Series 57 Chapter 3

What equities are excluded from the definition of a penny stock?

Exchange-traded stocks, investment company securities, OCC-listed puts and calls, and stocks priced at $5.00 or more

True or False: Quotes in the OTC markets must be two-sided.

False — they could be one-sided, two-sided, or bid/offer wanted.

If an OTC security is now being quoted, but does not yet meet the Piggyback Exception, how is it labeled?

Eligible. Once it meets the exception, it is labeled active.

What types of quotes are acceptable for market makers of Pink Market securities?

Two-sided, one-sided, bid only, offer only, or unpriced indications of interest

If executing OTC equity trades, a trader must obtain quotes from a minimum of _ dealers to ensure the best market.

Three dealers

True or False: No minimum quote size exists for securities that are quoted on the Pink Market.

False — there are minimum quote sizes based on the price of the security.

Jess has purchased Omega Industries, a penny stock, on three separate occasions. Is Jess an established client?

No. Established customers are those who have purchased three different penny stocks on three separate days.

Under penny stock rules, from what requirement are established customers NOT excluded?

The penny stock disclosure rules

When buying a stock quoted on the OTC Pink Market for a client, a BD must obtain quotes from how many dealers?

A minimum of three dealers (or all dealers if fewer than three exist).

For penny stock purposes, an established customer is one who has traded with a firm for more than ____ year.

One year

To what trades do penny stock rules apply?

Recommended or solicited trades of penny stocks

The CQS is the ___.

The Consolidated Quotation System

Is a security that's quoted OTC at 4.85 - 5.03 considered a penny stock?

Yes — a penny stock is any OTC equity with a bid price below $5.00.

In OTC markets, are all quotes considered to be firm?

No — only priced quotes are firm; unpriced indications of interest are not.

The Piggyback Exception provides an exception to SEC Rule _.

SEC Rule 15c2-11

Under Penny Stock Rules, from what requirements are established customers excluded?

Account approval and written consent requirements

True or False: Stocks quoted in the Pink Market are often thinly traded.

True

True or False: When quoting a security on the OTC Pink Market, a market maker must always provide a two-sided quote.

False — quotes may be one-sided, two-sided, or indications of interest.

A BD client of six months has purchased penny stocks on five occasions. What is the client considered?

An established customer

For what securities does CQS display quotes?

All securities listed for trading on the NYSE, AMEX, and certain regional exchanges

List the securities that are eligible for inclusion on the CQS.

Common and preferred stock, warrants, and rights of exchange-listed securities

Under SEC Rule 15c2-11, an OTC security that qualifies for the Piggyback Exception is referred to as _.

Active

To what does third market trading refer?

OTC trading of exchange-listed securities

According to penny stock disclosure rules, what must BDs disclose for each penny stock trade?

Current quote and compensation to be received by both BD and RR

From what requirement of the penny stock rules are established customers exempt?

Account approval requirement

What are some of the special standards that firms follow in regard to soliciting sales of penny stocks?

Determine suitability, obtain principal approval, send risk disclosure, and obtain written authorization for first 3 trades

If a market maker wants to quote an OTC security, what documents satisfy SEC Rule 15c2-11?

A prospectus (≤ 90 days old), offering circular (≤ 40 days), or similar documents with issuer information

Prior to a client’s initial penny stock trade, what must the client receive?

A risk disclosure document

What does SEC Rule 15c2-11 require of a BD interested in publishing quotes for an OTC equity?

Collect, review, and submit issuer information to FINRA before quoting

Consolidated quotes are NOT included in the CQS for which listed securities?

Nasdaq securities

Where may quotes for non-Nasdaq (OTC) stocks be found?

Pink Market

For stocks that are not listed on an exchange, where may the quotes be found?

The Pink Market

Under SEC Rule 15c2-11, when may a stock that qualifies for the Piggyback Exception be quoted?

Immediately, without filing Form 211

What is the system that provides quotes for the Third Market?

Consolidated Quotation System (CQS)

If a BD publishes a quote that represents unsolicited customer interest, is compliance with SEC Rule 15c2-11 required?

No

True or False: A client must provide signed acknowledgement of receipt of the penny stock risk disclosure document.

True

True or False: Pink Market securities have the same type of listing requirements as Nasdaq securities.

False

What is the penny stock commission limit for a BD to be excluded from the penny stock disclosure rules?

Commissions from penny stocks must not exceed 5% of total commissions.

True or False: ADRs can be quoted on the NYSE, Nasdaq, and OTC markets.

True

True or False: An exception to SEC Rule 15c2-11 is available to a BD displaying a client’s unsolicited order.

True

True or False: Penny stock rules govern the recommendation of a $4.00 OTC stock to a new client.

True

True or False: Quotes on the OTC Pink Market Electronic Quotation Service (EQS) are subject (informational) quotes.

False — EQS quotes are firm; only print quotes are subject.

Securities quoted through the CQS are _ securities trading over-the-counter.

Listed securities trading OTC

At least _ business days prior to quoting an OTC equity, a BD must submit a completed Form ___ to _____.

Three business days; Form 211; to FINRA

How often are BDs required to send statements to clients regarding penny stocks in their accounts?

Monthly

True or False: Penny stock trades that are NOT recommended by the BD are exempt from the disclosure rules.

True

What is considered regular and continuous quoting as defined by the Piggyback Exception?

Over 30 days, no more than 4 business days without a quote

True or False: Penny stock trades with institutional accredited investors are subject to the disclosure rules.

False — they are excluded from disclosure rules.