FINRA Series 7 — All Questions

For an initial public offering of a security of a company not already subject to Exchange Act reporting, when must a broker-dealer deliver a copy of the preliminary prospectus to a person expected to receive a confirmation?

• a.At least 48 hours before sending the confirmation✓
• b.At least 24 hours before the order is placed
• c.Within 30 days after the offering becomes effective
• d.No later than the settlement date of the transaction, together with the confirmation

For an issuer not already reporting, Rule 15c2-8(b) requires the broker-dealer to deliver a copy of the preliminary prospectus to any person expected to receive a confirmation at least 48 hours before sending the confirmation. Later delivery would not give the investor time to review it.17 CFR 240.15c2-8(b)

An investor places an order to buy shares of an open-end mutual fund at 11:00 a.m. on a business day. At what price will the order be executed?

• a.The average of the day's high and low
• b.The price at 11:00 a.m. on the exchange
• c.The net asset value computed at the close of the previous business day, not the next one
• d.The fund's net asset value next computed after the order is received✓

Forward pricing under Rule 22c-1 requires redemptions and purchases to be at a price based on the current net asset value next computed after receipt of the order. An order cannot be priced at yesterday's NAV or at an intraday market price.17 CFR 270.22c-1(a)

A money market fund under Rule 2a-7 may not acquire an instrument with a remaining maturity greater than how many calendar days?

• a.60 calendar days, the limit on the fund's dollar-weighted average maturity
• b.One year to the exact day
• c.397 calendar days✓
• d.180 calendar days

Rule 2a-7 limits a money market fund to instruments with a remaining maturity of 397 calendar days or less, subject to the rule's stated exceptions. The 60-day figure is the cap on the portfolio's dollar-weighted average maturity.17 CFR 270.2a-7(d)

A money market fund's dollar-weighted average portfolio maturity may not exceed what limit under Rule 2a-7?

• a.60 calendar days✓
• b.30 calendar days
• c.397 calendar days
• d.120 calendar days

The rule bars a money market fund from maintaining a dollar-weighted average portfolio maturity that exceeds 60 calendar days. The 397-day figure is the limit on the remaining maturity of each individual instrument. A 120-day or 30-day cap is not the WAM limit in the rule.17 CFR 270.2a-7(d)

A person acquires beneficial ownership of more than five percent of a class of a company's registered equity securities. By when must the person generally file Schedule 13D?

• a.Within two business days after the acquisition
• b.Within five business days after the date of the acquisition✓
• c.Within ten calendar days after the date of the acquisition of the shares
• d.Within 45 days after the end of the calendar year in which the acquisition occurred

Rule 13d-1(a) requires a person who becomes the beneficial owner of more than five percent of a class to file Schedule 13D within five business days after the acquisition. The ten-day deadline is the older rule, and the year-end 45-day period relates to a different type of filing.17 CFR 240.13d-1(a)

A corporate officer subject to Section 16 buys shares of the company's stock. By when must the officer file a Form 4 reporting the transaction?

• a.Before the end of the seventh business day after the transaction
• b.Before the end of the second business day following the day of the transaction✓
• c.Within ten calendar days after the end of the month in which the purchase was made
• d.Within 45 days after the end of the fiscal year

Form 4 must be filed before the end of the second business day following the day on which the subject transaction was executed. Month-end and year-end schedules apply to other reports, not to Form 4.17 CFR 240.16a-3(g)(1)

A company director adopts a Rule 10b5-1 trading plan. What cooling-off period applies before any trades under the plan may occur?

• a.No waiting period, because the plan is written
• b.The later of 90 days after adoption or two business days after the company discloses financial results for the quarter in which the plan was adopted, subject to a 120-day maximum✓
• c.A fixed 30 days after adoption
• d.A fixed 120 days after adoption, with no other condition

For directors and officers, no trades may occur until the later of 90 days after the plan's adoption or two business days after the filing of the Form 10-Q or 10-K covering the quarter of adoption, subject to a maximum of 120 days after adoption. A written plan is not exempt from the waiting period, and 30 days is not the rule.17 CFR 240.10b5-1(c)(1)(ii)(B)

A dealer sells shares to a customer in a registered offering and relies on the SEC's access-equals-delivery approach instead of sending a final prospectus. By when must the dealer give the purchaser either the final prospectus or a notice that the sale was made under a registration statement?

• a.Within thirty calendar days after the registration statement becomes effective
• b.Not later than two business days after the sale is completed✓
• c.Before the customer pays for the shares, so the notice is on hand when the purchase is settled
• d.Only when the customer asks for it in writing, because the notice is optional for dealers

Rule 173 requires the underwriter or dealer to provide the final prospectus or the notice not later than two business days following the completion of the sale. The purchaser may also request a copy of the final prospectus. A fixed calendar period tied to effectiveness is not the rule, and the notice is not left to the customer to ask for.17 CFR 230.173(a)

Under SEC Rules 172 and 173, a firm sells registered shares and sends the customer a written confirmation. Which statement about the Rule 173 notice is correct?

• a.The notice must be sent by the issuer in every case, never by a dealer or an underwriter
• b.Failing to send the notice on time does not, by itself, take away the confirmation's exemption under Rule 172✓
• c.The notice replaces the confirmation required by Rule 10b-10, so the firm needs to send only the notice to each purchaser
• d.A late notice makes the sale void, and the customer may rescind it at any time within the next year

Rule 173(c) says compliance with the notice requirement is not a condition to reliance on Rule 172. The two rules work together, since the confirmation under Rule 172 may even include the notice. The notice does not take the place of the Rule 10b-10 confirmation, and Rule 173 puts the duty on the underwriter or dealer, with the issuer responsible only for its own direct sales.17 CFR 230.172(a)(1); 17 CFR 230.173(c)

A communication about a new issue is limited to the information that SEC Rule 134 allows. When may it be published, and what may it contain?

• a.It may be published only after the effective date, and it may compare the issuer's results with those of its competitors in the same industry
• b.It may be published after the filing, and it may recommend the shares to investors who want growth
• c.It may be published only after a registration statement has been filed, and it may state the security's price and the intended use of proceeds✓
• d.It may be published at any time before filing, and it may predict the issuer's earnings for the next two years

Rule 134 covers a limited communication, like a tombstone ad, published only after a registration statement containing a section 10 prospectus has been filed. It can include items such as the name of the issuer, the title and amount of the security, its price or price range, and a brief description of the use of proceeds. Earnings projections, recommendations and competitor comparisons are not among the permitted items.17 CFR 230.134

A private company issues stock options under a written compensatory plan in reliance on Rule 701. At its latest balance sheet date the company has total assets of $12 million, and the amount outstanding of the class being sold is $9 million. What is the most it may sell under Rule 701 in a consecutive 12-month period?

• a.$3,150,000
• b.$1,000,000
• c.$1,800,000✓
• d.$1,350,000

Rule 701 caps sales in any consecutive 12-month period at the greatest of $1,000,000, 15% of total assets, or 15% of the outstanding amount of the class. Here 15% of $12 million is $1,800,000, 15% of $9 million is $1,350,000, and the greatest of the three figures is $1,800,000. The $3,150,000 figure adds the two percentages together, which the rule does not allow.17 CFR 230.701(d)(2)

A private issuer sells securities under Rule 701 to its employees, and the aggregate sales price in a consecutive 12-month period rises above $10 million. What additional obligation arises?

• a.It must register the sale on Form S-1 before any further securities are sold to employees
• b.It must deliver enhanced disclosure to investors a reasonable period before the sale, including financial statements✓
• c.It must stop relying on Rule 701 for the rest of the year but may use it again after that
• d.It must have the employees' brokers confirm in writing that each employee meets the accredited-investor standards before the sale

Rule 701(e) keeps the exemption available above $10 million but requires the issuer to give investors disclosure a reasonable time before the sale. The disclosure includes a plan summary, risk information and financial statements no more than 180 days old. Rule 701 does not demand registration or accredited status from the employees.17 CFR 230.701(e)

An issuer prices an offering and uses a prospectus that includes pricing information omitted from the effective registration statement under Rule 430A. By when must it be filed with the SEC under Rule 424(b)(1)?

• a.No later than the second business day after the offering price is determined or the prospectus is first used, whichever is earlier✓
• b.Before the offering price is set, so that the SEC can review the price in advance
• c.No later than the fifth business day after the registration statement becomes effective
• d.Within thirty calendar days after the first confirmation is sent to a purchaser

Rule 424(b)(1) requires a Rule 430A prospectus to be filed no later than the second business day following the earlier of the pricing date or the date of first use after effectiveness. The fifth-business-day period applies to other prospectus forms that are filed under Rule 424(b)(3), and not to a prospectus that contains the omitted pricing information.17 CFR 230.424(b)(1); 17 CFR 230.430A

A broker-dealer wants to run a generic advertisement about mutual funds. Which feature allows it to avoid being treated as an offer under Rule 135a?

• a.It describes fund types, and it includes a coupon that guarantees the fund's price for the next twelve months to all readers
• b.It names one fund and states the fund's top-performing results for the past five years
• c.It names the fund the firm sells most, as long as the ad is placed in a financial newspaper
• d.It describes fund types in general, does not name a particular fund, and includes the sponsoring broker-dealer's name and address✓

Rule 135a allows generic communication about investment companies in general, such as their types and objectives, as long as it does not refer by name to a specific investment company and shows the name and address of the registered broker-dealer sponsoring it. An advertisement that names a fund, quotes its results or guarantees a price is a sales communication and falls outside the rule.17 CFR 230.135a(a)

A tombstone-style notice under Rule 134 is published before the registration statement has become effective. Which statement must it carry?

• a.A statement that the SEC has approved the securities and found the prospectus to be accurate
• b.A statement guaranteeing that the price will be the same as the price in the notice
• c.A statement that the underwriters have bought all of the shares and will resell them at a profit
• d.A statement that a registration statement has been filed but has not yet become effective, and that the securities may not be sold until it does✓

Rule 134(b)(1) requires a communication made before effectiveness to say that a registration statement has been filed but has not become effective, and that the securities cannot be sold nor offers to buy accepted before it is. The SEC does not approve securities or pass on the accuracy of a prospectus, and a price in a preliminary notice is not guaranteed.17 CFR 230.134(a)(4); 17 CFR 230.134(b)(1)

An investor sells one XYZ 50 put for $4 and buys one XYZ 45 put for $1 on the same expiration date. At expiration, at what stock price does the position break even?

• a.$47, the higher strike less the $3 net premium received✓
• b.$48, the higher strike less the $2 gap between the two premiums
• c.$46, the lower strike plus the $1 premium paid for the long put
• d.$53, the higher strike plus the $3 net premium received

A credit put spread starts with a net premium of 4 - 1 = $3. The short 50 put begins to lose money below 50, and the credit cushions the first $3 of that loss, so the break-even is 50 - 3 = 47. Adding the credit is the formula for a call spread, and the lower strike plays no part in the break-even.FINRA Rule 2360(a)(2), (a)(28)

An investor sells one XYZ 40 put for $3 and buys one XYZ 35 put for $1 on the same expiration date. What is the most the investor can lose, ignoring commissions?

• a.$3,800, the cost of buying the stock at 40 less the net premium, if the stock goes to zero
• b.$300, the $5 spread width less the $2 net premium received✓
• c.$500, the width of the spread, since the premium is not counted against the loss
• d.$200, the net premium received, since that is the amount the investor stands to lose

The long 35 put caps the loss on the short 40 put at the width of the spread, which is $5. The $2 net credit offsets part of it, so the worst case is (5 - 2) x 100 = $300. The long put is what keeps the loss from approaching the strike price, as it would on an uncovered put.FINRA Rule 2360(a)(2), (a)(28)

Under Regulation T, a customer buys a listed stock in a margin account on a Tuesday, with no holidays that week. The standard settlement cycle is one business day. By which day must the firm obtain full payment for the purchase, absent an extension?

• a.Thursday, two business days after the purchase date
• b.Friday, three business days after the purchase date✓
• c.The following Monday, since the payment period is five business days
• d.Wednesday, the settlement date of the trade under the one-day cycle

Regulation T defines the payment period as the number of business days in the standard settlement cycle plus two business days. With a one-day cycle that is three business days, so a Tuesday purchase must be paid for by Friday. Settlement occurs on Wednesday, but the Regulation T payment period is longer than the settlement cycle.12 CFR 220.2 (payment period); 12 CFR 220.8(b)(1); SEC Rule 15c6-1(a)

Which equity-market test can qualify an issuer as a well-known seasoned issuer (WKSI) under SEC Rule 405, assuming it meets the other registrant requirements?

• a.A public float of at least $75 million of common equity held by non-affiliates of the issuer
• b.A market capitalization of at least $700 million counting every share, including those held by its officers
• c.A listing on a national securities exchange for at least five consecutive years
• d.A worldwide market value of at least $700 million of common equity held by non-affiliates✓

Rule 405 sets the equity test at $700 million or more of worldwide market value of outstanding voting and non-voting common equity held by non-affiliates. Shares held by affiliates are excluded from the measurement, so a figure that counts them does not meet the test. Exchange listing time is not part of the definition, and a $75 million float is a different, lower threshold.17 CFR 230.405 (definition of well-known seasoned issuer)

An issuer has not reached the $700 million non-affiliate equity float. Under Rule 405, what other test can qualify it as a WKSI if it will register only non-convertible securities other than common equity?

• a.It has issued at least $1 billion in non-convertible securities in registered primary offerings for cash during the last three years✓
• b.It has issued at least $1 billion in convertible preferred stock in any period of five years
• c.It has at least $1 billion in non-convertible debt that was sold privately in the last three years
• d.It has at least $700 million in total assets on its most recent audited balance sheet

Rule 405 provides a debt-based alternative: at least $1 billion aggregate principal amount of non-convertible securities other than common equity issued in primary offerings for cash, registered under the Act, within the last three years. Convertible securities, private placements and a total-assets test do not meet that alternative.17 CFR 230.405 (definition of well-known seasoned issuer), paragraph (1)(i)(B)

An issuer plans to use an issuer free writing prospectus in a registered offering. When must the issuer file it with the SEC, unless an exception applies?

• a.At least five business days before the date of first use, so that the SEC can review it
• b.Only after the offering has closed and the final confirmations have been sent
• c.No later than the date the free writing prospectus is first used✓
• d.Within thirty days after the registration statement becomes effective

Under Rule 433(d)(1), an issuer free writing prospectus must be filed by a means reasonably calculated to result in filing no later than the date of first use. It is not subject to an advance review period, and waiting until the offering closes would let it be used with no public record.17 CFR 230.433(d)(1)(i)(A)

An issuer already filed a free writing prospectus with the SEC and now wants to use the same document again in the same offering with no substantive change. What does Rule 433 require?

• a.A new filing that must be made before any person other than the issuer uses it
• b.A new filing, plus a fresh copy of the final prospectus delivered to each person who receives the document and each person who reads it online
• c.A new filing each time the document is used, with the date of each use stated
• d.No new filing, because the filing condition does not apply to a document with no substantive changes from the one already filed✓

Rule 433(d)(3) removes the condition to file a free writing prospectus that has no substantive changes from, or additions to, one previously filed. Filing is not repeated for each use, and the rule does not add a delivery of the final prospectus to each recipient.17 CFR 230.433(d)(3)

Rule 134 requires certain communications to be accompanied or preceded by a section 10 prospectus. How can an electronic communication satisfy that requirement?

• a.By containing an active hyperlink to the prospectus✓
• b.By quoting the price range from the prospectus in the body of the message
• c.By stating the prospectus will be mailed on request, with no link in the message
• d.By including a printed copy of the prospectus attached to the first page

Rule 134(f) says the requirement that a section 10 prospectus precede or accompany a communication is met if the communication is electronic and contains an active hyperlink to the prospectus. Promising a later mailing, or repeating a few figures from the prospectus, does not put the prospectus in front of the reader.17 CFR 230.134(f)

A broker-dealer sponsors a generic advertisement under Rule 135a that describes a type of product, service or security. What must the sponsor do?

• a.Attach a signed order form for each type of product described in the advertisement itself
• b.Offer for sale a security, service or product of the type described in the advertisement✓
• c.File the advertisement with the SEC at least ten days before it is published
• d.State the fund's most recent annual return so readers can compare it with others

Rule 135a(c) says the sponsor of a communication describing a type of security, service or product must offer for sale something of that type. Otherwise the ad would draw inquiries for a product the sponsor does not sell. The rule contains no pre-filing period, and quoting returns would turn the notice into a performance advertisement.17 CFR 230.135a(c)

Holders have deposited shares in a third-party tender offer that is still open. What right do they have under SEC Rule 14d-7?

• a.They may withdraw the shares only during the first ten business days after the offer begins
• b.They have no withdrawal right once a deposit is made, because the shares are committed to the bidder
• c.They may withdraw the deposited shares at any time while the tender offer remains open✓
• d.They may withdraw the shares only if the bidder has not yet accepted any shares from other holders

Rule 14d-7(a)(1) gives any person who has deposited securities in a tender offer the right to withdraw them during the period the offer stays open. The right is not limited to an early window and does not end because other shares have been accepted. The one carve-out is that a bidder need not offer withdrawal rights during a subsequent offering period.17 CFR 240.14d-7(a)

An officer of a listed company is subject to Section 16 and had small exempt transactions during the fiscal year that were not previously reported. By when is the Form 5 due?

• a.Within 45 days after the issuer's fiscal year end✓
• b.Within ten days after the officer's first transaction of the new year
• c.Within two business days after the fiscal year end
• d.Within 90 days after the date the issuer's annual report is filed

Rule 16a-3(f)(1) requires the Form 5 to be filed within 45 days after the issuer's fiscal year end, disclosing exempt transactions and holdings not reported earlier on Forms 3, 4 or 5. The two-business-day period belongs to Form 4, which reports ordinary changes in beneficial ownership.17 CFR 240.16a-3(f)(1)