restricted or control stock may be sold ?

Back 368

90-days

7-37

Front 369

Time required for: Wait period for failing a regulatory exam the first and second time (e.g. Series 79) ?

Back 369

30-days:

Any candidate who has failed a qualification examination for the securities industry for the first or second time must wait 30 days before retaking the examination.

1-3

Front 370

Time required for: Wait period for failing a regulatory exam the third time ?

Back 370

180-days:

Any candidate who has failed the exam 3 times must wait 180 days before taking it again.

1-3

Front 371

Stock acquired by an underwriter as compensation may be sold:

Back 371

If a broker-dealer receives securities as compensation in connection with the sale of a new issue, the securities may not be sold for a period of six months from the effective date. Options or warrants received as compensation may be exercised at any time.

8-14

Front 372

Tulta Truffles, a purveyor of distinctive chocolates, is considering a merger with Munille Choco Sweetz Bars, a budget-conscious confection sold through mass merchandisers in the Midwest. The name typically given to this type of transaction is a:

Back 372

Product extension merger

A product extension merger involves two companies that sell different, but somewhat related products. In this type of transaction, two companies merge that sell products into different niches within the same markets, in an attempt to capture consumers across several price points.

9-11

Front 373

Two automobile manufacturers have defined benefit pension plans. Company ZBT uses a discount rate of 5% to calculate its pension fund liabilities, and Company SMI uses a 7.5% discount rate to calculate its pension fund liabilities. Which of the following statements is TRUE?
Company ZBT is using a more aggressive method of accounting.
Company SMI is using a more aggressive method of accounting.
Company ZBT will have higher pension fund assets.
Company SMI will have higher pension fund assets.

Back 373

Company SMI is using a more aggressive method of accounting.

Aggressive accounting refers to a method of accounting that is used to report lower expenses and higher income, or to overstate assets while understating (not recognizing or lowering) liabilities. In regard to accounting practices for defined benefit pension plans, using a low discount rate is conservative, and using a higher discount rate would be aggressive. Therefore, the higher the discount rate, the lower the present value of the fund's long-term liabilities.

5-6

Front 374

Two Exceptions to prospectus delivery requirement (in days) for new issue of company securities?

Back 374

1) If an issuer was subject to the reporting requirements of the Securities Exchange Act of 1934 prior to the filing of the registration statement, there is no prospectus delivery requirement for dealers.
2) If the issuer was not a reporting company prior to filing, but will be listed on an exchange or on Nasdaq as of the effective date, the requirement applies for 25 days.

7-10

Front 375

Typically, does a buyer or seller prefer a stock or asset sale? Why?

Back 375

Typically, a buyer prefers to purchase the assets of a corporation's business, while the seller prefers a stock sale. The benefit to the buyer of an asset is the ability to exclude pre-acquisition liabilities from the purchase. Therefore, it can (generally) acquire only those assets (and liabilities) it desires. In effect, this technique allows the buyer to cherry-pick the target's business. The buyer would normally have a stepped-up cost basis against which it could take increased depreciation and amortization deductions. Alternatively, sellers usually prefer to sell stock rather than assets, since this process would transfer all of the acquired firm's liabilities (including contingent liabilities) to the buyer.

9-7

Front 376

Under code of arbitration, how many people on arbitration panel must come from outside industry? Is there an exception?

Back 376

Under the Code of Arbitration, if a public customer takes a member firm to arbitration to resolve a dispute, the majority of the panel must come from outside the securities industry, unless the customer requests a panel with a majority of industry arbitrators. Neither the broker-dealer nor the customer may actually pick the arbitrators, although the customer has the right to reject the selection of an arbitrator.

1-23

Front 377

Under Regulation D, which of the following private placements may require a purchaser representative for individuals?

Back 377

Under Rule 506 of Regulation D, only offerings exceeding $5,000,000 specify the need for investor sophistication, or the use of a purchaser representative.

7-32

Front 378

Under Rule 102 of Regulation M, selling shareholders are prohibited from:

Back 378

Investors who are selling stock through a distribution would have a motivation to inflate the price of the stock, just prior to the distribution. The issuer and selling shareholders are bound by Rule 102 of Regulation M, and are prohibited from buying shares in the open market prior to the closing of the new issue (defined as the restricted period).

8-20

Front 379

Under Rule 103 of Regulation M, a firm that is participating in a distribution of a Nasdaq stock in which it makes a market may continue to make a market in the security:

Back 379

While Rule 101 of Regulation M normally prohibits distribution participants from purchasing or bidding for a subject security, Rule 103 of Regulation M permits distribution participants to continue making markets in a Nasdaq stock on a passive basis that is the subject of an offering during the restricted period. This means the market maker may not enter a bid or effect a purchase at a price that exceeds the highest independent bid on Nasdaq. Since the bids and purchases made by a passive market maker are limited by the highest independent bid, passive market making is not allowed if no independent bid exists on Nasdaq.

8-21

Front 380

Under SEC rules, a tender offer must normally be held open for at least:

Back 380

20 business days after it is announced to shareholders

A tender offer must normally be held open for at least 20 business days from the time the offer is announced to security holders. If the person making the offer increases or decreases the percentage of the class of securities being sought, the consideration being offered, or the dealer's soliciting fee, the offer must remain open for at least 10 business days from the date that notice of the change is given to security holders.

9-26

Front 381

Under SOX, what is the policy and potential exceptions about loans to officers in the firm?

Back 381

Sarbanes-Oxley prohibits publicly traded companies from making personal loans to their executive officers and directors. This prohibition does not apply to executives of lending institutions in the ordinary course of their business or to executives of broker-dealers who use loans to purchase securities in margin accounts.

7-25

Front 382

Under the Code of Arbitration, if the dispute involves two FINRA members, what are the restirctions on the composition of the arbitration panel?

Back 382

Under the Code of Arbitration, if the dispute involves two FINRA members, there are no restrictions regarding the composition of the panel. The panel may have any composition of industry or public arbitrators.

1-23

Front 383

Under the Code of Procedure, appellate jurisdiction rests with …?

Back 383

If a respondent disagrees with the findings of the Hearing Panel, she may appeal to the National Adjudicatory Council, which has both appellate and review jurisdiction.

1-22

Front 384

Under the Code of Procedure, original jurisdiction rests with…?

Back 384

Under the Code of Procedure, original jurisdiction rests with a Hearing Panel. It is the Hearing Panel that holds hearings, considers complaints, and assesses penalties.

1-22

Front 385

Under what rule does Restricted Stock have a holding period? How long is the holding period?

Back 385

Restricted stock has a six-month holding period under Rule 144.

7-36

Front 386

Veronica has acquired securities of the NJF Corporation, a nonreporting issuer, directly from the issuer. The transaction did not involve a public offering. Under Rule 144, Veronica may sell the securities when?

Back 386

After 1 year(since it is non-reporting). A person who acquires securities directly from an issuer, in a transaction that did not involve a public offering, has received restricted securities.

7-36

Front 387

Water Investments is a hedge fund. It has acquired a controlling interest in Air Entertainment. It was later determined that the disclosure statements for Air contained material omissions. Water Investments would likely initiate legal action against all of the following parties? Who can't it sue?

Back 387

The parties that may be sued for untrue statements and material omissions from a registration statement according to the Securities Act of 1933 include:

• Every person who signed the registration statement
• Every director or partner of the issuer at the time of the filing
• Every accountant, engineer, or appraiser named as having prepared or certified any part of the registration statement
• Every underwriter of the security Under Section 11,

The above parties, other than the issuer, are exempt from liability if they can prove that they had no knowledge of the fraud and properly notified the Commission. This would include an accountant or other professional, who refused to sign or certify any of the documents used to prepare the registration statement.

7-23

Front 388

Wayne worked at Mad Anthony Investments as an investment banking representative and was called to active military duty. May he receive transaction-related compensation during this period?

Back 388

He may, provided another representative services the clients.

Wayne may receive transaction-related compensation, but he is prohibited from servicing clients during his active tour of duty. He may share in the compensation with the representative servicing the account during his military service. The term used to describe Wayne's status is Special Inactive. Additionally, meeting the requirements for both the Regulatory and Firm Elements of Wayne's Continuing Education is deferred during active duty. The time element applied to registered persons deferring their Continuing Education requirement is tolling (delaying) during the period of active military service. Therefore, the requirement to sit for the Regulatory Continuing Education, based on the second anniversary of initial registration and every three years thereafter, is halted (delayed) while the person is in active military service and resumes once the individual's Special Inactive status ends.

1-5

Front 389

Websidestory Publishing had filed for its initial public offering in 2004. What form could an investment banking representative view to determine relevant information concerning the Websidestory's business, competition, use of proceeds, risk factors, financial statements, and other important disclosures?

Back 389

An S-1 registration statement is used for an initial public offering of shares or where no other registration forms are indicated.

(2-5 or 7-6)

Front 390

Who files a 13e-3? For what purpose?

Back 390

The issuer (not the investment bank) is required to file a Schedule 13E-3 with the SEC and make certain disclosures to shareholders.

SEC Rule 13e-3 applies to going private transactions by certain issuers or affiliates. It involves transactions where an issuer (or an affiliate of the issuer) is purchasing its own common stock and this will likely cause the company to become delisted from an exchange, or to be no longer considered a reporting issuer.

9-32

Front 391

What is the difference between marginal and effective tax rate?

Back 391

The marginal tax rate includes both the statutory federal and state taxes, is considered the rate for any additional dollars of income, and does not include many of the adjustments made to calculate a company's effective tax rate (which is a blended rate and is usually lower than the marginal tax rate).

5-27

Front 392

When would SEC halt a Regulation A registration?

Back 392

It is acceptable to test the waters prior to filing an offering statement with the SEC. The materials that may be distributed when testing the waters are limited to factual information that must include a description of the company's business, the background of the CEO, and a statement that no money should be sent by interested investors. The SEC may halt a Regulation A offering if any of the terms, conditions, or requirements of the regulation are deficient. This would include failure to provide the SEC with a copy of the script used in any radio or TV broadcast and the solicitation of money for the issue prior to completion of the review by the SEC. Additionally, there must be at least 20 days separating the use of a solicitation statement and the first sale of securities.

7-28

Front 393

What are 3 forms that are relevant to an "insider"? What are they for? When are they filed?

Back 393

Form 3 is filed when a person initially becomes an insider. The amount of the issuer's equity securities they own must be reported to the SEC within 10 days of becoming an insider.

Form 4 is filed by any insider of a corporation who buys or sells shares of his company. The form must be filed no later than the second business day following the transaction.

Form 5 is an annual filing by insiders.

2-4

Front 394

What are 4 items that might disallow a company from filing an S-3?

Back 394

An issuer is precluded from filing an S-3 registration statement if it has:

-failed to pay a dividend on an issue of preferred stock (7-6)
-failed to pay interest on a bond (7-6)
-if it is delinquent in its filings with the SEC (7-6)
-does not meet the minimum requirement to file an S-3 is $75 million of public float in voting and nonvoting common equity. 2-5

(7-6 & 2-5)

Front 395

What are 425 Filings?

Back 395

According to SEC Rule 165, any written communication after the public announcement, and until the filing of a registration statement, must be filed with the SEC. These communications are referred to as Form 425 filings.

9-34

Front 396

What are Accredited Investors?

Back 396

Accredited investors are defined as:
• Financial institutions (such as banks, insurance companies, and investment companies), large
tax-exempt plans, and private business development companies
• Any director, executive officer, or general partner of the issuer
• Those individuals who meet certain financial tests: 1) the person must have a net worth at the time of the purchase, individually or with a spouse, of at least $1,000,000, and 2) the individual's gross income for each of the last two years was at least $200,000 ($300,000 with spouse), with the expectation of at least the same income in the current year.

7-31

Front 397

What are conditions for an issuer repurchasing stock in marketplace?

Back 397

According to SEC Rule 10b-18, an issuer may repurchase its securities in the marketplace provided:

The issuer purchases an amount not exceeding 25% of the average daily trading volume
Issuers may not make purchases that are the first transaction reported that day, nor may purchases be made during the last half-hour of the normal trading day. If the securities are actively traded, the prohibition is within the last 10 minutes of the trading day.
The issuer does not purchase the securities at a price higher than the highest independent transaction price
The issuer uses only one broker-dealer or electronic communication network (ECN) to execute the transactions on any single day

1-9

Front 398

What are differences in the use of ADRs and GDRs?

Back 398

American Depositary Receipts (ADRs) facilitate U.S. investment in the stock of foreign corporations. When the foreign securities are deposited in a U.S. bank based in that country, a receipt for those securities is issued and traded in the U.S. as if it were the foreign security itself.

Global Depositary Receipts would be used if the securities are going to trade in markets other than in the U.S.

3-10

Front 399

What are exempted from Rule 145?

Back 399

Stock splits, stock dividends, and the resulting changes in par value

9-33

Front 400

What are FINRA Corporate Financing Rule requirements for filing in terms of compensation?

Back 400

The FINRA Corporate Financing Rule has two different filing requirements, based on whether the securities are registered or exempt from registration.

1)If the securities are to be registered, the required disclosures are to be filed with FINRA no later than one business day following the filing of the issuer's registration statement with the SEC (or any state securities commission).

2)If the issue is exempt from registration, the disclosures must be filed with FINRA at least 15 business days prior to the anticipated offering.

8-11

Front 401

What are the minimum listing requirements for NYSE?

Back 401

(1) 400 U.S. round-lot shareholders
(2) 1,100,000 outstanding shares
(3) A total market value of all public shares of $140 million
(4) A stock price of at least $4 at the time of listing
(5) At least one of several alternative financial tests

8-33

Front 402

What are OTC stocks?

Back 402

In general, the reason for which a stock is traded over-the-counter is usually because the company is small, making it unable to meet exchange listing requirements. Also known as "unlisted stock", these securities are traded by broker-dealers who negotiate directly with one another over computer networks and by phone.

Although Nasdaq operates as a dealer network, Nasdaq stocks are generally not classified as OTC because the Nasdaq is considered a stock exchange. As such, OTC stocks are generally unlisted stocks which trade on the Over the Counter Bulletin Board (OTCBB) or on the pink sheets. Be very wary of some OTC stocks, however; the OTCBB stocks are either penny stocks or are offered by companies with bad credit records.

(http://bit.ly/XVhlWK)

Front 403

What are piggyback registration rights?

Back 403

“Piggyback” rights allow investors to sell previously unregistered shares when the issuer registers a public offering.

7-5

Front 404

What are pink sheets and OTCBB?

Back 404

Quotes for non-Nasdaq, over-the-counter-traded equities can be found on the OTC Bulletin Board (OTCBB). Pink sheets are the traditional forum for trading OTC equities.

8-32 & 8-33

Front 405

What are private placements?

Back 405

The sale of securities to a relatively small number of select investors as a way of raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. Private placement is the opposite of a public issue, in which securities are made available for sale on the open market.

7-28

Front 406

What are rules about the time frame of projections in Regulation S-K?

Back 406

Regulation S-K establishes guidelines for the format employed when presenting projections (estimations) used in nonfinancial statements contained in registration statements. Often revenue, net income, and earnings per share are financial items projected for a specified period. The basis of the projection must be reasonable and the time frame must be appropriate for the type of business. The registrant is not limited to projections for these items, or to any specified time frame for projections; however, the format used must not be misleading and the time frame must be appropriate.

7-20

Front 407

What are some of the guidelines for a Reorganization plan under Ch.11?

Back 407

Under the bankruptcy code, an entire class of claims is considered to have accepted the plan if creditors that hold at least 2/3 of the dollar amount, and represent more than 1/2 of the total number of creditors in that class, agree to the plan.

The debtor normally has a 120-day period, which may be extended by the court, during which it has exclusive right to file a plan.

If, based on on the votes gathered, approval is not forthcoming, creditors have the right to file their own reorganization plan.

Generally, a plan may not be voted on until a written disclosure statement is approved by the court. After there has been a vote on the plan, the court will conduct a hearing to determine whether to confirm the plan.

9-25

Front 408

What are some of the items and activities reviewed in a fairness opinion?

Back 408

-The review of pertinent, publicly available financial statements and other business and financial information of companies
-The review of pertinent, internal financial statements as well as other financial and operating data concerning the companies prepared by their managements
-The review of pertinent financial projections of the companies prepared by their managements
-Discussions with senior management regarding past and current operations, financial conditions and prospects of the companies, including information relating to strategic, financial, and operational benefits anticipated to be derived from the merger
-The review of the pro forma impact of the merger on the acquiring company's earnings per share
-The review of the reported prices and trading activity for each company's common stock
-A comparison of the financial performance of both companies' stock prices and trading activity against those of certain other publicly traded companies
-A review of the financial terms of comparable acquisition transactions, to the extent that such information is publicly available
-A review of the draft of the merger agreement and certain related documents

9-20

Front 409

What are tax implications for general partnerships?

Back 409

Most partnerships qualify for flow-through taxation, which means that the partnership is not a taxable entity, while the individual general partners are taxable as individuals (or corporations).

7-3 (Look at table)

Front 410

What are the conditions under Regulation A for foreign issuers?

Back 410

Public offerings of securities in the U.S. under the Regulation A exemption require certain conditions to be met.

The business entity must be organized under the laws of the United States, CANADA or any district, territory or possession of the United States or Canada.

In addition, the principal place of business must be in the U.S. or Canada.

7-27

Front 411

What are the dates (in relation to a lockout expiration) that a booster shot for IPOs cannot be published?

Back 411

Prohibited for 15 days prior to and 15 days after the expiration of a lock-up agreement

Booster shot research reports are reports published shortly before, or after, the end of a lock-up agreement. Lock-up agreements prohibit an insider from selling the stock of his company for a specified period. However, when the restricted selling period is over, an insider may sell his stock. This additional supply of shares in the secondary market may cause the price of the stock to drop. When a booster shot research report is published, it is usually positive and reiterates a buy recommendation that stabilizes the security when the lock-up agreement ends. Booster shot research reports are prohibited from being published by a manager or comanager of a securities offering for 15 days prior to, and after, the expiration of lock-up agreements.

This prohibition does not apply to securities that are actively traded, and is defined under Rule 139 of the Securities Act of 1933.

8-10

Front 412

What are the differences between a WKSI and seasoned issuer in terms of benefits?

Back 412

A seasoned issuer does not meet the financial requirements to be classified as a WKSI, or well known seasoned issuer. The financial requirements relate to the market value of voting and non voting common equity, which must be at least $700 million, or the issuance of at least $1 billion of bonds in the last three years. (7-12)

A seasoned issuer can benefit from shelf registration, but not the automatic shelf registration afforded WKSI status, where there is no SEC staff review. (7-14)

7-12, 7-14

Front 413

What are the FINRA regulations for compensation of member firms who help rollup limited partnerships?

Back 413

Member firms are sometimes compensated for soliciting the votes or tenders of customers who are
investors in the partnerships to be rolled up. FINRA requires that such compensation be:
• No more than 2% of the exchange value of the newly created securities
• Paid regardless ofwhether or not the partners reject the proposal
• Payable in an equal amount regardless of whether the partners vote for or against the rollup proposal

8-31

Front 414

What are the requirements of Regulation A?

Back 414

Organized under U.S./Canada laws with principal place of business in terrirtory/possession of US/Canada.

Regulation A requires that two years of financial statements need to be filed. These statements may be unaudited, if audited information is not readily available.

The maximum aggregate dollar amount of the offering is limited to $5,000,000 over 12 months, with no more that $1,500,000 to be sold on behalf of selling shareholders.

The issuing company may choose among three different formats for the offering circular, one of which may be a question-and-answer format.

7-27

Front 415

What are the rules concerning the audit committee of an SEC reporting company?

Back 415

According to the Sarbanes-Oxley Act, SARBOX, in general, each member of the audit committee must be a member of the BOD of the issuer and be independent.

According to Regulation S-K, the issuer must disclose either:
-The issuer has at least one audit committee financial expert serving on its audit committee, or
-The issuer does not have an audit committee financial expert serving on its audit committee.
-If the issuer has a financial expert(s) on its audit committee, it must disclose the name(s).
-A financial expert is generally defined as someone who understands GAAP and financial statements, has audit experience, can evaluate financial statements, can understand internal controls over reporting systems, and understands the audit committee functions.

According to the listing requirements of the NYSE and Nasdaq, an issuer must have at least one person on the audit committee who meets the definition of a financial expert.

As a matter of practice, most reporting issuers have at least one financial expert serving on its audit committee.

7-26

Front 416

What are the Safe Harbor provisions associated with "gun-jumping"?

Back 416

Rule 168 allows the issuer or someone acting on its behalf to continue to publish or disseminate regularly released factual business and forward-looking information at any time. Information is considered to be regularly released if, in the past, the issuer has released or disseminated the same type of information in the ordinary course of its business. The information must be consistent in timing, manner, and form of release. Factual business information and Forward-looking information.

Rule 169 allows a nonreporting issuer (or someone acting on its behalf) to continue to publish regularly released factual business information that is meant for use by suppliers and customers rather than investors (or potential investors). Items considered factual business information under Rule 169 are the same as those previously discussed for Rule 168.

7-18 & 7-19

Front 417

What are the thresholds and 2 types of tests that determine whether a company must report M&A to DOJ and FTC? What is the act called?

Back 417

The Hart-Scott-Rodino (HSR) Act is a federal antitrust law that requires certain companies or financial investors, such as hedge funds planning a merger or acquisition, to file notice with the Federal Trade Commission (FTC) and the Antitrust Division of the Justice Department, before the deal is completed.

Two different tests are applied to determine whether filing is required. One test is based on the size of the companies involved; the other is based on the size of the deal. These provisions are intended to impact larger-sized companies and transactions. Smaller transactions are generally exempt from this Act. The two tests are:
1. One company has $131.9 million or more in revenues and assets, while the other company has at least $13.2 million (revenue and assets) and, as a result of the transaction, the acquiring party (company/person) will hold aggregate stock and assets valued at more than $66 million (size of company test).
2. The transaction itself is valued at more than $263.8 million, regardless of the sales or assets of the acquiring person and acquired person (size of transaction test).

9-37

Front 418

What are the two ownership tests that a REIT must pass in terms of organizational structure? When is this done?

Back 418

As a general rule, a Real Estate Investment Trust (REIT) in its second taxable year must meet two ownership tests. There must be at least 100 different shareholders and 5 or fewer individuals may not own more than 50% of its common stock during the last half of its taxable year.

7-3

Front 419

What are treasury STRIPS?

Back 419

An acronym for 'separate trading of registered interest and principal securities'. Treasury STRIPS are fixed-income securities sold at a significant discount to face value and offer no interest payments because they mature at par.

3-29

Front 420

What are true in long vs. short bonds?

Back 420

-Generally, bonds with longer maturities also have higher coupons. Since the investor's money is at risk for a long period, the investor expects a higher rate of return than those offered by shorter-term investments.

-The prices of long-term bonds tend to fluctuate more than those with shorter maturities. A change in interest rates will affect the prices of 30-year bonds more dramatically than five-year bonds. In periods of rising interest rates, the prices of long-term bonds will decrease more than the prices of short-term bonds, but when interest rates decrease, the prices of long-term bonds will increase more than those of short -term bonds.

- Although long-term bond prices fluctuate more than short-term bond prices, the yields of short-term bonds will fluctuate more than those for long-term bonds. When interest rates shift, the change is first reflected in the yields offered by short-term bonds.

3-18 & 3-19

Front 421

What are two broker-dealer's suitability obligations to institutional customers?

Back 421

When determining the suitability obligations of a broker-dealer concerning institutional customers, the two most important considerations are:
- the customer's ability to evaluate the investment risk independently
-the extent to which the customer is exercising that ability in connection with the recommendation.

New or riskier types of products may require additional risk disclosures.

Prior to recommending the securities, the broker-dealer would need to determine whether the customer understands the risks of the securities.

8-6

Front 422

What are two signs of the peak of the market? What would the FRB do in terms of money supply?

Back 422

Low unemployment and lower-than-expected inflation generally signal the peak of a market. 4-2

Although the inflation numbers may be low, expectations of higher inflation may cause the FRB to reduce the money supply to keep inflation in check.

4-2 & 4-10

Front 423

What are two types of investments that are eligible for dividend exclusion?

Back 423

Corporations are allowed an exclusion on dividends received from investments in common and preferred stock.

(3-5)

Front 424

On an annual basis, a corporation will be considered a real estate investment trust if it meets what tests?

Back 424

1) At least 75% of its gross income must be derived solely from real estate-related activities such as rental income or interest received on mortgages.
2) Additionally 95% ofits gross income must be derived from real-estate-related activities (slated above), or dividends and interest (such as interest on bank deposits). This means no more than 5% of a RElT's income may be derived from non-real estate business.
3) A REIT must be established as a trust.
4) A RElT must distribute a minimum of 90% of its income. Shareholders are responsible for paying taxes on the income distributed by the REIT.

7-3

Front 425

What can structured products be used for? What types of securities may it be linked to in terms of offering returns?

Back 425

Structured products are prepackaged securities that often combine securities, such as a bond with a derivative. The structured security may be linked to any of the following underlying assets: a stock index, a foreign currency, an interest rate and inflation linked product, a commodity, a basket of securities, a change in spread between asset classes, or a single security (the reference asset).

3-38

Front 426

What conditions are typically found in a private placement confidentiality agreement?

Back 426

Nondisclosure agreements normally contain:
• A statement that all material received is confidential and may not be used for other purposes
• Anti poaching clauses to prevent solicitation of the target's employees
• Details regarding the term during which confidentiality restrictions remain in effect
• Standstill agreements which prevent would-be buyers from acquiring a target's shares
• Details regarding what information maybe disclosed to third parties, such as the buyer's bankers or financing sources
• Restrictions concerning collusion with other buyers (a.k.a. anti-clubbing provisions)

9-17

Front 427

What constitutes a "public appearance" by a research analyst?

Back 427

A public appearance is defined as any conference call, seminar, or public speaking engagement delivered to 15 or more persons, or with one or more representatives of the media (radio, TV, or print media). where a research analyst makes a recommendation, or offers an opinion concerning an equity security. It would also include any article where the analyst makes a recommendation, or offers an opinion concerning an equity security. A television interview is a public appearance regardless of how many people are interviewing the analyst. An internal meeting is not a public speaking engagement and would not be considered a public appearance.

8-10

Front 428

What document must investors receive if company spinoffs of division and allots them shares? According to what rule?

Back 428

Rule 145 defines certain types of reclassifications of securities as sales, subject to the registration and prospectus requirements of the 1933 Act. (9-33)

Shares acquired through mergers, consolidations, and spinoffs involving exchanges of stock are all covered under the Rule. It requires holders of securities to receive information concerning a new investment decision. The amount of shares offered is irrelevant. (7-6)

(7-6) & (9-33)

Front 429

What does "Factual Business Information" consist of?

Back 429

Factual business information includes:

Information about the issuer
Information about business or financial developments of the issuer
Advertisements or information about the issuer's products and/or services
Dividend notices
Information in reports filed with the SEC under the Securities Exchange Act of 1934

7-18

Front 430

What does "Forward-Looking" Information include?

Back 430

¨Forward-looking information includes:

Earnings forecasts (e.g., revenue projections, loss of income, loss of earnings per share, capital expenditures, dividends, and capital structure)
Future management operations plans (e.g., plans related to products or services)
Statements about future economic performance (e.g., statements from management discussion and analysis)
Information in reports filed with the SEC
The second safe harbor permits a non-reporting issuer (or someone acting on its behalf) to continue to publish, or disseminate regularly released factual business information that is meant for use outside of the scope of an investor or potential investor.

7-19

Front 431

What does Regulation M refer to?

Back 431

Restricted period rules and stabilization rules for secondary market activities associated with new issues.

8-18

Front 432

What does Rule 105 of Regulation M state?

Back 432

Rule 105 of Regulation M stipulates that it is a violation for any person to sell short the security that is the subject of an offering and to purchase an offered security from an underwriter if the short sale was executed during the period beginning five business days prior to the pricing of the offering and ending with the pricing of the issue. If the pricing of the offering occurs within five business days of the filing of the registration statement, then Rule 105 applies from the filing date until the pricing of the issue

8-24

Front 433

What does SEC Rule 165 say?

Back 433

According to SEC Rule 165, any written communication after the public announcement, and until the filing of a registration statement, must be filed with the SEC. These communications are referred to as Form 425 filings.

9-34

Front 434

What does Section 14 (Proxies) of the Securities Exchange Act of 1934 say?

Back 434

According to Section 14 (Proxies) of the Securities Exchange Act of 1934, any person who makes a tender offer and becomes the owner of more than 5% of the shares of a company is required to file a form 13D within 10 days of the transaction. If the buyer is buying shares for investment purposes only, it may file Schedule 13G as an alternative to Schedule 130 but must state that it has no intention to influence or control the issuer.

9-32

Front 435

What does SOX require CEO and CFO to do?

Back 435

The Sarbanes-Oxley Act requires the principal executive officer and the principal financial officer (also referred to as the chief executive officer and chief financial officer) of public companies to personally certify that the company's quarterly and annual reports are accurate and complete, and that effective controls and procedures have been established relating to the disclosure of all material information.

7-25

Front 436

What does NSMIA stand for? What do they do?

Back 436

The National Securities Markets Improvement Act (NSMIA) places limits on states' power to regulate certain securities (federal covered securities). Federal covered securities include securities listed on the New York, Nasdaq, and American stock exchanges, and mutual funds. Federal covered securities are not subject to state registration requirements.

8-6

Front 437

What can be included in a tombstone ad?

Back 437

A tombstone ad may include:
• The name of the issuer
• The full title of the security
• The amount being offered
• A brief description of the issuer's type of business
• The price of the security
• The date of sale
• The identity or names of the underwriters
• A statement indicating that the securities registration is not yet effective and the orders for the securities may not be accepted until registration is effective
• The contact information of the person or organization sending the communication (e.g., name, address, phone number, and e-mail address) and a statement of participation or expected participation in the distribution of the security
• An anticipated schedule for the offering (approximate commencement date of the proposed sale to the public) and a description of marketing events (including dates, times, locations, and information on how to attend)
• The securities exchanges or other markets where any class of the issuer's securities are or will be listed
• The names of selling security holders, if disclosed in the prospectus filed with the registration statement

7-17

Front 438

What exchanges provide exemption to filing compensation by underwriters? Any exceptions?

Back 438

Securities that will be listed on the Nasdaq Capital Market are subject to the filing requirement, unless the company is filing an S-3 registration.

Securities that will be listed on the NYSE, Nasdaq Global Market, and AMEX are excluded from compensation filing requirements.

8-12

Front 439

What exemption is granted in Rule 14d-10?

Back 439

An exception is granted for changes in compensation arrangements for executives of the company, provided the arrangements are approved by a majority of the independent board members.

Most companies have a specific compensation committee that consists of independent members from the board of directors. It will perform this function and approve the additional bonuses or other employment compensation paid to the target company's management.

(9-31)

Front 440

What filiings must a WKSI file when using a shelf registration?

Back 440

A Well-Known Seasoned Issuer (WKSI) is permitted to use an automatic shelf registration. (7-14)

The issuer must file an S-3 ASR registration form for a specified dollar amount and type(s) of securities that it is planning to offer. Each time the issuer offers securities, it will file both a preliminary and then a final prospectus supplement with the SEC (for the specific securities being issued). If the company issues a press release announcing the offering or term sheets describing the offering, it would be defined as a free writing prospectus. This may be used prior to the filing of the prospectus. (7-15)

According to SEC Rule 433, the issuer is permitted to use a term sheet for each offering, provided it is filed as a free writing prospectus. (7-16)

(7-14) - (7-16)

Front 441

What form would show the Recommendations of the board of directors who are making a tender offer? What else does the form show? What is it used for?

Back 441

Schedule 14D-9

SEC Rule 14d-9 concerns recommendations, or solicitations by the subject company and other parties.

Schedule 14D-9 is filed with the SEC. A letter from the board of directors addressing its recommendation concerning the tender offer would be attached as one of the exhibits of the Schedule 14D-9.

9-29

Front 442

What happens during the cooling off period in registration?

Back 442

During the cooling-off period, an issue is described as being in registration. The SEC will review the issuer's registration statement for completeness. The SEC does not evaluate (pass on) the investment merits of the issue.

Also, during the cooling-off period, potential buy-side clients are identified and are offered a preliminary prospectus.

Underwriters, however, are not permitted to offer the security for sale, or accept firm-commitments from purchasers.

7-9

Front 443

What happens if passive market maker gets an order that would put it over the limit on trades?

Back 443

Once a passive market maker's net purchases (purchases in excess of sales) for that day are more than its purchase limit, it must withdraw from the market for the rest of the day. However, a passive market maker that is near the limit is allowed to execute any single order, even if the daily limit would be exceeded. It must then withdraw from the market for the rest of the day.

8-21

Front 444

What happens in a reverse triangular merger?

Back 444

A subsidiary owned by the buyer merges into the seller, with the target company as the surviving entity. The reverse triangular merger is most often used when the selling entity has significant contracts in place that would not survive the acquisition transaction. In this way, the target company's contracts with customers (and the resulting revenue) remain intact.

9-10

Front 445

What happens in Chapter 7 bankruptcy?

Back 445

Under Chapter 7 of the United States Bankruptcy Code, the entity is in liquidation. Chapter 11 is a reorganization bankruptcy. In Chapter 7, a trustee is appointed to handle the liquidation of the firm. The trustee may attempt to recover payments made by the debtor during the 90-day period preceding the bankruptcy filing by using its avoiding powers. These funds would be available to creditors that have allowed claims against the debtor. The bankruptcy court may authorize the trustee to operate the business for a limited period if it will benefit creditors, and enhance the liquidation.

9-23

Front 446

What happens in forward triangular merger?

Back 446

A triangular merger involves three entities, the buyer, the target and a subsidiary entity owned by the buyer. In a forward triangular merger, the subsidiary merges with the seller (target company). The legal structure that was the selling entity is liquidated while the subsidiary survives.

9-10

Front 447

What happens in two-step merger? Do target shareholders approve?

Back 447

In a two-step merger process, the acquirer offers to purchase the shares of the target for cash or proposes an exchange offer. The terms of the offer may be negotiated or unsolicited. The first step is a tender offer made directly to the target's shareholders and no shareholder approval is required from the target's shareholders. The second step is a short-form merger agreement that does not require shareholder approval. The merger agreement is a contract between the two parties to the transaction that stipulates the terms and conditions of the transaction.

9-27

Front 448

What information is permitted to be shown according to SEC Rule 145?

Back 448

The name of the person whose assets are to be sold in exchange for the securities to be offered
The names of any other parties to the transaction
A brief description of the business of the parties to the transaction
The date, time and place of the meeting of the security holders to vote on, or consent to the transaction
A brief description of the transaction and the basic terms of the transaction

9-34

Front 449

What information is usually NOT found in a potential buyer's final bid?

Back 449

The purchase price range

A final bid would likely contain a firm purchase price (NOT a range), and the intended method of payment (cash, stock, or a combination). Committed financing guarantees are typically also provided. Additional information may include the buyer's board of directors' approval, an estimate as to the closing date, an attestation that the offer is binding, and a markup of the draft definitive agreement that is normally provided by the seller with the final bid procedures letter.

9-19

Front 450

What is shareholder rights plan and what is it used for?

Back 450

Defensive tactic used by target companies to prevent a hostile takeover

In a shareholder rights plan, the target company issues rights to existing shareholders to acquire a large number of new securities, usually in the form of common or preferred shares. This tactic dilutes the percentage of the target owned by a hostile bidder, and makes it more expensive to acquire control of the target company.

9-14

Front 451

What is "BW" on the OTC?

Back 451

Bid Wanted

8-32

Front 452

What is "OW" on the OTC?

Back 452

Offer Wanted

8-32

Front 453

What is "Painting the Tape"?

Back 453

Painting the Tape is a technique used whereby individuals, acting in concert, repeatedly sell a security to one another without actually changing ownership. This is intended to give the impression of increased trading volume. The regulators considered this a type of manipulation.

1-7

Front 454

What is "short tendering"? And is it OK in a tender offer? Why or Why not?

Back 454

It is considered manipulative or fraudulent to tender securities that a person does not own (short tendering). To be considered the owner of securities that are the subject of a tender offer, an individual must own the stock (have a long position) and be prepared to deliver it to the person making the tender offer

9-28

Front 455

What is "subject" security? What is a "covered security"? What is a "reference security"?

Back 455

A reference security is a security into which the subject security can be converted, exchanged, or exercised, or which, to a significant extent, determines the value of the subject security.

For example, if a convertible bond is being distributed, the underlying common stock is a REFERENCE security subject to the restrictions of Rule 101. Together, subject and reference securities are called COVERED securities in Regulation M.

Note that, while common stock would be a reference security if a derivative such as a convertible, right, or warrant, were the subject security, the reverse is not true. For example, if FLPO is issuing common stock, FLPO convertibles are not reference securities.

8-18

Front 456

What is a "teaser"? What is it used for? Who prepares it? What would be included in the teaser?

Back 456

The term teaser, although slang, is the common name used for a business profile. This document is designed to create initial interest in a potential transaction. It provides an overview of the asset for sale, including financial and operational history. The teaser is usually prepared jointly by the selling entity and its investment banker. Further information would be provided to potential buyers once nondisclosure agreements have been signed. Details of the teaser may include:

The nature of the business
The size of the business
A basic P & L presentation
A proposed deal timeline
Reasons why a buyer may find the business attractive

9-16

Front 457

What is a 363 sale?

Back 457

A section 363 sale is an asset sale in bankruptcy. The sale of assets outside the normal course of business can be accomplished through a Section 363 sale. The benefits of this form of sale include simplicity and avoidance of the requirement to obtain majority shareholder approval. Assets sold via this process will generally be free and clear of liens and encumbrances. The trustee, or debtor, must file a motion with the bankruptcy court seeking the court's approval of an asset sale. Opponents of the transaction will have a period of time to object to the proposed sale. If approved, the debtor or trustee can proceed with the sale.

9-25

Front 458

What is a best-efforts agreement?

Back 458

In a best-efforts agreement, the underwriter agrees to use all efforts to sell as much of an issue as possible to the public. The underwriter can purchase only the amount required to fulfill its client's demand or the entire issue. However, if the underwriter is unable to sell all securities, it is not responsible for any unsold inventory.

Best-effort agreements are used mainly for securities with higher risk, such as unseasoned offerings.

8-2

Front 459

What is a blank check company?

Back 459

Companies are permitted to conduct offerings of securities without a specific business plan. Such entities are called blank-check companies. There is no requirement for a company to have an operational history, or to be profitable prior to registering securities.

7-6

Front 460

What is a block purchase, according to 10b-18 Safe Harbor?

Back 460

A block purchase under this rule is defined as a quantity of stock that either (i) has a purchase price of $200,000 or more, or (ii) is at least 5,000 shares with a purchase price of at least $50,000, or (iii) is at least 20 round lots that total150% or more of the trading volume for that security (or, if trading volume data is not available, is at least 20 round lots that total1 I 1Oth of 1% of the outstanding shares of the security, less the shares beneficially owned by affiliates.

1-9

Front 461

What is a blotter?

Back 461

A record of trades and the details of the trades made over a period of time (usually one trading day). The details of a trade will include such things as the time, price, order size and a specification of whether it was a buy or sell order.

http://www.investopedia.com/terms/b/blotter.asp

Front 462

What is a bring down due diligence meeting?

Back 462

A final meeting, known as bring down due diligence, is held prior to the issuance of the final prospectus. The term bring down refers to making sure all the parties involved in the offering (the underwriter, issuer, attorneys, and other interested parties) are brought up-to-date since the last due diligence meeting. The purpose of the meeting is to make certain that the information that is to be published in the final prospectus is complete and accurate.

7-9

Front 463

What is a CMO?

Back 463

Collateralized Mortgage Obligations.- A CMO is a mortgage-backed security that takes the principal and interest payments from underlying mortgages and creates various classes of bonds called tranches. Each tranche has a different rate of interest, repayment schedule, and priority level.

CMOs help minimize the prepayment risk associated with traditional mortgage-backed securities by repackaging their principal and interest payments.

CMOs are usually secured by FNMA, GNMA, and FHLMC pass-through securities but can be backed by pools of mortgage loans.

3-31

Front 464

What is a conglomerate merger?

Back 464

Conglomerate mergers occur when the buyer and target company(ies) sell products in completely different markets. There may be little or no synergy between the target(s) and acquirer's product lines or customer bases. In general, conglomerate mergers seek to expand the product mix of the acquirer to insulate it from the cyclicality of an individual product line. These business collectors seek to achieve synergies through leveraging the strengths of different divisions.

9-11

Front 465

What is a covered person?

Back 465

A covered person is an issuer or individual that is making the tender offer, with the investment bank acting as the dealer-manager in the transaction.

9-28

Front 466

What is a Creditor's Committee? Where is it relevant and what does it do?

Back 466

In order to protect the interests of unsecured lenders during the reorganization, a Creditors' Committee is appointed by the U.S. Trustee and ordinarily consists of the seven largest unsecured creditors. The committee consults with the debtor in possession and investigates its conduct and operation of the business. The Creditors' Committee does not operate the business; the DIP does. It plays a major role in the bankruptcy process by acting as a fiduciary for the other unsecured creditors.

9-25

Front 467

What is a cross-default clause?

Back 467

A cross default clause in a bond's indenture would provide protection to bondholders of this security by triggering a default if any of the bonds issued by the same company defaulted. In other words, a default on one loan automatically places a company in default of other loans, even if no payments were missed.

3-21

Front 468

What is a DESIGNATED MARKET MAKER'S ROLE? What is another name of designated market maker?

Back 468

Another name for the DMM is the NYSE floor specialist.

Every stock that trades on the NYSE floor is assigned a specialist. The responsibilities of the specialist, now referred to as a designated market maker (DMM), include resolving trade imbalances. Imbalances may result from a temporary lack of supply or demand in a particular security. The specialist's role also includes maintaining liquidity and a fair and orderly market.

8-32

Front 469

What is a development stage company? Eligible for registered offering?

Back 469

A company that is in a preliminary or early state of its corporate life. A development stage company is characterized by its focus on early-stage business activities, such as research and development, market research or construction of manufacturing facilities. Development stage companies are generally underfunded.

A development stage company is an enterprise without any significant track record or revenues. Such companies are eligible to have a public offering of shares, based on the conditions of the '33 Act.

7-6 & 7-31 & http://www.investopedia.com/terms/d/developmentstage.asp

Front 470

What is a dutch auction?

Back 470

1. A public offering auction structure in which the price of the offering is set after taking in all bids and determining the highest price at which the total offering can be sold. In this type of auction, investors place a bid for the amount they are willing to buy in terms of quantity and price.

2. A type of auction in which the price on an item is lowered until it gets a bid. The first bid made is the winning bid and results in a sale, assuming that the price is above the reserve price. This is in contrast to typical options, where the price rises as bidders compete.

http://www.investopedia.com/terms/d/dutchauction.asp

Front 471

What is a fixed value agreement?

Back 471

In fixed value agreement, the deal's total dollar valuation (total purchase price in dollar terms) is guaranteed by altering the number of shares issued to the target, based on the performance of buyer's stock price prior to the closing. An increase in the market price of the buyer's shares would result in fewer acquirer shares being issued to keep the dollar value of the deal unchanged. If the buyer's share price falls, more new shares would need to be issued to keep the dollar value constant. A fixed value arrangement provides certainty to the seller, but may result in greater than expected dilution to the acquirer's shareholders if the market reacts unfavorably to the news of the deal and the acquirer's shares fall in value.

9-8

Front 472

Explain the difference between a floating collar agreement (fixed exchange ratio) and a fixed value payment arrangement (floating exchange ratio).

Back 472

If an M&A transaction has a fixed exchange ratio, the board of directors of the buyer have agreed to purchase the seller for a fixed number of shares. This amount will not fluctuate between the announcement date and the closing. Therefore, the buyer will know how many shares it will need to issue to acquire the seller.
In a fixed value (payment) arrangement the buyer guarantees to the target firm's shareholders that they will be paid a fixed dollar value in stock, provided the buyer's shares remain within the collar range.

9-8

Front 473

What is a fund of hedge funds? Do they have to be registered by SEC?

Back 473

A fund of hedge funds is a mutual fund that invests in unregistered, private hedge funds. Although hedge funds are not required to register with the SEC, funds of hedge funds typically must register with the SEC.

7-4

Front 474

What is a go-shop provision?

Back 474

A provision contained in a preliminary proposal, which allows the target to seek out other bidders, is
called a go-shop provision. A no-shop provision would prohibit the target from this type of activity.

9-13

Front 475

What is a golden parachute ?

Back 475

Lucrative benefits given to top executives in the event that a company is taken over by another firm, resulting in the loss of their job. Benefits include items such as stock options, bonuses, severance pay, etc

Front 476

What is a golden parachute?

Back 476

A golden parachute is a severance payment made to a senior officer of a company in the event of a takeover, or change in control. Sometimes the payments are significant and designed as a form of takeover defense.

9-14

Front 477

What is a horizontal merger?

Back 477

A horizontal merger combines two companies that are in direct competition with one another. These mergers often occur when the (former) competitors attempt to increase margins by creating a new, larger organization that has the ability to capture market share and/or potentially obtain pricing power as the result of decreased competition. This type of retail combination may have opportunities to reduce headcount through the merging of operations, such as warehousing, marketing, or the elimination of retail locations. Antitrust concerns arise if the potential merger partners are dominant participants in the industry and/or geographic market.

9-11

Front 478

What is a jump ball basis?

Back 478

An allocation method, where the syndicate uses an institutional pot in which shares will be available on a jump ball basis. This process sets aside shares for institutional clients and allows all members to compete for orders. The profit is allocated based on each member's sales. The institutions that receive allocations generally designate which underwriters are credited with the sale. The manager is often capped on the amount of credits it can earn. If the pot agreement is fixed, the credit on these sales is based on the original risk percentages assigned to each member. The manager will often deliver the shares directly to the institutional clients; this bookkeeping is referred to as a Manager Bill and Deliver.

8-11

Front 479

What is a limited partnership able to do, in regards to income and losses?

Back 479

A limited partnership is permitted to pass through both income and losses to investors.

7-3 (read table)

Front 480

If you are asked to calculate the current ratio after two companies merge and the acquiring company used a line of credit, what would need to be done before calculating the current ratio?

Back 480

The amount borrowed would need to be added to current liabilities.

5-18

Front 481

What is a lock-up agreement? What is it designed to do?

Back 481

A lock-up agreement is a contract between an employer and its employee that dictates an amount of time the employee must wait to sell shares of his company's securities after an offering. Generally, a lock-up agreement will expire within six months following the closing of the company's IPO, but there is no statutory time limit.

It is designed to prohibit management and venture capitalists who initially funded the company from trading the stock. In addition, it may provide a comfort level for investors who are concerned that holders of
pre-IPO shares might sell or dump their shares as soon as the IPO begins trading.

7-11 & 8-10

Front 482

What is a market maker

Back 482

broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker immediately sells from its own inventory or seeks an offsetting order.

http://www.investopedia.com/terms/m/marketmaker.asp

Front 483

What is a market out clause?

Back 483

This clause enables the syndicate to cancel its commitment, if certain events occur that make marketing the issue difficult, or impossible. This includes a material adverse event affecting the (proposed) issuer, or a general dislocation in financial markets, caused by an external event.

8-5

Front 484

What is a matched order?

Back 484

Matched orders are similar to wash sales. They involve two persons, acting in concert, to buy and sell a security to raise or depress its price.

1-7

Front 485

What is a no-shop provision

Back 485

A provision contained in a preliminary proposal, which allows the target to seek out other bidders, is
called a go-shop provision. A no-shop provision would prohibit the target from this type of activity.

9-13

Front 486

What is a passive market maker? And rules governing the bid?

Back 486

The offering by a market maker to purchase a firm's securities at the same time the market maker is acting as an underwriter of the securities in a secondary offering. The market maker is not permitted to offer a higher bid than a competing non-underwriting market maker.
A passive market maker's daily purchase limit is the greater of 30% of its ADTV in the stock (as determined by FINRA) or 200 shares.

8-21

Front 487

What is a penalty bid? What is the acronym?

Back 487

A penalty bid is an arrangement that permits the managing underwriter to reclaim a selling concession from a syndicate member in connection with an offering when the securities originally sold by the syndicate member are purchased in syndicate covering transactions. Penalty bids are identified on Nasdaq by the abbreviation PBID.

8-23

Front 488

What is a poision pill?

Back 488

A strategy used by corporations to discourage hostile takeovers. With a poison pill, the target company attempts to make its stock less attractive to the acquirer. There are two types of poison pills:

1. A "flip-in" allows existing shareholders (except the acquirer) to buy more shares at a discount.

2. A "flip-over" allows stockholders to buy the acquirer's shares at a discounted price after the merger.

http://www.investopedia.com/terms/p/poisonpill.asp or 9-14

Front 489

What is a pool order?

Back 489

Pools or syndicates that are formed to raise or lower the price of a security are also prohibited.

1-7

Front 490

What is a prospectus? What is included in the defininition of a prosepectus? Is there an exception and if so describe it?

Back 490

According to the Securities Act of 1933, a prospectus is defined as any notice, circular, prospectus, advertisement, letter, or communication, whether written or on television or radio, that offers a security for sale. This is a very broad definition, but it includes an exemption if the information only identifies the security, the price, the name of the underwriters, and from whom a prospectus may be obtained. This type of advertisement is called a tombstone. (7-14)

A list of more things that can be included on a tombstone can be found on 7-17.

7-14, 7-17

Front 491

What is a proxy statement?

Back 491

A document containing the information that a company is required by the SEC to provide to shareholders so they can make informed decisions about matters that will be brought up at an annual stockholder meeting.

Issues covered in a proxy statement can include proposals for new additions to the board of directors, information on directors' salaries, information on bonus and options plans for directors, and any declarations made by company management.

2-4 & 2-5

Front 492

What is a purchaser representative?

Back 492

Apurchaser representative is defined as a person who represents potential purchasers who are solicited to buy securities pursuant to Regulation D.

7-32

Front 493

What is a red herring?

Back 493

An issuer files an S-1 Form in the case of an IPO. Part of the S-1 Form is the preliminary registration statement (red herring), which is used as a disclosure document for potential investors.

7-7

Front 494

What is a reverse takeover/merger? Why do it?

Back 494

In a reverse takeover (merger), shareholders of the private company purchase control of the public shell company and then back the private entity into the public shell. In this way, the former private company can quickly have publicly traded shares and will forgo much of the regulatory expense incurred during an IPO.

9-9

Front 495

What is a roll up transaction?

Back 495

A limited partnership rollup transaction is one that involves the combination or reorganization of one or more limited partnerships. Typically, several similar partnerships are combined into a new entity, usually a corporation, REIT, or new partnership.

8-31

Front 496

What is a Split-Off?

Back 496

In a split-off, a corporation is split into pieces. In this type of transaction, one group of shareholders will own shares in the parent, while a separate group of shareholders will own shares of the split-off entity. This strategy is often used to split corporate assets between groups of feuding shareholders. No tax liability is created for either group.

9-9

Front 497

What is a staggered board structure? What are the reasons for implementing one?

Back 497

Issuers often employ a staggered board structure to prevent hostile buyers from quickly gaining control of the board. Consider, for example, a company that has nine board seats, each term for a director being three years and, each year, three seats come up for vote. In this case, a hostile shareholder could at best capture three seats in the first year, giving the issuer time to mount counteroffensives.

9-14

Front 498

What is a stalking horse?

Back 498

Creditors worried that an asset may be sold at a fire-sale price generally appoint a stalking horse bidder from among their ranks, to set a floor on any expedited auction process. The stalking horse normally conducts the initial due diligence and provides a lead bid. This bid sets a minimum price for the sale.

9-25

Front 499

What are standby agreements? What is a standby underwriting arrangement?

Back 499

If a corporation wishes to sell additional shares to the public, it will sometimes do so under a preemptive rights offering. In this process, the current shareholders will be granted the opportunity to purchase the new issue security before the public. A shareholder may exercise or sell the rights.

Under a stand-by underwriting arrangement, the syndicate agrees (in return for a fee) to purchase any unsubscribed shares from the rights offering.

8-3

Front 500

What is a stop order ?

Back 500

In some cases, new material information becomes available following the effective date but prior to the completion of the offering. In that case, the issuer would file a posteffective amendment with the SEC, which becomes effective when the Commission so declares. If the SEC becomes aware of information that leads it to believe the offering is not in compliance with the 1933 Act, it can issue a stop order, requiring all sales activity to cease.

7-10

Front 501

What is a subscription agreement and what information does it contain?

Back 501

The subscription agreement is a sales contract for the sale of securities in a private placement. It sets forth the terms and conditions of the offering. This agreement would usually contain the following information.

--A statement in which the investor agrees that she alone, or with the assistance of a purchaser representative, has sufficient knowledge and experience to evaluate the risks and merits of the investment
--investor's annual gross income and net worth
--A statement regarding the status of the investor, and the category of accredited investor (This is also referred to as the qualification of investor section.)
--The number of shares (or units) and the price per unit that the investor is purchasing
--A statement by the investor acknowledging that she has received and carefully reviewed a numbered copy of the appropriate disclosure document, and any other related information concerning the issuer
--A statement that the investor understands that the investment is illiquid and involves a high degree of speculative risk
--A statement that the investor understands that the securities being purchased have not been registered and may not be sold unless a registration is effective
--A statement as to the investor's state of residency

7-30

Front 502

What is a term sheet?

Back 502

A term sheet is a very frequently used type of free writing prospectus and provides a summary of the specific securities being offered. For example, in a debt offering the term sheet would include the issuer, the name of the security, the size, maturity, coupon, price to the public, yield to maturity, the spread to a benchmark Treasury security, and other relevant information. (7-15)

The term sheet in a private placement will only contain information on the securities being offered. Some of the information found in this document includes the name of the issuer, the types of securities that are being offered and their characteristics, the price, aggregate proceeds, the expected closing date, liquidation preference in the case of a bankruptcy, voting rights, and any other specific terms and conditions of the offering. (7-29)

(7-15) & (7-29)

Front 503

What is the Trust Indenture Act of 1939?

Back 503

According to the Trust Indenture Act, a corporation issuing more than $10 million of debt must provide an indenture (agreement) between the issuer and a trustee who will act on behalf of the bondholders. The trustee is usually a bank or trust company that must act in the bondholders' interest. All the terms of the issue must be spelled out in detail in the indenture, which the trustee signs on the bondholders' behalf.

3-21

Front 504

What is a two dollar broker? Are they allowed on NYSE floor?

Back 504

ALLOWED.

A floor broker who executes orders for other brokers who cannot do it themselves because they have more business than they can handle at that particular time.

The name came about because brokers were once paid $2.00 for a round lot trade. Today, commission is negotiated.

8-32 and (http://www.investopedia.com/terms/t/twodollarbroker.asp)

Front 505

What is a wash sale?

Back 505

Wash sales represent the purchase and sale of securities, without beneficial change of ownership, for the purpose of raising or depressing the price of the security.

For example, an individual places an order with Broker A to buy 10,000 shares of XYZ at 40 and, at the same time, places an order with Broker B to sell 10,000 shares of XYZ at 40. Since there is no chance for a profit or loss, it is obvious that the investor's intention is to manipulate the price of the stock.

1-7

Front 506

What is a way to see if an acquisition is accretive to shareholders using financial metrics?

Back 506

An acquisition is accretive to shareholder value if the return on invested capital (ROIC) exceeds the weighted average cost of capital (WACC).

6-39

Front 507

What is a yield curve? What is it also referred to as?

Back 507

If different maturities are plotted against the corresponding yield for each maturity, the resulting graph is a yield curve. A yield curve is also called the term structure of interest rates.

4-11

Front 508

What is an "inside market" on the OTC? What else is it known as?

Back 508

The spread between the highest bid price and lowest ask price among various market makers in a particular security. Typically, price quotes between market makers feature a lower ask and a higher bid than the quotes made to retail investors in the same security. The inside market ensures liquidity in the market.

http://www.investopedia.com/terms/i/insidemarket.asp or 8-32

Front 509

What is an "insider"?

Back 509

A director or senior officer of a company, as well as any person or entity that beneficially owns more than 10% of a company's voting shares. For purposes of insider trading, the definition is expanded to include anyone who trades a company's shares based on material non-public knowledge. Insiders have to comply with strict disclosure requirements with regard to the sale or purchase of the shares of their company.

http://www.investopedia.com/terms/i/insider.asp

Front 510

What is a firm-commitment offering?

Back 510

If the syndicate agrees to purchase the entire issue and absorb any securities that are not sold, it would be engaging in a firm commitment underwriting. The syndicate is acting for its own account and risk. It agrees to purchase the entire issue and absorb any shares that it is unable to sell.

8-1

Front 511

What is an engagement letter?

Back 511

An engagement letter defines the legal relationship between the investment banker (or other professional firm) and the issuer. This document defines the terms and conditions of the relationship by detailing the scope of the engagement and the compensation paid to the professional firm.

9-16

Front 512

What is an exemption for a restricted person?

Back 512

Under the New Issue Rule, an exemption exists from the definition of a restricted person for personnel of a LIMITED broker-dealer. A LIMTIED broker-dealer restricts its business to investment company/variable contract securities or direct participation programs.

8-27

Front 513

What is an indemnification basket?

Back 513

An indemnification basket sets a certain dollar amount of liability that must occur based on a breach in the contract in order for the buyer to claim any compensation. This amount is usually based on a percentage of the purchase price and is included, so the seller is not liable for a negligible amount. An indemnification cap limits the seller's liability to a maximum amount of money based on the sale price, if there is a breach in the contract.

9-20

Front 514

What is an odd-lot?

Back 514

An amount of a security that is less than the normal unit of trading for that particular security.


For stocks, any transaction less than 100 shares is usually considered to be an odd lot.

In regardes to rule 101. (http://www.investopedia.com/terms/o/oddlot.asp

Front 515

What is an S-3 used for? What is the minimum requirement?

Back 515

An S-3 registration statement is sometimes called short form registration for a folow-on offering. The minimum requirement to file an S-3 is $75 million of public float in voting and nonvoting common equity.

2-5

Front 516

What is an unseasoned issuer?

Back 516

An issuer that is required to file reports under Section 13 or Section 15(d) of the Securities Exchange Act of 1934, but does not meet the requirements to file on Form S-3 or Form F-3 for a primary offering of its securities.

7-13

Front 517

What is Barbell? Why is it done?

Back 517

Investors employing a barbell strategy buy bonds at the two ends (long and short maturities) of the yield curve. The strategy seeks to capture the high coupon interest from the long-term bonds as well as retain the ability to reinvest quickly when the short-term bonds mature. In this way, if the investor anticipates a shift in interest rates, only a portion of the portfolio needs to be changed.

4-13

Front 518

What is blanket approval?

Back 518

Authority that is given to designate Reviewers who can approve a document to a chosen route point. The action bypasses approvals that would otherwise be required in the Routing.

http://researchadmin.iu.edu/EO/AppHelp/KC/Documents/gloss_blanketapproval.htm

Front 519

What is the Code of Procedure?

Back 519

The Code of Procedure describes FINRA's disciplinary process. These rules cover disciplinary actions by FINRA against member firms and their associated persons. Disciplinary actions may be taken by FINRA for violations of its rules, violations of SEC rules or failure to pay dues or assessments.

1-20

Front 520

What is a Coincident Economic Indicator?

Back 520

Coincident indicators usually mirror the movements of the business cycle. The makeup of the coincident economic indicators includes four components:
1) Employees on nonagricultural payrolls
2)Personal income less transfer payments (Transfer payments represent aid for individuals in the
form of Medicare, Social Security, and veteran's benefits, to list a few.)
3) The Index of Industrial Production
4) Manufacturing and trade sales

4-4

Front 521

What is Commerical Paper?

Back 521

An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.

http://www.investopedia.com/terms/c/commercialpaper.asp#ixzz2KdVteyFu

Front 522

What is Control Stock?

Back 522

1. Equity shares owned by major shareholders of a publicly traded corporation. These shareholders have either a majority of the shares outstanding or a portion of the shares that is significant enough to allow them to exert a controlling influence on the firm's decisions.

2. In situations where companies have more than one class of common shares, shares with superior voting power or vote weighting are considered to be control stocks, relative to the inferior class.

http://www.investopedia.com/terms/c/controlstock.asp

Book answer:

Stock that has been acquired in the open market by an
affiliated person of the issuer, such as an officer or director.

7-35

Front 523

What is convertible Bond?

Back 523

A bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder.

Convertibles are sometimes called "CVs".

3-23

Front 524

What is convertible preferred stock?

Back 524

Investors who purchase convertible preferred stock can exchange their shares for common stock at a specified price, at their discretion. The par value of preferred stock exchanged for each share of common is called the conversion price. This type of stock appeals to investors who want higher, more secure income than common stocks typically provide, but also want the higher potential for capital appreciation, usually offered by common stocks. The trade-off is a lower dividend rate than on other types of preferred.

3-7

Front 525

What is convexity and what is the implication on a bond price's sensitivity to interest rates?

Back 525

The relationship between yield and price is not linear; the term that describes this phenomenon is convexity.
For a given yield change, the prices of long-term bonds are more volatile than short term bonds.

3-19

Front 526

What is cumulative preferred Stock?

Back 526

A type of preferred stock with a provision that stipulates that if any dividends have been omitted in the past, they must be paid out to preferred shareholders first, before common shareholders can receive dividends.

3-6

Front 527

What Is cumulative voting?

Back 527

In cumulative voting, shareholders may multiply the number of shares they own by the number of directors being elected and cast all the votes any way they want. They may cast all their votes for one individual director or divide them among various directors.

3-5

Front 528

What is diff btw primary and secondary offering?

Back 528

Shares sold by the company are a primary offering, while shares sold by selling shareholders are a secondary offering.

8-1

Front 529

What is difference between unsponsored and sponsored ADR?

Back 529

In a sponsored ADR, the company pays a depositary bank to issue shares in the U.S. Many of the largestADRs are sponsored. This allows the company to raise capital in the U.S. and list the ADR on the NYSE, or Nasdaq. In an unsponsored ADR. the company does not pay for the cost associated with trading in the U.S. A depositary bank issues the ADR. In an unsponsored ADR, the issue will trade in the OTC market, and will usually be quoted on a private quotation service called the Pink Sheets.

3-10

Front 530

What is Dividend Exclusion?

Back 530

A rule that allows corporations to subtract dividends received from income for tax purposes. Dividend exclusion is permitted for domestic corporations in the United States and allows for the exclusion of a percentage of dividend income received from other domestic corporations under income tax provisions.

http://www.investopedia.com/terms/d/dividend-exclusion.asp

Front 531

What is Duration?

Back 531

Duration is a measure, expressed in years, of a fixed-income security's price sensitivity to increases or declines in interest rates. Duration measures the percentage change in the market value of a bond, given a small change in interest rates. Duration allows the comparison of interest-rate risk among securities with different coupons, maturities, and credit quality.

3-19

Front 532

What is earnings yield?

Back 532

The earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield (which is the inverse of the P/E ratio) shows the percentage of each dollar invested in the stock that was earned by the company.

(http://www.investopedia.com/terms/e/earningsyield.asp) or 6-5

Front 533

What is the difference between the FCFF and the FCFE model?

Back 533

Both models approach valuation in a similar manner in that the value is determined by the present value of future cash flows to the firm or to its equity shareholders. In the FCFF model, we include the debt holders since they are contributors of capital to the firm, whereas, in the FCFE model, the interest on the debt will be excluded from the model.

6-23

Front 534

What is federal funds rate? Is it long term and volatile?

Back 534

Federal funds are excess reserves one bank lends to another (usually overnight) when the borrowing bank must make up a deficit reserve position. Since federal funds are short-term (overnight). they are considered money-market instruments. Due to the short duration of the loan, the fed funds rate is normally considered to be the most volatile interest rate.

4-8

Front 535

What is free retention?

Back 535

Free retention is the amount that an underwriter is allotted for placement to its own clients.

8-11

Front 536

What is gun jumping

Back 536

The gun-jumping provisions ofthe Securities Act of 1933 restrict the type of communications that may be made during a registered public offering. With these amendments and new rules, there are various other forms of communications that may be made, as well as changes to the exceptions under the gun-jumping provisions.

7-17

Front 537

What is in a 13d filing? What is not?

Back 537

A 13D filer is required to provide certain information such as:

The security and issuer
The identity and background of the filer, which may be an individual or a group
The source and amount of funds, or considerations that were used for the purchase. This section will indicate if the funds used to purchase the securities were borrowed, or came from an existing cash position of the filer.
The purpose of the transaction. This important section indicates if the filer wants to acquire the company, or is purchasing the shares as an investment.
The number of shares and the percentage ownership of the filer
Contracts or relationships regarding the securities of the issuer, e.g., a standstill agreement
Any material to be filed as exhibits, e.g., a merger agreement or a tender offer agreement

Although the source of the funds is disclosed, the NAME of the financial institution providing the funds is not a required disclosure. The filer is required to update the schedule promptly for any material changes.

2-3 & 2-4

Front 538

What is Investment Company Act of 1940?

Back 538

One of the general exemptions to the New Issue Rule.

Created in 1940 through an act of Congress, this piece of legislation clearly defines the responsibilities and limitations placed on fund companies that offer investment products to the public.

http://www.investopedia.com/terms/i/investmentcompanyact.asp & 8-29

Front 539

What is Laddering? Why is it done?

Back 539

Laddering is a strategy employed by some bond investors. When laddering, an investor could construct a portfolio of bonds with maturities distributed over a given period. The purpose of this strategy is to reduce interest-rate risk, since the portfolio is typically having some maturities each year and the proceeds are being reinvested at prevailing rates.

4-13

Front 540

What is lagging indicator?

Back 540

The index of lagging indicators represents items that change after the economy has moved through a given stage of the business cycle. The index of lagging indicators should confirm the economic condition portrayed by previous leading and coincident indexes.
Lagging indicators include:
The average duration of unemployment
The relationship of inventories to sales, manufacturing, and trade
Labor cost per unit of output for manufactured goods
The average prime rate charged by banks
Commercial and industrial loans outstanding
The relationship of consumer installment credit to personal income
The consumer price index for services

4-4

Front 541

What is a leading economic Indicator?

Back 541

Leading economic indicators precede the upward and downward movements of the business cycle. They may also be used to predict the near-term activity of the economy. The government index of 10 leading economic indicators is released monthly.

4-3

Front 542

What is momentum trading?

Back 542

The term momentum trading is used to describe a situation where prices are moving in a certain direction and there is a high level of trading volume. There is also an expectation that this pattern will continue in the near future. For example, if the S&P 500 Index has been trading up or down significantly over a period of days, based on heavy trading volume, some traders anticipate this pattern will continue in the near term.

4-20

Front 543

What is market neutral?

Back 543

Market Neutral is used to describe an attempt to profit by buying securities while, at the same time, selling short other securities within the same (or similar sector). The investor identifies and purchases undervalued securities while simultaneously identifying and selling short overvalued securities. The objective is to manage the risk of the portfolio and profit by the difference between long and short portfolios (excess return).

4-20

Front 544

What is Mini-maxi underwriting?

Back 544

There is a minimum threshold of sales that must be met in order for the offering to avoid cancellation. However, once that minimum is met, additional sales may be made up to a specified maximum amount.

8-2

Front 545

What will happen if at least two market makers are displaying two-sided quotations for a security on the OTCBB?

Back 545

If at least two market makers are displaying two-sided quotations on the OTCBB for a security, the system will calculate and display the inside market based on all the priced quotes in the system for that security, including any one-sided priced quotes.

8-32

Front 546

What is odd-lot shares?

Back 546

For stocks, any transaction less than 100 shares is usually considered to be an odd lot.

http://www.investopedia.com/terms/o/oddlot.asp

Front 547

How may a company fulfill Regulation FD's requirements?

Back 547

The company may fulfill its disclosure requirements by filing Form 8-K with the SEC or by some other
method that is reasonably designed to reach a broad spectrum of the investing public-issuing a
press release and broadcasting the information on the Internet, for example.

7-24

Front 548

What is OTCBB? What are listing requirements?

Back 548

A regulated electronic trading service offered by the National Association of Securities Dealers (NASD) that shows real-time quotes, last-sale prices and volume information for over-the-counter (OTC) equity securities. Companies listed on this exchange are required to file current financial statements with the SEC or a banking or insurance regulator. There are no listing requirements, such as those found on the Nasdaq and New York Stock Exchange, for a company to start trading on the OTCBB.

http://www.investopedia.com/terms/o/otcbb.asp

Front 549

What is parity?

Back 549

If the convertible bond's conversion value is equal to its market price, then the bond is at parity. Most bonds trade at a premium to parity, meaning that the market price of the bond is higher than the market value of the stock the investor would receive upon conversion.

3-24

Front 550

What is passive market maker's daily purchase limit?

Back 550

A passive market maker's daily purchase limit is the greater of 30% of its average daily trading volume (ADTV) in the stock, or 200 shares.

8-21

Front 551

What is positive convexity?

Back 551

Positive convexity describes the condition where, as yields decline, prices increase at a faster rate for long-term bonds as compared to intermediate or short-term bonds. In other words, durations lengthen when rates fall and durations shorten as rates rise.

3-19

Front 552

What is predispute arbitration agreement?

Back 552

Under the FINRA Code of Arbitration, a dispute between a member firm and a customer require:

- that the majority of the arbiters be from OUTSIDE the securities industry (public arbiters), although a customer may request that the arbitration panel be composed entirely of industry arbiters. HOWEVER, if the dispute is between member firms, all the arbiters will be from within the industry.

The decision reached by the arbitration panel is final and binding.

Additionally, the arbiters do not need to explain their reasoning

all parties abandon (vacate) the right to sue if dissatisfied with the decision.

1-22 & 1-23

Front 553

What is proxy that can be used to figure out the amount of debt a company can issue?

Back 553

The present value for the company's cash flow for the next three years may be used as a proxy to estimate the additional amount of debt the company can incur. The after-tax cost of debt is used as the discount rate.

6-29

Front 554

What is public float?

Back 554

The total number of shares publicly owned and available for trading. The float is calculated by subtracting restricted shares from outstanding shares.

http://www.investorwords.com/3936/public_float.html

Front 555

What is refunding?

Back 555

Call provisions usually benefit the issuer, which has the option of calling in the bonds when interest rates decline. The issuer can then refinance the debt at a lower rate of interest. For instance, if an issuer has outstanding bonds that are paying 8% interest at a time when similar bonds are paying only 6%, it can reduce its interest costs by calling in the 8% bonds and issuing new ones at 6%. This is known as refunding.

3-14

Front 556

In general, Regulation M-A updates disclosure rules for the contemporary market while preserving investor protections. How is this accomplished?

Back 556

1. Reducing certain restrictions that conflict with the investor's need for information
2. Setting rules to balance the treatment of cash tender offers versus stock tender offers
3. Simplifying disclosure requirements to facilitate compliance while still increasing investor understanding

9-35

Front 557

What is reinvestment risk?

Back 557

The risk that future coupons from a bond will not be reinvested at the prevailing interest rate when the bond was initially purchased. Reinvestment risk is more likely when interest rates are declining. Reinvestment risk affects the yield-to-maturity of a bond, which is calculated on the premise that all future coupon payments will be reinvested at the interest rate in effect when the bond was first purchased. Zero coupon bonds are the only fixed-income instruments to have no reinvestment risk, since they have no interim coupon payments.

http://www.investopedia.com/terms/r/reinvestmentrisk.asp

Front 558

What is restricted and control stock? How long is the hold period? What rule applies?

Back 558

Restricted stock is unregistered stock that was acquired as a result of a private placement. There is a required holding period of six months for all restricted stock.
Control stock is stock that has been acquired in the open market by an affiliated person of the issuer, such as an officer or director. There is no required holding period for control stock.

Rule 144

7-35

Front 559

What is restricted stock?

Back 559

Insider holdings that are under some other kind of sales restriction. Restricted stock must be traded in compliance with special SEC regulations.

http://www.investopedia.com/terms/r/restrictedstock.asp#ixzz2KdbyF8sq

Restricted stock cannot be sold without registration with the SEC (under the Securities Act of 1933) or some other special exemption. 7-35

7-35 or http://www.investopedia.com/terms/r/restrictedstock.asp

Front 560

What is ROIC? How do you calculate it?

Back 560

ROIC measures how well a company utilizes the capital that is invested in the business. It is similar to the ROE but takes into consideration the debt of the company. (5-23)
An acquisition is said to be accretive to shareholder value if the return on invested capital (ROIC) exceeds the weighted average cost of capital (WACC). (6-39)

EBIT (operating income) x (1.00 - Tax Rate %) divided by the Invested Capital (5-24)

5-23, 5-24, 6-39

Front 561

What is round-lot shares?

Back 561

A group of 100 shares of a stock, or any group of shares that can be evenly divided by 100, such as 500, 2,600 or 14,300.

http://www.investopedia.com/terms/r/roundlot.asp

Front 562

What is Rule 101 of Regulation M?

Back 562

The purpose of this part of Regulation M is to prevent those interested in a distribution from manipulating secondary market trading for their own benefit. Distribution participants would include syndicate members, selling group members, and any other broker-dealers helping to sell the security being offered to the public (the subject security). These participants are not permitted to buy or bid for the subject security within a critical time frame called the restricted period.

8-18

Front 563

What is Rule 105 of Regulation M?

Back 563

Rule 105 of Regulation M stipulates that it is a violation for any person to sell short the security that is the subject of an offering, and purchase the offered security from the underwriter if the short sale was executed during the period beginning five business days prior to the pricing of the offering and ending with the pricing of the issue.

8-24

Front 564

What is Rule 144?

Back 564

Rule 144 specifies procedures for the sale of restricted stock and control stock. Restricted stock is stock that is not registered and is acquired through a private placement. Control stock is stock acquired by affiliated persons. This includes officers, directors, owners of more than 10% of the stock of a corporation, and their immediate families.

7-35

Front 565

What is Rule 14d-10 also called?

Back 565

Best Price Rule

9-31

Front 566

What is Rule 14d-10?

Back 566

Also Called Best Price Rule. An SEC regulation that stipulates that a tender offer is open to all security holders of that class of security and the amount paid to the security holder is the highest paid to any other holder of the same security.

9-31

Front 567

What is Rule 14e-3? What are exemptions?

Back 567

SEC Rule 14e-3 prohibits a person from trading while in possession of material, nonpublic information concerning a tender offer. In addition, a person (e.g., an investment banking representative) who acquires material, nonpublic information concerning a tender offer is prohibited from disclosing this information. An exception is provided if the communication is made in good faith to:
• Officers, directors, employees, or advisers of the person making the tender offer. The adviser's role would involve the planning, financing, preparation, or execution of the tender offer.
• Officers, directors, employees, or advisers of the person that is the subject of the tender offer (the target company). The adviser's role would involve the planning, financing, preparation, or execution of the tender offer.

9-31

Front 568

What is Sarbanes-Oxley Act ?

Back 568

An act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The Sarbanes-Oxley Act (SOX) mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud by making senior management more directly accountable for the company's internal control system and the financial information that it releases to the public.

7-25

Front 569

What is Schedule 14d-9? Who is it filed by? What are exemptions?

Back 569

SEC Rule 14d-9 concerns recommendations or solicitations by the subject company and other parties related to a tender offer. The rule requires Schedule 14D-9 or Schedule TO be filed by certain persons such as:

The subject company, any officer or director, employee, or affiliate of the subject company
Any owner of any security of the subject company, the bidder, or any affiliate of the bidder
Any other person who makes a solicitation or recommendation to shareholders on behalf of any of the previously mentioned persons
Exceptions to this rule apply to:

Attorneys, banks, broker-dealers, and investment advisers who are not participating in the tender offer and who are furnishing information only on an unsolicited basis to their customers
The subject company, if it is providing a "stop-look-and-listen communication," which only identifies the tender offer by the bidder, states that the tender offer is under consideration by the subject company's board of directors, and states that, on or before a specified date (no later than 10 business days from the commencement of the offer), the subject company will advise its shareholders.

9-30

Front 570

What is section 11 defense?

Back 570

If an underwriter sells a security based on an untruthful statement, or the omission of a material fact, it may be held liable to the purchaser for any monetary damages suffered. However, the underwriter will not be held liable if it can demonstrate that reasonable care (due diligence) was used, and the underwriter was unaware of the untruthful statement or omission. This is known as the Section 11 defense. In addition, directors of the issuer and any person who signed the registration statement may also use this defense. An issuer is not permitted to use this defense.

7-23 & 7-24

Front 571

What is Securities Taken in Trade provision? What is the purpose of this rule?

Back 571

If a member firm is engaged in a public distribution of securities, it may take securities that an investor owns in exchange for the securities being distributed. The member firm may act in either a principal or agency capacity. If acting in a principal capacity, the securities must be purchased at a fair market price. If acting in an agency capacity, the member must charge a normal commission for the securities that are sold. The purpose of the rule is to prevent member firms from taking the security at artificially high prices in order to facilitate the distribution of the new issue of securities.

8-30

Front 572

What is short form registration?

Back 572

An S-3 registration statement is sometimes called short form registration.

2-5

Front 573

What is SOX? What are two key provisions?

Back 573

Sarbanes-Oxley.

1. Section 302: A mandate that requires senior management to certify the accuracy of the reported financial statement (7-25)

2. Section 404: A requirement that management and auditors establish internal controls and reporting methods on the adequacy of those controls. Section 404 had very costly implications for publicly traded companies as it is expensive to establish and maintain the required internal controls. (7-26)

7-25, 7-26

Front 574

What is Stabilization?

Back 574

Stabilizing is defined as the placing of any bid, or the effecting of any purchase, for the purpose of pegging, fixing, or otherwise maintaining the price of a security. The maximum price at which a stabilizing bid may be initiated is the last independent sale price or the highest bid in the market.

8-22

Front 575

What is stapled financing?

Back 575

A pre-arranged financing package offered to potential bidders in an acquisition. Staple financing is arranged by the investment bank advising the selling company and includes all details of the lending package, including the principal, fees and loan covenants. The name is derived from the fact that the financing details are stapled to the back of the acquisition term sheet.

http://www.investopedia.com/terms/s/staplefinancing.asp

Front 576

What is tangible book value? Formula?

Back 576

A more conservative valuation that is used is tangible book value, which is equal to the total assets of the company minus liabilities less intangibles and goodwill.

5-2

Front 577

What is a tender offer? When is disclosure necessary?

Back 577

An offer to purchase some or all of shareholders' shares in a corporation. The price offered is usually at a premium to the market price. 9-26

Under Section 14 (Proxies) of the Securities Exchange Act of 1934, any person who makes a tender offer (or acquires shares in any manner) and becomes the owner of more than 5% of the shares of a company is required to file a Form 130 within 10 days of the transaction. 9-32

9-26 & 9-32

Front 578

What is the Best Price Rule?

Back 578

Also Called Rule 14d-10. An SEC regulation that stipulates that a tender offer is open to all security holders of that class of security and the amount paid to the security holder is the highest paid to any other holder of the same security.

9-31

Front 579

What is the common benchmark for fixed Income instruments?

Back 579

The most common benchmark for fixed income securities is U.S. Treasuries.

3-27

Front 580

What is the criteria for being a WKSI?

Back 580

An issuer that qualifies as a well-known seasoned issuer is required to file reports under Section 13(a) or Section 13(d) of the Securities Exchange Act of 1934 and must meet the following requirements.
• Eligible to register on Form S-3 (short form of the registration statement) or Form F-3 (registration statement for certain foreign private issuers)
• Within 60 days of the determination of eligibility, must have either:
- A worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates of$700 million or more, or
- In the last three years, issued at least $1 billion aggregate principal amount of nonconvertible securities, other than common equity, in primary offerings for cash, not exchange, registered under the Securities Act of 1933
• May not be an ineligible issuer

7-12

Front 581

What is the difference between a development stage company and a blank check company?

Back 581

A blank check company is in a developmental stage that either doesn't have an established business plan or has a business plan that revolves around a merger or acquisition with another firm.

A company that is in a preliminary or early state of its corporate life. A development stage company is characterized by its focus on early-stage business activities, such as research and development, market research or construction of manufacturing facilities. Development stage companies are generally underfunded.

http://www.investopedia.com/terms/b/blankcheckcompany.asp & http://www.investopedia.com/terms/d/developmentstage.asp

Front 582

What is the Green Shoe Clause?

Back 582

A clause in an underwriting agreement that allows the syndicate to sell more of an issue than was originally available, and acquire those shares from the issuer, is known as a Green Shoe option. This clause is typically triggered by robust demand for a deal.

8-5

Front 583

What is the most frequently used valuation metric for REIT? How is it calculated?

Back 583

The most frequently used valuation metric for a REIT is Funds from Operations (FFO). This is determined by taking the net income plus depreciation, and subtracting gains from the sale of assets

5-22

Front 584

What is a MPO? When is it used?

Back 584

FINRA Rule 5122 relates to a private placement of securities where a member firm issues the securities and conducts the placement on its own behalf. It is also referred to as a Member Private Offering (MPO).

7-34

Front 585

What is the procedure for customer complaints and the SRO?

Back 585

Member firms are required to report to the appropriate SRO statistical and summary information regarding customer complaints, on a quarterly basis. (1-19)

If the complaint from a customer involves theft, forgery, or misappropriation of funds, the firm must notify the SRO promptly (1-20)

1-19, 1-20

Front 586

What is the Quiet Period and when it relevant?

Back 586

In terms of an IPO, the period where an issuer is subject to a SEC ban on promotional publicity.

For IPOs, the quiet period that applies to managers and comanagers is 40 calendar days following the date of the offering; for secondary offerings, the quiet period is 10 calendar days following the date of the offering. The quiet period for secondary offerings does not apply to issuers whose securities are actively traded as defined under Regulation M of the Securities Exchange Act of 1934.

There is also a 25-day quiet period in effect for a broker-dealer (other than a manager or comanager)
that has agreed to participate as an underwriter or dealer in an initial public offering.

8-9

Front 587

What is the Selling Concession?

Back 587

In securities underwriting, the fee that the underwriting group pays to a securities firm that isn't part of the syndicate, but who still sells shares in the offering.

8-15

Front 588

What is the shortcut to calculate P/E ratio (given the dividend payout ratio and dividend yield)?

Back 588

The P/E ratio equals the dividend payout ratio divided by the dividend yield. (DPR/DY)

6-5

Front 589

When can members execute, directly or indirectly, third-market transactions?

Back 589

According to FINRA, members are not permitted to execute, directly or indirectly, third-market transactions (trading in NYSE and AMEX listed securities away from the floor of the exchange) in a security that is the subject of an IPO, until the security has begun trading on its primary exchange. The indication that trading has begun is a report of an opening transaction on the listing exchange.

8-11

Front 590

What is total underwriting spread comprised of?

Back 590

manager's fee, underwriting fee, selling concession

8-4 & example on 8-5

Front 591

What is Treasury Stock?

Back 591

Treasury stock is stock that is issued by a corporation and is repurchased at a later point in time. It is no longer considered to be outstanding, does not receive dividends, and has no voting rights.

3-4

Front 592

What must happen if CEO discloses non public information to analysts INTENTIONALLY? According to what regulation?

Back 592

According to Regulation FD (Fair Disclosure), the company must also simultaneously disclose the information to the public at large.

7-24

Front 593

What must happen if CEO discloses non public information to analysts UNINTENIONALLY? According to what regulation?

Back 593

According to Regulation FD (Fair Disclosure), , If the disclosure is unintentional, the public disclosure must be made within 24 hours

7-24

Front 594

What percentage of its income must REITs pass on to shareholders?

Back 594

In order to be considered a real estate investment trust, REITs must pay 90% of their income to shareholders.

7-3

Front 595

What set of agreements must set forth the price at which securities will be sold to the public? Additionally, what must these agreements have?

Back 595

Under industry rules, syndicate and selling group agreements set the price at which the securities are to be sold to the public, or the formula to determine the price. The agreements must also state to whom and under what circumstances concessions are permitted.

8-15

Front 596

What Regulation covers the meetings of the board of directors? What info must be disclosed?

Back 596

Under Regulation S-K, an issuer is required to disclose the following information in its annual filing with the SEC. This information is usually found in the company's annual proxy statement to shareholders.

-The number of meetings of the BOD, including regular and special meetings held during the last fiscal year
-The name of each director who, during the last fiscal year, attended less than 75% of the meetings

7-21

Front 597

What regulation refers to directors who missed ____% of meetings last year? What % too?

Back 597

Regulation S-K requires an issuer to disclose the name of each director who attendance less than 75% of board meetings during the previous year.

7-21

Front 598

What scenarios constiture "owning" a stock?

Back 598

An individual is considered to own (to be long) stock if the individual:
• Has title to the stock (or the individual's agent has title to the stock). This would include owning the stock or an equivalent security such as a convertible security, warrant, or right.
• Has entered into an unconditional contract to buy the stock but has not yet received it
• Owns a call option and has exercised the option

9-28

Front 599

What SEC filing arises from SEC Rule 145?

Back 599

Typically an S-4 (9-33), which Registration form used when issuing securities in a merger (9-34).

9-33, 9-34

Front 600

What securities are ineligible for exemption under Rule 144a?

Back 600

Offers or sales of securities that are the same class as those listed on an exchange or quoted on Nasdaq, including certain convertibles and warrants, are not eligible for the exemption. Also ineligible are securities of registered investment companies.

7-33

Front 601

What situation must a TO be filed and in how long?

Back 601

According to Section 14 (Proxies) of the Securities Exchange Act of 1934, any person who makes a tender offer and becomes the owner of more than 5% of the shares of a company is required to file a Schedule TO (tender offer). This schedule must be filed as soon as practical on the commencement date.

2-6

Front 602

What to REITs generally do?

Back 602

Real estate investment trusts (REITs) raise capital and invest the proceeds in real estate and mortgages.

7-3

Front 603

What type of activity would not require a prospectus delivery to shareholders? What types of activies DO require a delivery?

Back 603

SEC regulations (Rule 145) require issuers to provide a prospectus to shareholders in advance of the various transactions, including reclassifications, mergers, consolidations, and the transfer of assets to another party. 9-33

A repurchase by a company of its own stock is regulated under Rule 10b-18 of the 1934 Act. The activity DOES NOT require a prospectus delivery to shareholders. 1-9

1-9, 9-33

Front 604

What type of firms must maintain restricted and watch lists?

Back 604

Only firms that engage in investment banking, research, or arbitrage activities are required to maintain restricted and watch lists.

1-12

Front 605

What type of liability do general partnerships hold?

Back 605

All the partners are personally responsible for the partnership's debts. This equates to unlimited liability.

7-2 & look at table on 7-3

Front 606

What type of SEC registration is necessary for an "at the market" secondary offering?

Back 606

Only those issuers registering under Form S-3 or Form F-3 may engage in this type of offering.

7-14

Front 607

What would be a Branch Office?

Back 607

A branch office of a broker-dealer is considered to be where one or more of the firm's associated personnel regularly conduct the business of effecting transactions in, or inducing or attempting to induce the purchase or sale of any security, or any location represented as such.

1-14

Front 608

When a broker-dealer hires an individual who was previously employed by a different broker-dealer, the hiring firm is required to:

Back 608

FINRA Rule 3010(e) requires firms to investigate the qualifications of the newly hired individual by reviewing the U5 submitted by the previous securities industry employer, within 60 days of filing the U4 with FINRA.

1-2

Front 609

When a firm attempts to "stabilize", what is the maximum offer it can stabilize at and what must conditions must be met? What if those conditions are not met?

Back 609

After the opening of quotations in a security's principal market, stabilization may be initiated at a price no higher than the last independent transaction in the principal market if (1) the security has traded in its principal market (Nasdaq in this case) on the day stabilizing is initiated or on the preceding day, and (2) the current asked price in the principal market is equal to or greater than the last independent transaction price. Since both (1) and (2) are true in this question, stabilizing can be initiated at a price no higher than the last independent transaction.

If either condition (1) or (2) is not satisfied, stabilizing may start after the opening of quotations at a price no higher than the last independent bid for the security on Nasdaq. The maximum stabilizing bid is the public offering price; however, a lower ceiling may apply.

8-22

Front 610

When a member firm attempts to raise capital for itself through a private placement of unregistered secuities, what is this called? What disclosures are required and what to do they contain? And to whom?

Back 610

Due to potential conflicts of interest, when a member firm attempts to raise capital for itself or for a firm it controls, the member firm is required to provide:

- a term sheet,
- or a private placement memorandum,
- or a disclosure document that contains certain disclosures.

The member firm is also required to file this document with FINRA's Corporate Financing Department.


(7-34)

Front 611

What is FINRA Rule 5122?

Back 611

FINRA Rule 5122 relates to a private placement of securities where a member firm issues the securities and conducts the placement on its own behalf (Member Private Offering).

7-34

Front 612

When a prospectus is filed as part of the registration statement, what information may be omitted?

Back 612

A prospectus may be filed as a part of the registration statement and may be used prior to the effective date of the registration statement. Certain information may be omitted, such as:

-The offering price of the issue
-The underwriting discounts (or commissions)
-Discounts to dealers
-The amount of proceeds to be received by the issuer
-Conversion rates
-Call prices
-Other matters dependent upon the offering price

7-15

Front 613

When an issuer files an amendment to the registration statement, it will delay the effective day _____days? Under what conditions will an amendment not delay the effective date?

Back 613

When an issuer files an amendment to the registration statement, it will delay the effective date of an offering as the 20-day cooling off period will restart.
There are two limited conditions where an amendment will not delay an effective date.
1) The registration statement is for registering additional securities of the same (not a different class) as were included in the original registration statement.
2) The new registration statement registers additional securities in an amount and price that represent together no more than 20% of the maximum offering price included in an earlier registration statement.

7-7

Front 614

When an issuer requests to accelerate the effective date of an SEC filing, the SEC will:

Back 614

When an issuer requests to accelerate the effective date of an SEC filing, the SEC will review the information to ensure the issuer has submitted all the required data concerning the securities being offered. The SEC is trying to protect the public and, therefore, would want to ensure the investors have been provided with full and fair disclosure.

7-7

Front 615

When calculating EV, do you include capital lease obligations, investments in treasury bills, or preferred shares?

Back 615

Enterprise value includes the market capitalization of both common and preferred shares. Enterprise value also includes long- and short-term debt, cash, and equivalents. Long-term lease obligations are included in enterprise value. (6-11)

Investments in Treasury bills are considered a cash equivalent.

6-11

Front 616

When Can a road show be conducted?

Back 616

Most road shows that are considered free writing prospectuses need not be filed with the SEC (as would be required for other free writing prospectuses under Rule 433). However, in the case of a nonreporting issuer that is offering common equity (IPO) securities, or convertible equity securities, the issuer must file the electronic road show with the SEC at the time it files its registration statement.

7-19

Front 617

Are research analysts allowed to have any contact with customers?

Back 617

Research analysts are prohibited from participating in the solicitation of investment banking services. Investment banking services are defined as acting as an underwriter or selling group member in an offering for an issuer (8-7).

A research analyst may discuss a new issue transaction with a client once the analyst's firm has received the mandate for the transaction, and the deal has been publicly announced. Additionally, a research analyst is prohibited from communicating with a customer, or a prospective customer, regarding an investment banking service transaction, in the presence of investment banking personnel or personnel of the issuing company. (8-8)

Under certain circumstances, a research analyst is permitted to communicate with both prospective and existing customers and personnel of her member firm about research and investment banking service transactions. A research analyst may educate personnel and clients of the firm about a particular investment banking transaction, provided his presentation is fair, balanced, and not misleading, and there are no members of the investment banking department or issuing company present. (8-9)

(8-7) - (8-9)

Front 618

When determining the suitability of a recommendation to a client, a principal or representative would look at the:

Back 618

Every security that investment banking or registered representatives recommend to a client must be suitable for that customer, based on the client's individual financial circumstances
and investment objectives. To comply with this rule, representatives must collect adequate information about the client, prior to making a recommendation.

8-6

Front 619

What is 10-K and 10-Q? When does a company file 10-Q and 10K?

Back 619

The document gives a detailed overview of the past year's results of the company and its business. Some of the information includes: the business line and assets of the company, any legal proceedings in which the company is involved, risk factors, footnotes of accounting policies, the market for the company's equity securities, and a list of the company's directors and executive officers.

The 10-Q of an SEC reporting company is required to be filed after the end of each of the first three fiscal quarters of each fiscal year. The last quarter results are included in the annual results, reported through the company's 10-K.

2-2 & 2-3

Front 620

When does a schedule TO and/or 13D be filed?

Back 620

According to Section 14 (Proxies) of the Securities Exchange Act of 1934, any person who makes a tender offer and becomes the owner of more than 5% of the outstanding shares of a company, is required to file a Schedule TO (tender offer) as soon as practical on the commencement date. In addition, according to SEC rules, a 13D filing is made within 10 days when a person or group of persons acquires ownership of more than 5% of a company's equity.

(9-32)

Front 621

When does Continuing Education have to be completed?

Back 621

All registered persons are required to participate in Regulatory Element training on the second anniversary of their initial securities registration, and every three years thereafter, for the remainder of their careers. There is no graduation.

1-5

Front 622

When entering mediation, is it voluntary for both parties? Is the mediator required to be a finra member? How many mediators on panel? DO you give up rights under code of arbitration?

Back 622

Mediation is a VOLUNTARY process entered into in an effort to solve a dispute.

While FINRA will suggest a mediator initially, the parties can also select another mediator from a list provided by FINRA or they may select one on their own, with mutual agreement.

There is a SINGLE mediator who may be any NEUTRAL 3rd party agreed to by the participants.

Parties may withdraw from mediation and pursue other remedies, such as arbitration, or civil court proceedings, hence they DON'T GIVE UP ARBITRATION RIGHTS.

1-23 & 1-24

Front 623

When evaluating convertible bonds and the common stock to which it may be converted, what situation would create a profitable arbitrage opportunity?

Back 623

If stock is selling above parity, the value of the stock received from converting the bond would be more than the value of the bond. An investor could sell short the stock and buy the bond and then convert the bond and use the stock to cover the short position.

3-26

Front 624

When is 8-K filed?

Back 624

All companies that are registered with the Securities and Exchange Commission are required to file Form 8-K for current reporting, upon the occurrence of any material event that would affect its financial condition or the value of its shares and that would be deemed of significant interest to the public. Each occurrence listed would necessitate the filing of Form 8-K.
• Business and Operations- Termination of a material definitive agreement or bankruptcy or
receivership
• Financial Information-Completion of an acquisition or disposition of an asset, results of operations
and financial condition, an off-balance-sheet arrangement, and material impairment
• Securities and Trading Markets- Notice of delisting, unregistered sale of equity securities
• Accountants and Financial Statements- Change in the certifying accountant
• Corporate Governance and Management-Change in control of the company, the resignation
or election of a director, amendments to corporate bylaws, code of ethics, and change in shellcompany
status
• Asset -Backed Securities-Securities Act updating disclosures, failure to make a required distribution,
and change in servicer or trustee
• Regulation FD (7-24)
• Financial Statements and Exhibits-The latest financial statement, which is included in the
press release announcing the company's latest financial results
• Other Events-Material events not listed in the form

(2-3)

Front 625

When is a 13d filed? And in how long?

Back 625

This is triggered when a person or group of persons acquires ownership exceeding 5% of a company's equity (i.e. Tender Offer....TO must be filed before too). (The filing is required within 10 days of the transaction.) If a person acquired more than 5% of the shares through other means (e.g., open-market purchases). Schedule 13D would still need to be filed.

9-32 or 2-3

Front 626

When is a fairness opinion most likely used?

Back 626

A fairness opinion is a document created by an outside entity, such as an investment bank, or other third party, as to whether the terms of a business transaction are fair. This document is often created in mergers, acquisition spinoffs or going private transactions.

9-21

Front 627

When is a married couple an accredited investor?

Back 627

A married couple with $300,000 in net income or $1,000,000 in net worth is an accredited investor.

7-31

Front 628

When is a Restricted Period Notification Form used?

Back 628

For any N asdaq security that is part of a distribution
subject to Regulation M, the managing underwriter may request an Underwriting Activity Report
(UAR) from FINRA's Corporate Financing Department. The report will identify whether the security's restricted period begins one day, or five days prior to pricing, or whether it is exempt as an actively traded security. The underwriter is not required to use the UAR, and may use sources to determine the Regulation M status of the issuer. For those securities that are not exempt, the manager must submit to Nasdaq Market Operations, no later than the day prior to the commencement of the restricted period, a Restricted Period Notification Form. This form must be filed with FINRA for both exchange-listed securities and OTC equity securities.

8-25

Front 629

When is an offering circular used?

Back 629

An offering circular is a disclosure document provided to an investor who is purchasing exempt securities under Regulation A (a public offering not exceeding $5,000,000).

7-27

Front 630

When is Corporate Debt or Commecial Paper exempt from registration?

Back 630

Corporate debt with a maturity of 270 days or less (commercial paper) is exempt from registration.

7-26

Front 631

When is DCF not a good valuation methodology? List the three circumstances where DCF works best.

Back 631

Discounted cash flow analysis is typically used for mature companies with stable and predictable cash flows. It is not a suitable metric when examining companies with little or no sales. (9-6)

1. Cash flows are currently positive.
2. Can be estimated with some reliability for future periods
3. When the benchmark for risk, i.e., 5-year, 10-year, and 30-year Treasury bonds, can be considered to have a positive correlation to the stock price (6-37)

6-37, 9-6

Front 632

When is EV/EBITDA a good metric and when is Price-to-Sales a good metric?

Back 632

EV/EBITDA is the best metric for valuing companies in the same industry. 6-25

Price to sales is applicable in an industry when the earnings are nonexistent or low but the likelihood for growth of earnings is significant. 6-10

6-10, 6-25

Front 633

When is item 14 on proxy statement? Who files it? Why?

Back 633

According to SEC rules, certain information is required in a proxy statement that is filed with the SEC and provided to shareholders. Item 14 on this form concerns mergers, consolidations, and acquisitions. Since the shareholders of the target company will be voting on the terms of the acquisition, the TARGET company is required to file this information, regardless of whether the offer consists of cash, cash and securities, or securities.

9-36

Front 634

When is P/E not an effective valuation metric?

Back 634

With companies that are particularly sensitive to business or industry cycles, the P/E may not provide an adequate reflection of the company. If the trailing P /E is used, it may be especially high at the bottom of a cycle and excessively low at the top of a cycle. The P/E ratio could be highly volatile without any change in prospects for future earnings of the company.

6-3

Front 635

When is preliminary proxy statement required? When would it not be required?

Back 635

In certain circumstances the SEC does not require a company to file a preliminary proxy statement. This is the case if the matter being voted on relates only to the election of directors, the election or approval of the company's accountants, or a proposal that was put forth by shareholders of the company's stock under SEC Rule 14a-8 (the rule that addresses when a company must include a shareholder proposal in its proxy). A business combination, such a proposed merger, would require the filing of a preliminary proxy.

2-6

Front 636

When is S-8 filed?

Back 636

An S-8 is filed when securities are offered to company employees through an employee benefit plan.

7-6

Front 637

When is Schedule 13E-3 filed?

Back 637

SEC Rule 13e-3, governing the going private transactions by certain issuers or their affiliates, involves transactions in which an issuer or an affiliate of the issuer is purchasing its common stock, which will likely cause the company to become delisted from an exchange or no longer considered a reporting issuer. The issuer is required to file a Schedule 13E-3 with the SEC and make certain disclosures to shareholders. In addition, the issuer is required to file certain information with the SEC, such as reports and opinions by a financial adviser.

2-6

Front 638

When is the exemption that a reserch analyst can publish a research report during the quiet period?

Back 638

Under the significant news or events exceptions to quiet periods, firms that would otherwise be restricted from publishing or distributing research reports, or whose analysts would be restricted from making public appearances, may publish or distribute research reports and make public appearances with the authorization of the firm's legal compliance department. Significant news or events are things that have a material impact on or render a material change in a company's financial condition, operations, or earnings and would require the filing of SEC Form 8-K.

Bankruptcy and acquisition requires the filing of Form 8-K. However, an ordinary announcement that a firm will not meet its earnings expectations, or an announcement that its executive officers will remain the same, does not require the filing of Form 8-K.

8-10

Front 639

When is the use of pro forma statements considered fraudulent?

Back 639

The Securities Exchange Act considers the use of pro forma financial statements fraudulent unless the assumptions upon which the statement is based are clearly set forth (1-8). Selectivity may present a company in a better financial position than would be the case using GMP. As such, the results could be misleading. An investment banking representative must take special care to ensure that the information presented does not mislead, or unfairly present a picture of the company (5-6).

1-8 & 5-6

Front 640

When must a definitive proxy statement be filed with SEC?

Back 640

A definitive proxy statement must be filed with the SEC at the same time it is sent to shareholders.

2-6

Front 641

When must a person who sells restricted securities file a Form 144 notice of sale?

Back 641

An individual selling securities under Rule 144 must notify the SEC by filing a notice of sale. This must be done at the time a sell order is placed with a broker, or when the order is executed directly with a market maker.

7-37

Front 642

When must a red herring be amended and resubmitted to the SEC by an issuer?

Back 642

When the financial statements are outdated or "stale"

According to Regulation S-X, financial statements in a registration statement become stale and cannot be used, based on the number of days between the date of the statements in the filing and the effective date of the registration statement. For most issuers, this period cannot exceed 135 days and, in the case of an accelerated filer (a WKSI or seasoned issuer), the period is 130 days. On the effective date, the final prospectus is prepared since the red herring is no longer relevant.

7-22

Front 643

When must OFAC be notified if there is an issue?

Back 643

The Office of Foreign Asset Control (OFAC) administers U.S. economic sanctions and embargos with a number of countries such as Cuba, North Korea, Iran, and Syria. Any U.S. bank which has knowledge of a payment to or from one of these countries is required to block the transaction and report it to OFAC within 10 days.

1-16

Front 644

When ranking companies within an industry sector relative to its ROIC, what would be the best method to use?

Back 644

When ranking companies according to relative value, there may be companies with negative earnings that would make any P/E ratio invalid. Such companies might have a very high cost per dollar invested since they provide no returns. Therefore, the earnings yield is a more appropriate valuation method of such companies.

6-5

Front 645

When responding to a tender offer, what can management/bod recommend to shareholders?

Back 645

When responding to a tender offer, the subject company can accept, reject, remain neutral or state that it cannot take a position. It cannot recommend that shareholders purchase more shares of the company.

9-26

Front 646

When selecting members to the fairness committee, regulators require that broker-dealers set selection standards and employ a process that promotes a balanced view. Name the things a broker-dealer must address when creating a fairness committee.

Back 646

1. Identify the types of transactions on which it will issue a fairness opinion
2. Identify circumstances in which it will use a fairness committee
3. Establish a process to select members of the fairness committee and set standards necessary to become a committee member
4. Create a process that promotes a balanced view by the fairness committee. This is accomplished by selecting some members from outside the deal team.
5. Create a process to determine whether the valuation

9-22

Front 647

When should each of the following be inspected:

Nonsupervisory branches
Supervisory branches
OSJs
Nonbranch offices

Back 647

Offices of Supervisory Jurisdiction (OSJs) and supervisory branch offices (branch offices that supervise nonbranch offices) must be inspected by member firms at least annually.

Nonsupervisory branch offices are to be inspected at least every three years.

Nonbranch offices are to be inspected with regularity. No specific time applies.

1-14

Front 648

When the curve inverts, yields are? What else is inverted yield curve called? When do inverted sloped yield curves tend to appear?

Back 648

When the curve inverts, yields are the highest for the shortest maturity and decrease as the maturity increases. An inverted yield curve is also referred to as being a negative, descending, or downward sloping curve and is relatively rare. Negatively sloped yield curves tend to appear when interest rates are relatively high, such in periods of high inflation, or when borrowing far exceeds supply.

4-12

Front 649

Where and when can Regulation S securities be sold?

Back 649

Regulation S securities can be sold immediately on an SEC designated offshore securities exchange.

7-34

Front 650

Where are subordinated debentures on the priority list for bankruptcy?

Back 650

Subordinated debentures are below unsecured debt but above common stock in a liquidation proceeding.

9-24

Front 651

Where can the fees for a broker-dealer doing advisory work be found?

Back 651

The fees that a broker dealer is receiving for advisory work can be found in the engagement letter.

9-16

Front 652

Where does CAPEX and Depreciation sit in the CF Statement?

Back 652

Lower capital expenditures would be part of investing cash flows. 5-3

Depreciation is a noncash charge; add back. 5-7

5-3, 5-7

Front 653

Where is Detailed information concerning proposed executive compensation and ownership percentages is required in this document?

Back 653

In the PROXY STATEMENT.

According to SEC Rule 14a-6, the SEC requires a company to provide shareholders with a proxy statement prior to its annual meeting. The proxy statement contains information that will be voted on during the annual shareholder meeting. Detailed information concerning proposed executive compensation and ownership percentages is required in this document.

2-4

Front 654

Which are the 3 types of companies that are not allowed to use the Rule 104 of Regulation D exemption?

Back 654

There are three types of issuers that are not permitted to use this exemption: a company subject to the SEC's reporting requirements (a reporting company), an investment company, and a development stage company that has no specific business plan or purpose (e.g., a blank check company).

7-31

Front 655

Which bonds would increase most in price if interest rates decline?

Back 655

When interest rates decline, bond prices will rise. The longer maturities will rise more than the shorter maturities due to market risk.

(3-18)

Front 656

Which conditions must be met for a broker-dealer to represent a primary offering of an OTC Bulletin Board security as being at-the-market?

Back 656

A member firm that is participating in the primary or secondary distribution of a security that is not admitted to trading on a national securities exchange may not represent that the security is being offered at-the-market (i.e., priced based on the current secondary market value) unless the member firm has reasonable grounds to believe that an independent market for the security exists. To describe an offering as at-the-market when the firm controls that market would be misleading and fraudulent.

8-6

Front 657

Which of outside business activities would an investment banking representatives NOT need to report to their employing broker-dealer? Which must they report?

Back 657

FINRA rules require registered representatives to report to their firm any outside business activities for which they earn compensation. However, a passive investment would generally not need to be reported, nor would participation in charitable activities for which no compensation is received.

1-18

Front 658

Which of the following features are benefits of being classified as a seasoned issuer under the Securities Act of 1933?

Back 658

A seasoned issuer can benefit from shelf registration, but not the automatic shelf registration afforded WKSI status, where there is no SEC staff review .

7-14

Front 659

Describe the process when an issuer wants to accelerate the effective date of a filing?

Back 659

The request may be oral or written but, if the request is made orally, it must be followed by a letter that accompanies an amended filing. The request is made by the issuer and the managing underwriter. The issuer may request a specific hour in the day when it wants the date to be effective, but the SEC must be notified no later than the second business day before the day they want the registration to become effective.

The SEC would review the issuer's filing to make sui·e there is adequate information concerning the securities being offered. The SEC is trying to protect the public and, therefore, would want to ensure the investors have been provided with full and fair disclosure.

7-7

Front 660

Which of the following statements is TRUE concerning Rule 144A transactions?
-The securities may be offered only to accredited investors.
-The securities may be offered only to qualified institutional buyers.
-An investor buying these securities must hold them for a period of six months.
-Only domestic issuers may offer securities under this type of offering.

Back 660

B).

Rule 144A provides an exemption for the purchase of restricted securities by qualified institutions. Qualified institutional buyers are defined as financial institutions that have, on a discretionary basis, at least $100 million invested in securities of issuers not affiliated with the entity. These institutions may buy and sell directly with one another without meeting the requirement of Rule 144. The securities offered under Rule 144A may be debt or equity, may be offered by either a domestic or foreign issuer, and may be resold immediately to another QIB. There is no six-month holding period, as with restricted stock. A private placement under Regulation D may be offered to an unlimited number of accredited investors. An accredited investor is defined as a person with either a net worth of $1,000,000, or annual income of $200,000. (7-31)

TEST QUESTION (7-33)

Front 661

What open market transactions are not permitted by a covered person during the tender period?

Back 661

According to SEC Rule 14e-5, a covered person in a tender offer may NOT purchase the common stock or convertible securities of the same issuer during the period that the tender is open.

9-28

Front 662

Which TWO of the following statements are TRUE concerning the minimum criteria that a company must meet in order to be considered a well-known seasoned issuer (WKSI)?
-It must be eligible to register on Form S-3 (short form of the registration statement) or Form F-3 (registration statement for certain foreign private issuers).
-It must have been a reporting company for the previous 36 months.
-The company must have a certain public float of debt or equity.
-The company must have a certain amount of annual revenue.

Back 662

It must be eligible to register on Form S-3 (short form of the registration statement) or Form F-3 (registration statement for certain foreign private issuers).. The company must have a certain public float of debt or equity.

7-12

Front 663

Which TWO of the following statements are TRUE regarding a fixed exchange ratio?

1.The buyer will not know how many shares it will need to issue to acquire the seller.
2.The buyer will know how many shares it will need to issue in order to acquire the seller.
3.The seller will not know the final purchase price of the transaction.
4.The seller will know the final purchase price of the transaction.

Back 663

2&3

If an M&A transaction has a fixed exchange ratio, the board of directors of the buyer have agreed to purchase the seller for a fixed number of shares. This amount will not fluctuate between the announcement date and the closing. Therefore, the buyer will know how many shares it will need to issue to acquire the seller. For example, RSR agrees to purchase all of the outstanding shares of EXA for $14.00 per share. The company has 1,000,000 shares outstanding. The transaction is valued at $14,000,000. If RSR stock is trading at $56.00 per share, it must issue 250,000 shares ($14,000,000 / $56.00), and the fixed exchange ratio would be .25 ($14.00 / $56.00). The seller will not know the final purchase price of the transaction, since the buyer's stock may fluctuate. If RSR stock declined to $54.00, the transaction would be valued at $13,500,000 (250,000 shares x $54.00). For this reason, a seller that is in a strong negotiating position may ask for a collar, or a minimum dollar value per share.

Read example on page 9-8. Test Question.

Front 664

Which TWO of the following statements are TRUE when a member firm issues unregistered securities to nonaccredited investors through a private placement?
-The firm must disclose detailed financial information.
-The firm is required to file the offering document with the Corporate Finance Department 10 days prior to first use.
-At least 90% of the offering proceeds must be used for business purposes.
-The firm is required to provide both accredited and nonaccredited investors with a disclosure document.

Back 664

I and IV

7-32 Test Question.

Front 665

Which type of risk does NOT apply to the holder of a zero-coupon bond?

Back 665

Zero coupon bonds are the only fixed-income instruments to have no reinvestment risk, since they have no interim coupon payments.

http://www.investopedia.com/terms/r/reinvestmentrisk.asp

Front 666

While it satisfies most of the listing standards, due to recent adverse market conditions, the market value of the company's shares falls below the NYSE minimum. Is there another way to continue being listed?

Back 666

In situations where the market value has declined as a result of adverse market conditions, the NYSE will consider stockholders' equity of $60 or $100 million (as applicable) as an alternative measure, provided that the public market value is no more than 10% below the minimum.

8-33

Front 667

Which securities are exempt from registration?

Back 667

Certain securities are exempt from the registration and prospectus requirements of the Act because of the nature of the issuer. Among the exempted securities are:

U.S. government and U.S. government agency securities
Municipal securities
Securities issued by nonprofit organizations
Short-term corporate debt instruments (such as commercial paper) that have a maturity not exceeding 270 days
Securities issued by domestic banks and trust companies (but not bank holding companies)
Securities issued by small business investment companies (exempted by federal legislation regarding small businesses

7-26

Front 668

Who can participate in a Regulation S offering as a buyer?

Back 668

Only a non-U.S. person may buy an overseas offering sold under Regulation S.

-The investor must not be defined as a U.S. person. A U.S. person is defined as any individual who is a resident of the U.S. as well as any partnership, estate, or account held for the benefit of a U.S. resident.
-A U.S. investor who is traveling, or resides outside the U.S. for a significant part of the year, would still be classified as a U.S. investor.

7-34

Front 669

Who does Regulation S allow securities to be sold to?

Back 669

Regulation S allows U.S. issuers to sell securities to non-U.S. residents.

7-34

Front 670

Who does statutory voting give more power to? Smaller or larger shareholders? And why?

Back 670

Larger, more substantial.

A method of voting that gives larger, more substantial stockholders a greater degree of voting power over smaller, less substantial stockholders is statutory voting. Under statutory voting, each stockholder has one vote per share, per election. For example, if a corporation is electing three directors, and a shareholder owns 100 shares, the shareholder could cast 100 votes in each election. Unlike cumulative voting, you are not allowed to pool all of your votes onto one candidate.

3-5

Front 671

Who has authority in general partnership?

Back 671

Unless the partnership agreement specifies otherwise, all partners in a general partnership have the authority to transact business on the partnership's behalf. A general partnership is formed by an agreement among the partners.

7-2

Front 672

Is all cash flow from operations available for free use by bondholders and stockholders?

Back 672

This concept states that not all of the cash flow from operations is available for free use by bondholders and stockholders. The underlying requirement is that some of the cash flow from operations must be used to reinvest in operating activities or to purchase new equipment in order to maintain present production capacity.

6-22

Front 673

Who is required to be fingerprinted?

Back 673

Under SEC Rule 17f- 2, unless an exception is available, fingerprints are required of any employee of a registered broker-dealer. All registered personnel of a broker-dealer (both representatives and principals) are required to be fingerprinted. An exception would be available if the employee is not engaged in the sale of securities, does not have access to funds or securities, and does not handle or process funds or securities.

1-2

Front 674

Who is restricted from buying IPO? What are some exemptions?

Back 674

Restricted persons are not permitted to purchase any shares of a new issue unless an exemption applies. The following are considered restricted persons:
FINRA member fi~ms and any associated person (i.e., employee) of the member firm
• An immediate family member of an employee of a member firm.
Finders and fiduciaries
Portfolio managers purchasing for their own account
Persons who own a broker-dealer
The exemptions allow a new issue defined under the rule to be sold to the following accounts:
Investment companies registered under the Investment Company Act of 1940
The general or separate account of an insurance company
A common trust fund
An account in which the beneficial interest of all restricted persons does not exceed 10% of the account. (This is a de minimis exemption that allows an account owned in part by restricted persons to purchase a new issue if all restricted persons combined own 10% or less of the account.)
Publicly traded entities other than a broker-dealer or its affiliates that engage in the public offering of new issues
Foreign investment companies
ERISA accounts, state and local benefit plans, and other tax-exempt plans under IRS Code 501(c)(3)

8-28, 8-29

Front 675

Who is the 13F filing? Who must file it? Must be registered with SEC?

Back 675

SEC Rule 13f-l of the Securities Exchange Act of 1934 requires quarterly filings when institutional investment managers (for example, investment companies, holding companies, and hedge funds) exercise investment discretion over at least $100,000,000 in equity securities. The schedule includes information concerning the securities owned by the filer. This form must be filed REGARDLESS of whether the filer (e.g., a hedge fund) is registered with the SEC.

2-4

Front 676

What is FNMA, what do they do, and who backs them?

Back 676

The Federal National Mortgage Association (nicknamed Fannie Mae) raises money to buy insured Federal Housing Administration (FHA), Veterans Administration (VA) and conventional residential mortgages from lenders such as banks and savings and Joan associations. FNMA issues are backed by its authority to borrow from the Treasury. They are not backed by the U.S. government.

3-30

Front 677

Who pays roll up transaction solicitation expenses?

Back 677

The general partner or sponsor proposing the transaction must agree to pay all solicitation
expenses (including expenses associated with preparatory work), even if the proposal is rejected.

8-31

Front 678

Who typically signs a confidentiality agreement in a proposed merger?

Back 678

Both potential buyers and sellers.Typically, both the disclosing party and the party receiving the information sign the agreement.

9-16

Front 679

Why is information collected from a customer when they open a new account?

Back 679

This is done so that the member firm can make a determination as to whether certain trading, such as options and margin, is suitable for a customer based on financial means and investment objectives.

Additionally, information is obtained to determine if a particular recommendation is suitable for the customer.

8-6

Front 680

Why would a company issue convertible bond?

Back 680

Convertible bonds allow corporations to
borrow money at a lower rate (lower coupon) because the convertible feature is attractive to investors.
Investors will accept the lower interest rate in exchange for the possibility of being able to convert
the bonds into common stock.

3-25

Front 681

Working Capital:

Back 681

Working capital is total current assets minus total current liabilities. Working capital represents the net amount of a company's liquid resources.

5-2

Front 682

You are an investment banker at a member firm. What other people in your cirlce are bound by industry rules when opening an account at another member firm?

Back 682

Immediate family.

8-28

Front 683

You are seeking information on insider purchases. Which of the following filings would be the BEST source for such information?

Back 683

Form 4 is filed by any insider of a corporation who buys or sells shares of his company.

2-4

Front 684

Your client is President of XYZ Corporation and is selling XYZ shares. Go through the steps of Rule 144, regarding the selling of restricted or control stock.

Back 684

For restricted stock, the President is held to a 6 month holding period which begins at the time the securities were bought paid in full. After six months, the broker-dealer handling the sale may do so through a brokers' transactions or in transactions made directly with market makers. When a sell order is placed or when an order is executed directly with a market maker, the individual selling securities must notify the SEC. During any 3 month period, the maximum that may be sold is the greater of either 1) 1% of the total shares outstanding or 2) the average weekly volume of the past four weeks.

Control stocks follow the exact same steps and regulations, but do not require any holding period.

7-35, 7-36, 7-37

Front 685

Your firm is representing a Nasdaq-listed company that is in the process of purchasing a privately held software developer. The seller has asked your client to include an indemnification basket in the Definitive Purchase Agreement. What is the meaning of this provision?

Back 685

Indemnification clauses are often requested by buyers as protection against a seller's mate rial breach of contract after the deal has closed. These clauses are used mostly in the purchase of private companies and quantify the amount of compensation that is due the buyer if officers and directors of the selling firm fail to meet their legal obligations.

9-20

Front 686

Your firm is the lead underwriter for a Jupiter Oil Exploration debt offering. Jupiter is issuing $200 MM of 5 3/4% bonds, due July 1, 2026. The bonds are priced at 99 1/2% of par value. An institutional client would like to know the approximate yield to maturity on the bond. You would reply that the yield would be LOWER, SAME, GREATER THAN 5 3/4%, DON'T KNOW? AND WHY?

Back 686

Greater THAN 5 3/4%

The 5 3/4 % bonds are priced at a discount (99 1/2%) to par value ($1,000). An investor who purchases the bonds at the offering price, and who holds the bonds to maturity, would receive the par value of $1,000. Additionally, the investor's semiannual interest received is also assumed to be reinvested at prevailing rates. The interest earned on interest, coupled with the increase in the value of the bond, will provide a yield to maturity that is greater than 5 3/4%.

3-13

Front 687

List in terms of most stringent criteria for listing

-NYSE
-The Nasdaq Global Market
-Nasdaq Capital Market
-Nasdaq Global Select

Back 687

Considering the three levels of Nasdaq, the Capital Market has the least stringent initial listing requirements. The Nasdaq Global Market introduces more stringent listing requirements for net income, publicly held shares, stockholders' equity, etc. The NYSE initial listing requirements are less stringent than Nasdaq Global Select in several area such as publicly held shares, and financial criteria.

8-34

Front 688

Name two shortcomings of using the trailing P/E.

Back 688

1) When comparing two companies, the same time frames must be used when calculating the earnings per share. If differing time frames are applied to the calculation, the comparisons will not be valid or relative for two companies at a specific point in time, or for one company over comparable periods.
2) Due to the effects of nonrecurring items, the trailing P/E may not always be appropriate for the projection of future earnings. There may be company-specific nonrecurring items that will impact earnings. The company may change methods of accounting or inventory valuation. There may have been a sale of assets, or a revaluation of assets for accounting purposes that will appear on the financial statement in a particular quarter, and will not appear in ensuing periods. Additionally, the earnings may be affected by the cyclical nature of the business.

6-2

Front 689

How long must a broker-dealer maintain the majority of its records?

Back 689

According to SEC rules, a broker-dealer is required to maintain the majority of its records for three years. These must be readily accessible for the two most recent years.

8-27

Front 690

How long must a broker-dealer maintain documents of original entry?

Back 690

Documents of original entry, such as blotters and ledgers, must be kept for at least six years. These must be readily accessible for the two most recent years.

8-27

Front 691

How long must a broker-dealer maintain documents of origination?

Back 691

Documents of origination, e.g., the corporate charter and articles of incorporation, must be maintained for the life of the corporation. These must be readily accessible for the two most recent years.

8-27

Front 692

What are the requirements for an AML compliance program?

Back 692

The requirements for an AML compliance program include the designation of a compliance officer who is responsible for the program, an ongoing employee training program, and an independent audit function to test the program's effectiveness.

1-15

Front 693

What does FINRA Rule 3011 state?

Back 693

FINRA Rule 3011 states that the firm must designate an individual, or group of individuals, who is responsible for monitoring and implementing the firm's AML program.

1-15

Front 694

What is negative convexity?

Back 694

Negative convexity occurs in mortgage-backed securities where duration shortens when rates fall and lengthens when rates rise. When used in conjunction with duration, it helps to provide a more precise measurement of a bond's sensitivity to changes in interest rates.

3-19

Front 695

What does a bond's indenture consist of?

Back 695

Two parts. a protective covenants and what happens if an issuer defaults.

3-21

Front 696

What are covenants?

Back 696

Covenants are protective agreements that the borrower pledges for the protection of the lender. Covenants can be positive, which require certain actions on the part of the issuer, or negative, which limit certain actions. If debt covenants are broken, the loan may become due immediately. Covenants may also include a requirement to maintain a minimun amount of working capital and a requirement that sets a maximum debt-to-equity ratio. Covenants may also restrict the company from having a change of control.

3-21

Front 697

How does the SEC define a research report?

Back 697

The SEC has adopted a definition of a research report as a written communication that contains information, opinions, or recommendations regarding the securities of an issuer, whether or not it provides information reasonably sufficient upon which to base an investment decision.

7-17

Front 698

What is the difference between a selling syndicate and a selling group?

Back 698

A selling syndicate is defined as a group distributing securities under an agreement that imposes a financial commitment on its members. A selling group is defined as a group distributing securities under an agreement that does not impose a financial commitment on its members.

8-15

Front 699

What is a market extension merger?

Back 699

A market extension merger involves the combination of two companies that sell the same products or services into different markets. Unlike a horizontal merger, the companies involved are not direct competitors. Often this strategy is used when entering a new geographic market where the homegrown entity would have much greater name recognition.

9-11

Front 700

What is a vertical merger?

Back 700

A vertical merger involves a transaction between two firms at different levels of the production chain, as would be the case if a jewelry manufacturer purchased a gold supplier. The potential benefits in this type of deal are that the end producer of a product may obtain better pricing on supplied goods and have better control over the manufacturing process of its former standalone supplier. The merged supplier would benefit by being guaranteed a stream of business from its former customer, since the two entities would now be part of the same organization.

9-11

Front 701

What is three-way communications?

Back 701

A research analyst is prohibited from communicating with a customer, or a prospective customer, regarding an investment banking service transaction, in the presence of investment banking personnel or personnel of the issuing company. The prohibition of three-way communications is intended to prevent customers and prospective customers from identifying a research analyst as a part of the investment banking department and to prevent the analyst's solicitation of business for investment banking service transactions.

8-8

Front 702

What is a best-efforts, all-or-none arrangement?

Back 702

Under certain circumstances, a corporation might require a specific minimum amount of capital. Raising a lesser amount would not permit the corporation to accomplish its objectives. The issuer would specify that all of the issue must be sold, or the entire distribution will be cancelled.

8-2

Front 703

What is depreciation? What are the two types of depreciation? Explain both.

Back 703

The allocation of costs that reflect the wearing out or deterioration of an asset is called depreciation. Depreciation represents a noncash charge to the income statement. Straight-line depreciation produces a constant depreciation expense and a constant decline in the carrying value of the asset. Accelerated depreciation allows for a faster rate of decline in the asset's value in the early years of asset ownership, leading to a greater depreciation charge.

5-7

Front 704

What is a general securities principal? What does he do?

Back 704

An Office of Supervisory Jurisdiction, OSJ, must have a general securities principal on the premises whose responsibilities would include the approval and review of accounts, transactions, correspondence, advertising, sales literature, and responses to customer complaints. If the principal has jurisdiction over satellite offices, he must approve accounts and orders within those offices and make frequent visits to those sites.

1-14

Front 705

What does FIFO stand for? What is it?

Back 705

FIFO = First In, First Out

In regards to valuing inventory, the FIFO method applies the cost of the first item produced to the money received from the first item sold.

5-1

Front 706

What does LIFO stand for? What is it?

Back 706

LIFO = Last In, First Out

In regards to valuing inventory, under LIFO, the cost of the last item produced is applied to the price of the first item sold from inventory.

5-1

Front 707

What is a consolidation merger?

Back 707

In a consolidation merger, a brand new company is formed for the purpose of buying both companies and combining them under the new entity. Shareholders of the original Company A and Company B turn in their holdings and receive shares of the newly created entity, Company C.

9-9

Front 708

What is statutory disqualification? Give some examples.

Back 708

A statutory disqualification is a de nial of an application for registration based solely on past transgressions, including:
• Being expelled or suspended from a self-regulatory organization
• Having a registration de nied, suspended, or revoked by the SEC or another regulatory agency (including the Commodity Futures Trading Commission and foreign regulators)
• Violating or assisting in the violation of any securities or commodities law, or the rules of the MSRB
• Failing, as a principal or supervisor, to reasonably supervise a subordinate who violates rules. [This does not apply if (l) there was a supervisory system in place which would reasonably be expected to detect the violation, and (2) the supervisor reasonably discharged supervisory duties under the system.]
• Being convicted, within the last 10 years, of a felony or misdemeanor involving false reports, bribery, perjury, crimes related to funds or securities, or any other felony

1-2

Front 709

Define investment banking activities (2 part answer).

Back 709

Work performed by associated persons of a broker-dealer whose activities primarily involve:
1) Advising on, or facilitating debt or equity securities offerings through a private placement or a public offering, including but not limited to origination, underwriting, marketing, structuring, syndication, and pricing of such securities and managing the allocation and stabilization activities of such offerings, or
2) Advising on, or facilitating mergers and acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations or business combination transactions, including but not limited to rendering a fairness, solvency, or similar opinion.

1-3

Front 710

The rule that defines investment banking activities does not cover which three individuals?

Back 710

1) limited to public (municipal) finance offerings
2) direct participation program offerings (limited partnerships)
3) limited to effecting private securities offerings.

1-3

Front 711

In regards to exam confidentiality, it is a violation of FINRA rules to: (5 parts)

Back 711

1) Remove an examination, or a portion of an exam from an examination center.
2) Reproduce parts of an examination
3) Disclose parts of an examination to anyone
4) Receive parts of an examination from anyone
5) Compromise the contents of a past or present examination in any way

1-3

Front 712

Name three activities a non-registered person may do.

Back 712

1) Extend invitations to firm-sponsored events
2) Inquire whether a prospective customer wishes to discuss investments with a registered representative
3) Inquire whether a prospective customer wishes to receive investment literature from the firm.

1-4

Front 713

Name five activities a non-registered person may NOT do.

Back 713

1) Solicit orders or new accounts
2) Provide investment advice
3) Make recommendations
4) Give pricing information
5) Execute transactions on behalf of the firm

1-4

Front 714

(T/F) All registered persons must participate in an annual compliance review, discussing compliance issues that are relevant to the business of the representatives involved.

Back 714

True

1-4

Front 715

(T/F): Regulatory Element is a one-time training that must be taken 2 years after initial securities registration.

Back 715

False. It must be taken 2-years after initial securities registration and then every three years thereafter, for the remainder of your career.

1-5

Front 716

What is a "covered person" with regard to the Firm Element of continuing education?

Back 716

Any registered person who has direct contact with customers in the conduct of a member firm's securities sales, trading, or investment banking, and her immediate supervisor.

1-6

Front 717

What are the minimum standards for the Firm Element? How often must each firm demonstrate to regulators that it has analyzed and prioritized the training needs of its covered personnel and developed a written training plan based on that needs analysis?

Back 717

Required that the programs enhance registered representatives' securities knowledge, skill set, and professionalism.

1-6

Front 718

The Firm Element training must cover... with particular emphasis on (three things)?

Back 718

The securities products, services, and strategies offered by the firm, with particular emphasis on:
1) General investment features and associated risks
2) Suitability and sales practice considerations
3) Applicable regulatory requirements.

1-6

Front 719

Name two securities that are exempt from some parts of the Securities Exchange Act of 1934. Name these exemptions (four).

Back 719

U.S. government securities and municipal securities. They are not subject to the restrictions that apply to:
1) credit extensions
2) proxy solicitation
3) insider reporting requirements
4) Prohibitions against price manipulation on an exchange

1-7

Front 720

In the Securities Exchange Act of 1934, the line "manipulative, deceptive, or other fraudulent device or contrivance" is defined to include...

Back 720

Any untrue statement of a material fact and any omission of a material fact necessary to make the statements made not misleading.

1-7

Front 721

What is the goal of SEC Rule 10b-18? Why was it created?

Back 721

To control how an issuer, or an affiliate, may buy its own stock in the secondary market? To prevent an issuer of securities illegally raising the price of its own stock.

1-8

Front 722

In the Exchange Act, what is Rule 10b-5 and what does it say?

Back 722

Deals with insider trading. Makes it unlawful, in connection with the purchase or sale of any security to:
1) Employ any device, scheme or artifice to defraud
2) Make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading
3) Engage in any act, practice or course of business that operates or would operate as a fraud or deceit upon any person.

1-10

Front 723

What is insider trading?

Back 723

Rule 10b-5 in the Exchange Act. Involves the purchase or sale of securities using material, nonpublic information about those securities in a fraudulent manner. Usually involves either the misuse of confidential information or the misappropriation of confidential information from an employer.

1-10

Front 724

(T/F): If the the tippee knows that the tipper gave confidential information and trades on it anyway, both the tippee and tipper may have violated trading rules.

Back 724

True.

1-11

Front 725

What did the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA) do? What is the point?

Back 725

It required broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of the broker dealers' business, to prevent the misuse of material, nonpublic information by the broker-dealer or any associated person. The Act holds that any individual who purchases or sells a security while in possession of material, nonpublic information, or has communicated such information to another party in connection with a transaction, may be liable for trading violations under the Act.

1-11

Front 726

What is an information barrier, in regards to insider trading?

Back 726

It consists of a set of procedures for preventing the transmission of confidential information from one department to another within a broker-dealer.

1-11

Front 727

Any trade that is subject to investigation by a member firm requires a written statement to be submitted to its SRO within _____________ after the completion of the investigation and a written statement of the firm's findings must be submitted to its SRO by __________________ following the calendar quarter in which the trade occurred. This statement must be filed whether or not a disciplinary action has been taken.

Back 727

Any trade that is subject to investigation by a member firm requires a written statement to be submitted to its SRO within one week after the completion of the investigation and a written statement of the firm's findings must be submitted to its SRO by the 15th of the month following the calendar quarter in which the trade occurred. This statement must be filed whether or not a disciplinary action has been taken.

1-12

Front 728

Name the three possible consequences of insider trading violations.

Back 728

1) Civil Penalties
2) Criminal Penalties
3) Bounties

1-12

Front 729

What is a written supervisory procedures manual?

Back 729

All broker-dealers must have a written supervisory procedures manual. The manual must cover the scope and nature of the firm's business activities and methods of operation. It also must specify the detailed responsibilities of all supervisors and the review procedures they are required to follow.

The written procedures also must explain the method by which completed supervisory reviews are documented.

The supervisory manual must also include the titles, registration status, and location of supervisory personnel and their responsibilities.

1-13

Front 730

What are broker-dealers required to file if a cash transactions by a single customer during one business day exceed $10,000?

Back 730

Broker-dealers have long been required to file Currency Transaction Reports (CTRs) (FinCEN Form 104) for all cash transactions by a single customer during one business day that exceed $10,000.

1-15

Front 731

What does CMIR stand for? What is it?

Back 731

A Currency and Monetary Instrument Transportation Report (CMIR) must be filed whenever anyone physically transports, sends, or receives cash, cash equivalents, or monetary instruments in an aggregate amount of more than $10,000 into or out of the United States.

1-15

Front 732

What are the penalties for violating AML laws?

Back 732

The penalties for violating the AML laws are severe. The criminal penalties include jail sentences of up to 20 years and fines of up to $500,000 or twice the amount of the money involved, whichever is more. Violators may also face civil fines that can easily add up to millions of dollars. A registered representative does not need to actually know about a money laundering scheme or participate in it to be prosecuted. Firms and their registered representatives may also be held liable if they were willfully blind to the activity.

1-16

Front 733

What does FCPA stand for? What is it?

Back 733

The law prohibits corrupt or improper payments to foreign government officials for the purpose of obtaining business. The antibribery provision of the law applies to U.S. companies, the U.S. subsidiary of a foreign company, as well as any foreign private issuer that is an SEC reporting company.

1-16

Front 734

When an executing member knows that a person associated with an employer member has a financial interest in or discretionary authority over any existing or proposed account carried by the executing firm, the executing member must:

Back 734

• Notify the employer member in writing of the intention to open the account
• Send duplicate confirmations and statements to the employer member, if requested
• Notify the person opening the account that these procedures will be followed

The employee opening the account is required to give written notice of intention to open the account to both the employer firm and the executing firm.

1-17

Front 735

What must a person associated with a member who wishes to open an account with an investment adviser, bank, or other financial institution that is not a member of FINRA do?

Back 735

The person opening the account must notify the employer in writing prior to the opening of the account.

1-17

Front 736

What is the maximum amount a gift can be given/received by personnel employed by another member firm? Are there any exemptions?

Back 736

Member firm personnel may not give or permit to be given a gift of material value exceeding $100 per recipient per year to personnel employed by another member firm.

Exempt from the $100 limit are occasional meals, tickets to sporting and cultural events, reminder advertising (boxes of pens, key chains, etc.), and expenses related to legitimate business travel. An exemption is provided if the gift is given to another family member for an event having to do with a family relationship (a wedding).

Written records of all gifts and compensation must be retained by the member firm giving the gift or compensation.

1-19

Front 737

If a complaint is filed by the Department of Enforcement, how long does the respondent have to file a response to the complaint?

Back 737

The respondent must file a response to the complaint within 25 days of receiving it. If the respondent fails to answer within the required time, the Department will issue a second notice. Failure to answer the second notice within 14 days can be treated as an admission by the respondent to the allegations in the complaint.

1-21

Front 738

A Hearing Panel may impose the following penalties (Sanctions):

Back 738

• Censure a member firm or an associated person
• Fine a member firm or associated person (no limit as to the amount)
• Suspend the membership of a firm or suspend the registration of an associated person, either
for a definite period or until specified conditions are met
• Expel a member firm or cancel its membership; revoke or cancel the registration of an associated
person
• Suspend or bar an associated person from association with any member firm
• Impose any other fitting sanction

1-21

Front 739

How long does it take for a sanction to become effective?

Back 739

Other than a bar or expulsion, a sanction is effective 30 days after the respondent has received notice of a final disciplinary action. A bar or expulsion is effective as soon as the decision is served on the respondent.

1-21