Series 57 Chapter 6

True or False: Provided they are all a part of the same syndicate, multiple firms may enter stabilizing bids.

False. There may only be one firm entering a stabilizing bid. It is usually entered by the syndicate manager.

What regulation restricts activities that could be deemed manipulative during an offering?

Regulation M

Identify the acronym: PBID

Syndicate penalty bid

Under Rule 101 of Reg M, who are considered distribution participants?

Syndicate and selling group members, as well as other BDs engaged in the distribution

True or False: A stabilizing bid may be qualified.

False. Stabilizing bids must apply to all of the issuer's freely tradable outstanding securities of the same class.

When must a syndicate manager apply for an excused withdrawal for PSMM status?

At least one business day prior to the restricted period

A new issue is priced on Friday, July 15. No violation occurs if a buyer of the new shares shorted them on what date?

Thursday, July 7 since the five-day-period prohibition of Rule 105 of Regulation M begins on Friday, July 8.

During what period are distribution participants prohibited from bidding or buying a security being underwritten?

During the restricted period

During the Regulation M Restricted Period, underwriters may not___.

During the Regulation M Restricted Period, underwriters cannot purchase (bid) for the securities for their own account.

Related to short selling, Rule 105 of Regulation M prohibits investors from engaging in what practice?

Buying shares of a new issue if they had sold short the securities within five business days prior to pricing the issue

What is a QIB?

Qualified Institutional Buyer (institutions defined under Rule 144A)

What is the maximum period that a stabilizing bid may remain open in the marketplace ?

Indefinite

According to Regulation M, if the market is rising, what is a PSMM able to do with its bid?

The PSMM may raise its bid when the best independent bid rises (but is not required to do so).

A PSMM's DPL is 9,000 shares. It has net purchases of 8,800 shares and receives an order for 800 shares. What may it do?

Fill the 800 share order, but then withdraw from the market for the remainder of the day

The highest price at which a stabilizing bid may be placed is the __.

The highest price at which a stabilizing bid may be placed is the public offering price (POP).

To cover a short sale, investors may not use a new stock issue if the short sale occurred within ___ days of the offer.

To cover a short sale, investors may not use a new stock issue if the short sale occurred within 5 days of the offer.

A _ bid is placed in the secondary market to prevent a decline in the security's price.

A stabilizing bid is placed in the secondary market to prevent a decline in the security's price.

For how long may a new issue be sold under a shelf registration?

Up to 3 years

QIBs are financial institutions that have at least $___ invested in securities of non-affiliated issuers.

QIBs are financial institutions that have at least $100 million invested in securities of non-affiliated issuers.

According to Regulation M, the Restricted Period begins either ___ or ___ business days before pricing.

According to Regulation M, the Restricted Period begins either 1 or 5 business days before pricing.

True or False: Rule 103 of Regulation M allows for passive market making on OTC Pink Market equities.

False. Passive market making is only allowed for Nasdaq securities.

May a market maker acting as an underwriter for the issuer continue to make a market in the issuer's securities?

Yes, according to Reg M, but only as a passive market maker.

What permits an investor to sell restricted (unregistered) or control (affiliated) stock?

Rule 144 of the Securities Act of 1933

Rule 144A exempts sellers from the holding period and volume limitations of Rule 144 if trading is done with a _.

Rule 144A exempts sellers from the holding period and volume limitations of Rule 144 if trading is done with a QIB.

For Reg M, the security into which a convertible bond or stock may be converted is called a __ security.

For Reg M, the security into which a convertible bond or stock may be converted is called a reference security.

True or False: Under Rule 144, a six-month holding period applies to stock owned by an affiliated person.

False. The holding period applies to restricted stock, not control (affiliated) stock.

True or False: The SEC judges an offering’s investment merit and provides approval.

False

True or False: If XYZ issues common stock, outstanding warrants or rights on those securities are reference securities.

False

What is the maximum over-allotment that is allowed in conjunction with an offering?

15% of the issue. This is called the Green Shoe Clause or over-allotment option.

A PSMM may not place a bid that is the __ independent MM's bid.

A PSMM may not place a bid that is above the highest independent MM's bid.

When does the restricted period begin for issuers with a public float of $25 mill. or more and ADTV of $100,000 or more?

One business days prior to the pricing of the issue

A penalty bid allows the managing underwriter to reclaim a _ from a syndicate member.

A penalty bid allows the managing underwriter to reclaim a selling concession from a syndicate member.

The Green Shoe Clause allows the issuer to expand the offering by a maximum of ____%.

The Green Shoe Clause allows the issuer to expand the offering by a maximum of 15%.

An offering of shares of the issuer and selling shareholders (e.g., officers) is a _ offering.

An offering of shares of the issuer and selling shareholders (e.g., officers) is a combined primary/secondary offering.

Under Rule 144, for how long must control stock be held prior to sale?

There is no mandatory holding period for control stock. However, Rule 144 imposes volume limitations on sales.

In order to act as a passive market maker (PSMM), there must be at least ____ independent market maker.

In order to act as a passive market maker (PSMM), there must be at least one independent market maker.

If the last trade in Z Corp was 15.50 and the ask is 15.60, at what price may a stabilizing bid be placed?

15.50. The bid can be no higher than the last independent transaction price.

Is notification required when a member firm imposes a penalty bid or engages in syndicate covering transactions?

Yes. FINRA must be notified of these practices related to both Nasdaq and OTC securities.

If a security is defined as _ under Regulation M, there is no Restricted Period.

If a security is defined as actively traded under Regulation M, there is no Restricted Period.

Is a market maker allowed to engage in passive market making if there are no independent market makers for the security?

No. Passive market making is only allowed if there is at least one other market maker not involved in the distribution.

True or False: Receiving shares of a new entity created from a publicly traded company is done through stock dividends.

False. Receiving shares of a newly created entity is done through a spin-off.

Under Rule 144, for how long must restricted stock be held prior to sale?

Six months

Does Rule 144 require a specific holding period for control stock?

No, but the SEC must be notified when a sell order is placed and volume limitations apply.

Define subject security as used in Regulation M.

A security that is being offered or distributed to the public

QIB stands for _.

QIB stands for Qualified Institutional Buyer (QIB).

The holding period for unregistered (restricted) securities under Rule 144 is __.

The holding period for unregistered (restricted) securities under Rule 144 is 6 months.

True or False: To stabilize an issue, the principal market on which the stock trades must be notified.

True

If certain conditions are met, what type of stock may be resold under Rule 144?

Control stock and restricted (unregistered) stock acquired through a private placement

is the only form of price manipulation allowed by the SEC.

Stabilization is the only form of price manipulation allowed by the SEC.

When does the restricted period begin for issuers with public float less than $25 mill. and ADTV of less than $100,000?

Five business days prior to the pricing of the issue

True or False: Form 144 must be filed for any sale of restricted or control stock, regardless of the size.

False. If a sale is for 5,000 shares or fewer, and has a market value of $50,000 or less, no notification is required.

Under Reg M, may issuers, selling shareholders, and distribution participants bid for or purchase covered securities?

No. Only distribution participants may continue bidding on a passive basis.

The restricted period begins either ___ or ____ days before pricing, and ends at the __ of the distribution.

The restricted period begins either one or five days before pricing, and ends at the completion of the distribution.

True or False: Stabilization is designed to artificially raise the price of a new issue.

False. Stabilization is designed to support or keep a new issue’s price from falling.

When must an underwriter file an Underwriting Activity Report to declare its intention to stabilize the offering?

No later than the close of business on the day the stabilizing bid is entered

A PSMM's daily purchase limit (DPL) is the of ___% of its ADTV or ____ times the security's minimum quote size.

A PSMM's daily purchase limit (DPL) is the greater of 30% of its ADTV or two times the security's minimum quote size.

Is there a maximum number of stabilizing bids that may be placed?

Yes, one. It is usually placed by the syndicate manager.

During the restricted period, market making is allowed with respect to Nasdaq securities.

During the restricted period, passive market making is allowed with respect to Nasdaq securities.

While engaging in passive market making, what is the daily purchase limit?

The greater of 30% of your ADTV in the stock, or 200 shares

Under Reg. D private placement, ___ is the maximum number of non-accredited investors allowed.

Under Reg. D private placement, 35 is the maximum number of non-accredited investors allowed.

Are immediate family members of member firm employees always restricted from purchasing equity IPOs?

Not if the individual receives no material support and is not purchasing from the firm employing their family member

Prior to a new offering of actively traded securities, who is prohibited from bidding for or purchasing the securities?

Issuers and selling shareholders are prohibited; however, market participants are permitted to bid or purchase.

According to Regulation M, in a declining market, how long may a PSMM maintain the highest bid?

Until it purchases the lesser of two times the minimum quote size or it reaches its daily purchase limit (DPL)

What must a BD forfeit if its client buys a new issue and then sells it back to the syndicate at the stabilizing price?

The selling concession

The New Issue Rule covers what new issues?

All equity IPOs

True or False: BDs and their employees may buy shares of equity IPOs from the syndicate.

False. They are considered restricted.

Underwriters notify Nasdaq Market Operations of their intention to stabilize by filing an .

Underwriters notify Nasdaq Market Operations of their intention to stabilize by filing an Underwriting Activity Report.

Under Rule 144, control stock is not subject to a required holding period, but is subject to a limitation.

Under Rule 144, control stock is not subject to a required holding period, but is subject to a volume limitation.

What securities have no restricted period as described by Rule 101 of Regulation M?

Securities with a public float of $150 million and an ADTV of $1 million (also called actively traded securities)

Stock owned by an affiliated person of the issuer (e.g., officer, director, or greater than 10% owner) is _ stock.

Stock owned by an affiliated person of the issuer (e.g., officer, director, or greater than 10% owner) is control stock.

True or False: In the restricted period, a distribution participant may bid for or purchase an actively traded security.

True

Define covered securities as used in Regulation M.

Under Regulation M, covered securities are both subject and reference securities.

If a PSMM accepts a client's buy limit order that exceeds the highest independent bid, may it display the order?

Yes. A PSMM may display a client's buy limit order even if it sets the market.

As a passive market maker, you may not enter a bid _ than the highest independent bid.

As a passive market maker, you may not enter a bid higher than the highest independent bid.

According to Rule 102, during the restricted period, may an issuer bid for or purchase an actively traded security?

No. The actively traded security exception applies to distribution participants, not to issuers or selling shareholders.

True or False: A distribution participant may lead the market if the subject security is an actively traded security.

True. The limitations found in Rule 101 of Regulation M do not apply to actively traded securities.

A PSMM's DPL is 9,000 shares. Its net purchases equal 8,800 shares. If it gets 2 orders for 300 shares, what may it do?

It may fill one of the orders, but then must withdraw from the market for the remainder of the day (no combining).

In the Manning Rule, is an exception available for the following client order: Buy 10,000 shares for $12.50 per share?

Yes. Trade exceptions may apply for large orders (10,000 shares or more and a dollar value of at least $100,000).

Related to penalty bids, when is a managing underwriter allowed to reclaim selling concessions from syndicate members?

When the securities originally sold by the syndicate member are repurchased by the syndicate in stabilizing transactions

What is Rule 101 of Regulation M designed to prevent?

Distribution participants (syndicate and selling group) from manipulating secondary market trading for their own benefit

During the restricted period, passive market making is not allowed for ___ securities.

During the restricted period, passive market making is not allowed for OTC equity securities.

True or False: The sale of new issues is governed by the Securities Exchange Act of 1934.

False. The Securities Act of 1933 regulates new issues, while the 1934 Act regulates secondary markets.

The ___ clause gives underwriters the ability to buy additional shares from the issuer to cover over-allotments.

The Green Shoe clause gives underwriters the ability to buy additional shares from the issuer to cover over-allotments.

According to the Equity IPO Rule, firms must update the eligibility of purchasers ___ .

According to the Equity IPO Rule, firms must update the eligibility of purchasers annually.

Rule 105 of Regulation M is designed to minimize what possibility for a short seller?

He may benefit from an impending new issue at a set price and use those shares to cover a short position.

The Securities Act of 1933 regulates .

The Securities Act of 1933 regulates new issues.

What is indicated by the acronym SYND?

A stabilizing bid

Under Rule 103 of Regulation M, for what securities is passive market making allowed?

Only Nasdaq securities

Define reference security as used in Regulation M.

If the subject security is a convertible, the reference security is the security into which it may be converted.

True or False: If your daily purchase limit is exceeded, your firm is subject to disciplinary action.

False, after exceeding its daily purchase limit, the firm must withdraw as a market maker for the remainder of the day.

Under Rule 105 of Reg M, how does the bona fide purchase exception apply to an investor who had shorted the stock?

He may purchase the offering provided he closes out the short sale at least one business day before pricing.

For new issues, how does the syndicate manager actually penalize another participant with the penalty bid?

By refusing to pay the underwriting participant whose client buys the issue and immediately sells back to the syndicate

Investors may not purchase a new issue if those shares were sold short ____ business days prior to the offering.

Investors may not purchase a new issue if those shares were sold short 5 business days prior to the offering.

True or False: PSMMs may never set the market, but must instead always follow the independent market maker.

False. PSMMs may set the market to display an unsolicited customer bid that exceeds the highest independent MM bid.

A new company created from an existing division of a publicly traded parent company is known as a _.

A new company created from an existing division of a publicly traded parent company is known as a spin-off.

Under Rule 101 of Regulation M, are derivatives (options) considered reference securities?

No. Derivatives are not subject to trading restrictions during the distribution of the underlying security.

Besides BDs and their employees, who else is restricted from purchasing equity IPOs?

An employee's immediate family if materially supported by, or sharing household with, the employee

Accredited investors have net worth of at least $_ or pre-tax income in each of the last two years of $.

Accredited investors have net worth of at least $1,000,000 or pre-tax income in each of the last two years of $200,000.

If a PSSM matches the highest independent bid, must it immediately lower its bid when the independent MM lowers its bid?

No. PSMMs may match the highest independent bid and may temporarily lead the market if the independent MM drops its bid.