SERIES 7 EXAM

Primary Market

The market in which the proceeds of sales go to the issuer of the securities sold. Sometimes referred to as the new issues market.

Initial Public Offering (IPO)

The first time any shares have been issued to raise new capital for the issuer.

Additional Primary Offering (APO)

A new issuance of stock to the public by a company that has already completed its Initial Public Offering (IPO). Often referred to as a follow-on offering or seasoned equity offering.

When a company resells Treasury Stock

What is the ONE case where the issuer receives the proceeds of the sale of securities that is NOT a primary offering?

Secondary Market

An aftermarket where investors buy and sell to each other apart from the issuer. Exchanges, such as NASDAQ, NYSE, and NYSE American, facilitate this market.

Investor

Who receives the proceeds in the secondary market?

Registration Statement

An issue that is not exempt from registration, that is selling securities to raise money must file a … ?

SEC

Who must the issuer file the registration statement of a new, non-exempt issue with?

Due Diligence

A meeting at which an issuing corporation’s officals and representatives of the underwriting group present information on, and answer questions about, a pending issue of securities

Feasibility Study

This study focses on the projected revenues and costs associated with the project and on a analysis of competing facilities.

Revenue Bonds

For what type of security MUST a Feasibility Study be conducted?

Due Diligence

Due Diligence

What is the underwriter also commonly known as?

Investment Banker

Who conducts the due diligence on a new issue of securities?

Underwriter

A broker-dealer specializing in investment banking, the process of underwriting new issues.

Underwriter

The investment banker who negotiates with the issuer who directs the entire underwriting process.

Underwriting Manager (Syndicate Manager)

True or False: A syndicate may have more than one manager?

True

All underwriters of corporate securities must be _____ member firms.

FINRA

All underwriters of municipal securities must be members of the _____.

MSRB

What is the agreement between the underwriting manager and the issuer called?

Underwriting Agreement

A group of underwriters formed to purchase (underwrite) a new issue of municipal securities from the issuer and offer it for resale to the general public.

Syndicate

It is organized for the purposes of sharing the risks of underwriting the issue, obtaining sufficient capital to purchase an issue and and broadening the distribution channels to the issue, to the investing public.

Syndicate

This is a type of underwriting where all syndicate members commit to purchase from the issuer and then distribute an agreed-on amount of the issue (their participation or bracket)

Firm Commitment Underwriting

A signed document in a competitive bid describing the participants’ responsibilities and allocation of syndicate profits, if any.

Syndicate Agreement/Syndicate Letter

This is a type of underwriting where the issuer and the investment banker negotiate the offering terms, including the amount of securities to be offered, offering price or yield, and underwriting fees.

Negotiated underwriting

This is a type of underwriting where investment bankers bid for a new issue of bonds.

Competitive bid underwriting

In a competitive bid underwriting, the issuer awards the securities to the underwriter(s) whose bid results in the lowest _____ to the issuer.

Net interest cost

Competitive bid underwritings are more common for which type of securities?

General obligation bonds

A common calculation used for compring bids and awarding the bond issue. It combines the amount of the proceeds the issuer recieves with the total coupon interest it pays.

Net interest cost (NIC)

Similar to the net interest cost (NIC), this calculation provides the same type of cost comparison adjusted for the time value of money. Weights early interest payments more heavily to giver greater value to today’s dollars to pe paid in the future.

True interest cost (TIC)

Broker-dealer apart of the underwriting process who act as agents with no commitment to buy securities.

Selling group

What document do selling groups sign with underwriters to participate in the issuance of an underwriting?

Selling group agreement

Syndicate members take on financial liability and act in ______ capacity. Selling group members have NO financial liability and act as ______ agents because they have no commitment to buy securities from the issuer.

Principal, agent

A type of firm commitment where a company’s current stockholders do not exercise their preemptive rights in an additional offering, and a corporation has an underwriter waiting to purchase whatever shares remain unsold as a result of rights expiring

Standby

Standby is a form of ________.

Firm commitment

This a type of underwriting where the underwriter acts as an agent for the issuing corporation. The underwriter sells as much as possible, without financial liability for what remains unsold.

Best efforts underwriting

This a type of underwriting where the issuing corporation has determined that it wants an agreement outlining that the underwriter must either sell all of the shares or cancel the underwriting.

All-or-none underwriting

During this underwriting, because of the uncertainty of the outcome, any funds collected from investors during the offering period must be held in escrow pending final disposition of the underwriting.

All-or-none underwriting

A best efforts underwriting setting a floor or minimum, which is the least amount the issuer needs to raise to move forward with the underwriting, and setting a ceiling or maximum on the dollar amount of securities the issuer is willing to sell.

Mini-max offering

A signed document in a negotiated underwriting describing the participants’ responsibilities and allocation of syndicate profits, if any.

Syndicate Contract / Agreement among underwriters

Syndicate letters are not legally binding until the …

Syndicate’s submission of the bid

A type of syndicate account where each underwriter is responsible for only its own underwriting allocation. It is a divided account.

Western account

A type of syndicate account where underwriter is allocated a portion of the issue and may be allocated additional bonds representing its proportionate share of any unsold bonds. It is an undivided account.

Eastern account

The difference between what the public pays and what the issuer receives on a new issue

Spread

The process of establishing the reoffering yield (or price) for each maturity

Writing the scale

The price or yield at which a municipal security is sold to the public by the underwriters

Reoffering price

Competitive bids are submitted as _____.

Firm commitments

How much of the total par value of the offering is the good-faith deposit submitted by the underwriters during the competitive bid process?

1-2%

What account is created when the issue is awarded to the winning syndicate? This is the account where all sales proceeds are deposited into, and all expenses are paid out.

Syndicate account

Who is responsible for keeping the books and managing the syndicate account?

Syndicate managerWh

What is the maximum length of time for a syndicate account to exist?

30 calendar days (from the time the issuer delivers the securities to the syndicate)

The term ____ refers to the total dollar sales earned from a municipal issue.

Production

Who receives the management fee in a new issue?

Syndicate managers

The portion of the spread that remains after subtracting the management fee

Total takedown

What is a point? (for bonds)

$10

What is ½ a point? (for bonds)

$5

The amount of payment a member of the selling group retains from the sale of a newly issued security

Selling concession

Amount paid to syndicate members when bonds are sold through a selling group

Additional takedown

A portion of the concession available to firms that sells shares in an offering but are not syndicate or selling group members

Reallowance

The syndicate manager may notify other firms that are not syndicate or selling group members of the new issue through ______.

The Bond Buyer

The ______ is typically the smallest portion of the spread, and the ______ is the largest portion of the spread.

Management fee, total takedown

Selling concession + additional takedown =

Total takedown

Under what circumstances can a syndicate member recieve the full spread when a bond is sold?

If the syndicate member is also the syndicate manager

A dealer should consider all of the following factors when determining the spread on a new issue except:

A. the prevailing interest rates in the marketplace.

B. the amount bid on the issue.

C. the type and size of the issue.

D. the amount of the good-faith check.

D

A definite sequence in which orders will be accepted and cannot simply state that the order priority will not be left to the manager’s discretion. Syndicate members must signify in writing their acceptance of the allocation priorities.

Priority allocation provisions

Time set by the manager during which the syndicate solicits customers for the issue and all orders are allocated without regard to the sequence in which they were received. Usually runs for an hour on the day following the award of the bid.

Order period

A type of order that is obtained before the formation of the underwriting bid of a new municipal bond issue. If the syndicate wins the bid, the order takes the highest priority when orders are filled.

Presale order

In a municipal bond underwriting, an order recieved by a syndicate member that is credited to the entire syndicate. Takedowns on these orders are paid to members according to their participation in the synbdicate.

Group net order

In a municipal bond underwriting, a customer order that is submitted by one syndicate member but specifies more than one member to receive a percentage of the takedown. The size of the order establishes its prioriy for subscription to an issue.

Designated order

In a municipal bond underwriting, a customer order submitted by one syndicate member who will recieve the entire takedown. Member-at-the-takedown orders recieve the lowest priority when the securities of the issue are allocated

Member order (Member-at-the-takedown order)

Rank the type of orders in a municipal underwriting from highest priority to lowest priority:

Designated Order, Group net order, member order, presale order

Presale order, group net order, designated order, member order

This act requires issuers of new securities to file registration statements with the SEC to provide investors with complete and accurate information in the form of a prospectus when soliciting sales

Securities Act of 1933

This list of issuers are ____ from the Securities Act of 1933

• The U.S. government

• U.S. municipalities and territories

• Nonprofit religious, educational, and charitable organizations

• Banks and savings and loans

• Public utilities and common carriers whose activities are regulated as to rates and other items by a state or federal regulatory body (e.g., railroad equipment trust certificate)

Exempt

This list of securities is ______ from the Securities Act of 1933

• Commercial paper. Maturity less than 270 days.

• Bankers' acceptances. Maturity less than 270 days.

• Securities acquired in private placements. Regulation D.

Exempt

An underwriting syndicate has a firm commitment with an issuer to sell $5 million of common stock to the public. The syndicate has four selling groups. What is each selling group's financial responsibility for the sale?

A. Each shares a firm commitment with the issuer to sell all the securities in the offering.

B. Each selling group is responsible for $1 million of the $5 million offering.

C. Selling groups take no financial responsibility in the offering.

D. Each member of the selling group is responsible for its proportionate share of the offering.

C

An investment banker is a member of the selling syndicate of a new issue of municipal bonds. The member commits to $500,000 of bonds out of a total offering of $5 million in an undivided syndicate and sells $300,000 of the bonds. Of the total offering, $1 million of the bonds are unsold. What is the syndicate member's remaining liability?

A. $100,000

B. $200,000

C. $300,000

D. $500,000

A

An order confirmed for the benefit of the entire underwriting syndicate that is placed after the bid is awarded is called

A. a group net order.

B. a net designated order.

C. a presale order.

D. a member at the takedown order.

A

What is another name for state securities laws?

Blue-sky laws

A security is eligible for blue-sky registration by qualification in a state if all of the offering is to be sold in a single state or if the security is not eligible for another method of state registration

Registration by qualification

A security is eligible for blue-sky registration by coordination in a state if the issuer files for registration of the security under the Securities Act of 1933 and files duplicates of the registration documents with the state Administrator

Registration by coordination

Securities listed on the major stock exchnages and on NASDAQ, as well as investment companies registered under the Investment Company Act of 1940, are known as federal covered securities. State registration is not required, but most states require filing of a notice that the issuer intends to offer its securities for sale in that state. The state may assess a filing fee.

Notice filing

A distribution, with a prospectus, that involves securities owned by major stockholders (typically founders or principal owners of a corporation). The sale proceeds go to the sellers of the stock, not to the issuer.

Secondary distribution (offering)

A public offering of securities combing both a primary and a secondary offering. A portion of the issue is a primary offering, the proceeds of which go to the issuing corporation. The remainder of the issue is a secondary offering, the proceeds of which go to the selling stockholders.

Split offering

A waiting period between a registration statement’s filing date with the SEC and the registration effective date. In practice, the period varies in length.

Cooling-off period

An advertised prospectus that is distributed while the SEC is reviewing an issuer’s registration statement. It contains all essential facts, but it does not contain pricing or the effective date.

Red herring (preliminary prospectus)

During the waiting period (cooling-off) period, sales of the security and related activities are _____.

Prohibited

A printed advertisement that solicits indications of interest in a securities offering. The text is limited to basic information about the offering such as the name of the issuer, type of security, names of the underwriters, and where the prospectus is available.

Tombstone advertisement

During the cooling-off period, indications of interest are (binding/nonbinding) on all parties.

Nonbinding

This information is typically found on a _______ during the cooling-off period:
- Name of Issuer
- Type of security
- Underwriter
- Price, and
- Effective date of sale

Tombstone advertisement

What is the date when the security begins to trade after registration?

Effective date

FINRA reviews underwritings to determine if the compensation earned by the underwriter(s) is fair and reasonable. The amount of the ________ varies by issue and can influenced by:

• Type of commitment

• Security’s marketability

• Issuer’s business

• Offering size

Spread

A copy of the final prospectus must _____ or accompany all purchase confirmations. However, if the prospectus has been filed with the SEC and is available through its website, access to the prospectus equals delivery of the prospectus.

Precede

This is the ______ located on the front of every prospectus: These securities have not been approved or disapproved by the SEC or by any State Securities Commission nor has the SEC or any State Securities Commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

SEC Disclaimer

If at any time the SEC believes that the registration statement is incomplete or has other problems, it may issue an _____, and will send a ______ letter.

Stop order, deficiency

Is a standardized summary of key information found in a mutual fund’s statutory (full) prospectus. Investors who recieve this have the option of either purchasing fund shares using the application found therein or requesting a statutory prospectus.

Summary prospectus

When the registration statement for corporate securities becomes effective, the issuer amends the preliminary prospectus and adds information, including final offering price and the underwriting spread for the ______.

Final prospectus (effective, statutory prospectus)

Another name for final prospectus is?

Statutory Prospectus

Access equals delivery DOES NOT apply to…

Registered investment companies (open-end, closed-end, exchange-traded funds)

Additional statement NOT found in the prospectus. This additional information is not necessarily needed to make an informed investment decisio but may be useful to the investor. Includes the fund’s history, policies, and consolidated financial statements.

Statement of Additional Information (SAI)

If requested, a paper copy of the Statement of Additional Information (SAI) must be sent…

within three days