FINRA Series 6 — All Questions

A sponsor's generic ad invites inquiries, and the sponsor will send prospectuses on eight funds for which it is the principal underwriter. What must the ad state under Rule 135a?

• a.The largest sales load among the eight funds and the date of each prospectus
• b.The name and five-year total return of each one of the eight funds that are offered
• c.The number of funds, eight, and that the sponsor is their principal underwriter✓
• d.Nothing more than the sponsor's name and address, because the ad names no fund at all

When a generic ad solicits inquiries and prospectuses will be sent in response, it must state the number of investment companies and, if applicable, that the sponsor is their principal underwriter or investment adviser. Naming the funds or quoting their returns would take the piece outside the generic safe harbor, because it would then refer to particular securities. Sales loads and prospectus dates are not part of the requirement. The name and address alone are enough only when the ad does not solicit inquiries that lead to prospectuses.Securities Act Rule 135a(b)

A registration statement for a new corporate bond issue has been filed but is not yet effective. What must an underwriter's Rule 134 announcement of the issue include?

• a.Summary financial data for the issuer's last two fiscal years, in the order used by the prospectus
• b.The 'Subject to Completion' legend, printed in red ink along the left margin of the announcement
• c.That the registration statement is not yet effective, so no sale or acceptance may occur, and a prospectus source✓
• d.A statement that the SEC has not approved the securities, which then replaces any other legend

A Rule 134 communication used before effectiveness must state that a registration statement has been filed but has not yet become effective and that the securities may not be sold, nor offers to buy accepted, until it is, and it must give the name and address of a person from whom a written prospectus can be obtained. The red-ink legend belongs to a preliminary prospectus, not to a Rule 134 announcement. Financial data is not among the items the rule permits. The Commission legend is not a substitute for the statements the rule requires.Securities Act Rule 134(b)

Which of these communications cannot rely on Rule 134 to avoid being a prospectus?

• a.An announcement for asset-backed securities issued by a trust with a registration statement on file
• b.An announcement for an open-end mutual fund offering shares at net asset value✓
• c.An announcement for a registered closed-end fund offered in an initial public offering
• d.An announcement for a bond issue by an industrial company with a registration statement on file

Rule 134 does not apply to a communication relating to an investment company registered under the Investment Company Act, other than a registered closed-end company. An open-end mutual fund therefore must use other routes, such as Rule 482 or the summary prospectus rules. A registered closed-end fund is the stated exception and can use Rule 134. Corporate bond issuers and asset-backed issuers are ordinary registrants and are covered; the rule even lists items specific to asset-backed issuers.Securities Act Rule 134(g)

A fund's sales literature shows a rising three-year chart under the caption 'Steady growth you can count on year after year.' Why may this be misleading under Rule 156?

• a.Past results may appear in sales literature only as a table, because a chart cannot show returns accurately
• b.The caption implies that the gains realized in the past will be repeated in the future by the fund✓
• c.Charts of past results are misleading unless they cover at least ten years of the fund's history
• d.The caption would be acceptable only if it also named the benchmark the fund is measured against

Rule 156 treats representations about future performance as potentially misleading, including portrayals of past performance that imply gains realized in the past will be repeated. A caption promising growth you can count on year after year does exactly that. The rule contains no ban on charts and no preference for tables. It sets no ten-year minimum, although advertisements that quote standardized total return use one-, five- and ten-year periods. Naming a benchmark does not remove the implied promise.Securities Act Rule 156(b)(2)

A fund's sales literature quotes an expense ratio of 0.62% net of a fee waiver. The gross ratio before the waiver is 0.95%. What else must the piece include?

• a.Only the 0.62% figure, because the net ratio is what shareholders actually pay while the waiver lasts
• b.The gross 0.95% ratio and the maximum sales load, as prominent as the 0.62%, plus the waiver's end date✓
• c.The 0.95% gross ratio in a footnote, since a net figure may lead if the gross appears somewhere in the piece
• d.The waiver's expected end date alone, because that date replaces the need to show the gross ratio

Sales literature that gives fee or expense figures must include the maximum sales load or other nonrecurring fee and the total annual expenses without any waiver, shown at least as prominently as any other fee figure, and, when it gives net figures, the expected termination date of the waiver. Showing only the net ratio omits the gross ratio and the load. A footnote is less prominent than the lead figure and so fails the standard. The end date is an additional requirement and does not take the place of the gross ratio.Investment Company Act Rule 34b-1(c); Securities Act Rule 482(i)

A trust wants one summary prospectus that covers its Growth Fund and its Income Fund, two separate series. Is that permitted?

• a.Yes, if the cover page names both funds and gives an exchange ticker symbol for each one of the two
• b.Yes, if each fund's Item 2 through Item 8 section begins on its own page of the same combined document
• c.No, because a summary prospectus may describe only one fund, though it may cover several classes✓
• d.Yes, because both series belong to the same trust and are sold under a single registration statement

A summary prospectus may describe only one fund, although it may describe more than one class of that fund. Two series require two summary prospectuses. A shared trust or registration statement does not combine them, naming both on the cover does not change the one-fund limit, and starting each fund's information on a separate page does not either.Securities Act Rule 498(b)(4)

After the last required section, a fund adds a manager biography page and a market commentary essay to its summary prospectus. What is wrong under Rule 498?

• a.The additions are allowed if they come from the fund's SAI and are labeled as supplemental material
• b.A summary prospectus may hold only what Items 2 through 8 of Form N-1A require or permit, in the form's order✓
• c.Nothing, because accurate extra narrative may follow the Item 8 information in a summary prospectus
• d.The additions are allowed if the cover page legend tells investors that the extra pages are optional

A summary prospectus supplies the information required or permitted by Items 2 through 8 of Form N-1A, and only that information, in the order the form requires. A biography page and a commentary essay are outside those items. Accuracy does not bring extra material within the rule. The SAI may be incorporated by reference, which is different from reprinting extra material in the document, and a label or a legend cannot make unauthorized content permitted.Securities Act Rule 498(b)(2)

A city sells general obligation bonds that are exempt from registration under Section 3(a)(2). A salesperson tells buyers the city faces no litigation that could affect debt service, a statement she knows is false. Which provision of the 1933 Act reaches her statement?

• a.None, because securities exempt under Section 3(a)(2) fall wholly outside the 1933 Act
• b.Section 11, because the false statement was made while selling a security that the city issued
• c.Section 17(a), because the Section 3 exemptions do not apply to the antifraud provisions✓
• d.Section 12(a)(2), which gives every purchaser a right of rescission for a misstatement made in an oral sale

Section 17(c) says the Section 3 exemptions do not apply to Section 17, so the antifraud prohibitions of Section 17(a) reach the sale of exempt securities such as municipal bonds. Exemption from registration is not exemption from fraud liability. Section 12(a)(2) excludes securities exempt under Section 3(a)(2), so it gives the buyers no rescission claim here. Section 11 applies only to misstatements in a registration statement, and none was filed for these bonds.Securities Act Sections 3(a)(2), 12(a)(2) and 17(a), (c)

A manufacturer sells notes with a 12-month maturity at issuance and uses the proceeds to buy inventory, a current transaction. Does Section 3(a)(3) exempt the notes from registration?

• a.No, because the exemption covers only paper issued by banks and not paper issued by manufacturers
• b.Yes, because the exemption depends only on the proceeds being used for a current transaction
• c.No, because the exemption covers current-transaction paper with a maturity of nine months or less at issuance✓
• d.Yes, because paper may carry any maturity at issuance if the issuer expects to renew it every nine months

Section 3(a)(3) exempts a note, draft or bill of exchange that arises out of a current transaction or whose proceeds are used for current transactions and that has a maturity at issuance of not more than nine months. The use of proceeds is one test, but the maturity test also has to be met, and 12 months fails it. A renewal is exempt only if its own maturity is likewise limited, so expected renewals do not lengthen the permitted initial term. The exemption is not limited to banks; ordinary businesses can use it.Securities Act Section 3(a)(3)

Which of these securities is exempt from registration under Section 3(a)(4) of the 1933 Act?

• a.Notes of a charitable organization run only for charitable purposes, with no earnings paid to individuals✓
• b.Shares of an educational services corporation whose net earnings are paid to private stockholders as dividends
• c.Notes of a company that leases buildings to churches and spends part of its rent income on scholarships
• d.Bonds of a hospital company that operates for profit but donates a share of its profits to charity

Section 3(a)(4) exempts securities issued by a person organized and operated exclusively for religious, educational, benevolent, fraternal, charitable or reformatory purposes, not for pecuniary profit, where no part of the net earnings benefits any private person. A hospital company that operates for profit does not qualify merely because it gives to charity. Dividends to private stockholders defeat the exemption directly. A landlord that serves churches but exists to earn rent is a business, not an organization operated exclusively for exempt purposes.Securities Act Section 3(a)(4)

A company that has never sold securities under a registration statement completes its first public offering. The shares are not listed or quoted anywhere. The offering became effective and the shares were first offered to the public on March 3. On May 20 a dealer that is not an underwriter sells shares from its own inventory to a customer. Is a prospectus required?

• a.Yes, but only if the customer asks for a copy of the prospectus in writing before the sale
• b.No, because a dealer that is not an underwriter owes no prospectus on sales from its own inventory
• c.Yes, because the sale falls within 90 days of the offering of a first-time registrant✓
• d.No, because the 40-day dealer prospectus period ended on April 12, well before the sale

A dealer's transactions lose the Section 4 exemption during 40 days after the effective date or first bona fide offering, whichever is later, and the period is 90 days if the issuer has not previously sold securities under an earlier effective registration statement. March 3 plus 90 days ends on June 1, so a May 20 sale is inside the period. The 40-day rule, which ends on April 12, applies to issuers that have registered before. A dealer need not be an underwriter to owe a prospectus in this period. The duty to deliver does not depend on a written request by the customer.Securities Act Section 4(a)(3)

Ten days after an offering becomes effective, a dealer that is not an underwriter sells the issuer's shares to a customer. The issuer has filed Exchange Act reports for years and was a reporting company immediately before it filed the registration statement. Must the dealer deliver a prospectus?

• a.No, because Rule 174 excuses delivery when the issuer was a reporting company before filing✓
• b.Yes, because every dealer must deliver a prospectus for 40 days after the effective date of any offering
• c.No, but only because the shares are also listed on a national securities exchange
• d.Yes, because the 25-day period under Rule 174 for listed securities has not yet ended for this sale

Rule 174(b) provides that a dealer need not deliver a prospectus in the Section 4(a)(3) period if the issuer was subject to the Exchange Act reporting requirements immediately before filing the registration statement. The 40-day period is therefore not a universal duty. The 25-day period in Rule 174(d) is for an issuer that was not a reporting company and whose security is listed or quoted, so it does not apply to this issuer. Listing is not the basis for the excusal here.Securities Act Rule 174(b)

Before a company has filed any registration statement, an underwriter's representative phones a retail client to say the company's planned IPO 'will be a winner' and asks whether the client wants shares. What is the status of the call?

• a.It violates Section 5(b), because the client did not first receive a prospectus meeting Section 10
• b.It violates Section 5(c), which prohibits offers to sell before a registration statement is filed✓
• c.It is permitted, because no sale occurred and no money changed hands during the call
• d.It is permitted, because oral offers are allowed at every stage of an offering

Section 5(c) makes it unlawful to offer to sell or buy a security by any means of interstate commerce, including the telephone, unless a registration statement has been filed. The call is an offer made in the pre-filing period. Oral offers become permissible only after filing, during the waiting period. An offer is covered even if no sale or payment takes place. Section 5(b) concerns prospectuses used after a registration statement has been filed, so it is not the provision that applies when nothing has been filed.Securities Act Section 5(c)

A registration statement has been filed but is not yet effective. A customer tells a registered representative she wants 500 shares of the offering and offers a check. What may the representative do?

• a.Note an indication of interest, but take no order or payment before the statement is effective✓
• b.Accept the order and the check, and hold both in escrow until the effective date has arrived
• c.Decline to discuss the offering, because oral offers are barred until the registration statement is effective
• d.Accept the order but not the check, because written orders are binding once a preliminary prospectus is delivered

During the waiting period a representative may make oral offers and may record an indication of interest, but no sale may be made and no offer to buy may be accepted until the registration statement is effective. Rule 134 says the same thing in its required statement: no offer to buy can be accepted and no part of the purchase price can be received until effectiveness. Holding the check in escrow is still receiving it. Delivering a preliminary prospectus does not make an order binding. Oral offers are lawful once the registration statement is filed, so the representative need not refuse to talk about the offering.Securities Act Section 5(a), (c); Rule 134(d)

Purchasers sue under Section 11 over a material misstatement in a registration statement. The issuer argues that it made a reasonable investigation before the statement became effective. How does that argument fare against the issuer?

• a.It fails, because the issuer is liable for a material misstatement whatever investigation it made✓
• b.It succeeds, because every defendant under Section 11 may avoid liability by proving a reasonable investigation
• c.It succeeds if the issuer's independent auditors certified the financial statements that contain the error
• d.It fails only because the issuer's directors signed the registration statement, which removes the defense

Section 11(b) provides defenses, including reasonable investigation, to every person liable except the issuer. The issuer is liable for a material misstatement in the registration statement regardless of its care. Directors, signers, experts and underwriters may prove due diligence, so the defense is not open to all defendants. An auditor's certification gives the auditor an expert defense for its own part but gives the issuer none. The issuer's lack of a defense does not depend on who signed the statement.Securities Act Section 11(a), (b)

An investor buys 1,000 shares in the aftermarket at $30. The shares were offered to the public at $24 under a registration statement containing a material misstatement. The investor sells all 1,000 at $20 before filing suit, and the whole loss results from the misstatement. What is the maximum Section 11 recovery?

• a.$10,000, found by subtracting the $20 sale price from the $30 the investor actually paid
• b.$6,000, found by subtracting the $24 offering price from the $30 the investor actually paid
• c.$24,000, found by returning the full offering price on all 1,000 shares to the investor
• d.$4,000, found by capping the price paid at $24 and subtracting the $20 sale✓

Section 11 damages are the difference between the amount paid, not exceeding the offering price to the public, and the price at which the security was sold before suit. The cap limits the amount paid to $24, so the recovery is $24 less $20, or $4 a share, and $4,000 on 1,000 shares. Using the $30 actually paid ignores the cap and overstates the recovery at $10,000. The $6,000 figure is only the aftermarket premium over the offering price, which is not a measure of damages. Returning the whole offering price would ignore the $20 the investor received on the sale.Securities Act Section 11(e)

What time limit applies to a purchaser's suit under Section 12(a)(1) for a sale made in violation of Section 5?

• a.Ninety days after the purchaser receives the confirmation, and no more than one year after the sale
• b.One year after discovery of the problem, and no more than three years after the sale
• c.One year after the violation, and no more than three years after the security was first offered✓
• d.Two years after discovery of the problem, and no more than five years after the sale took place

Section 13 requires a Section 12(a)(1) action to be brought within one year after the violation, and in no event more than three years after the security was bona fide offered to the public. The one-year-from-discovery and three-years-from-sale pair applies to Section 12(a)(2) suits, not to Section 12(a)(1). The two-year and five-year limits belong to the general fraud claims under the Exchange Act, not to the 1933 Act provisions. No 90-day confirmation limit exists in Section 13.Securities Act Sections 12(a)(1) and 13

A purchaser sues the seller under Section 12(a)(2) over a material misstatement made orally while selling a registered public offering. The purchaser did not know the statement was untrue. Who bears the burden on the seller's knowledge?

• a.Neither side, because liability attaches to the seller automatically once the statement is shown to be false
• b.The purchaser must prove that the seller intended to deceive and that the purchaser relied on the statement
• c.The seller must prove it did not know, and with reasonable care could not have known, the statement was untrue✓
• d.The purchaser must prove that the seller knew the statement was untrue at the time it was made

Section 12(a)(2) covers misstatements in a prospectus or oral communication and puts the burden on the seller to prove it did not know, and in the exercise of reasonable care could not have known, of the untruth. The purchaser does not have to prove the seller's knowledge. Intent to deceive and reliance are elements of fraud claims brought under other provisions and are not required here. Liability is not automatic either, since the seller keeps the reasonable-care defense.Securities Act Section 12(a)(2)

A newsletter publisher writes a favorable article on a bond issue and receives $5,000 from the underwriter. The article says 'sponsored content' but gives no amount. The article does not offer the bonds for sale. Is Section 17(b) violated?

• a.No, because the label 'sponsored content' discloses the receipt of consideration and is enough
• b.Yes, but only if the bonds are not exempt under Section 3, since exempt securities fall outside Section 17
• c.No, because an article that does not purport to offer the bonds falls outside Section 17(b)
• d.Yes, because the receipt of consideration and its amount must be fully disclosed, even without an offer to sell✓

Section 17(b) targets a communication that describes a security, though it does not purport to offer it, for consideration received from an issuer, underwriter or dealer, without fully disclosing both the receipt and the amount. The absence of an offer is the very situation the provision addresses. A bare 'sponsored' label discloses neither the amount nor, necessarily, the source, so it does not satisfy the section. Section 17(c) states that the Section 3 exemptions do not apply to Section 17, so exempt bonds are covered too.Securities Act Section 17(b)

Four firms form an undivided (Eastern) syndicate for a 2,000,000-share offering. Firm Q has a 25% participation and sold its entire 500,000-share allotment. At the close, 400,000 shares of the syndicate's total remain unsold. How many of the unsold shares is Firm Q responsible for?

• a.None, because Firm Q has already sold every share of its own allotment to the public
• b.400,000 shares, because the manager can require one member to take all the unsold shares
• c.100,000 shares, because each member in an undivided account answers for its percentage of the unsold total✓
• d.500,000 shares, because each member takes back its entire allotment when the issue stalls

In an undivided (Eastern) account each member is liable for its percentage participation in whatever is left unsold, even if that member sold its own allotment in full. Firm Q's 25% of 400,000 unsold shares is 100,000 shares. Liability limited to a member's own unsold shares belongs to a divided (Western) account, so zero would be right only there. Nothing in the undivided structure lets the manager push the whole unsold block onto a single member, and no member takes back its full allotment merely because the issue is not fully sold.Agreement among underwriters (undivided, Eastern account)

Four firms with equal 25% shares form a divided (Western) syndicate for a 2,000,000-share offering. Firm Q sells 420,000 of its 500,000-share allotment. The other members leave 220,000 shares unsold in total. How many shares must Firm Q take?

• a.220,000 shares, since a member that sold well must take what the other members could not sell
• b.80,000 shares, since a Western member answers only for the unsold part of its own allotment✓
• c.75,000 shares, since a member answers for 25% of the 300,000 shares the syndicate left unsold
• d.300,000 shares, since the manager may assign the whole unsold balance to any member it chooses

In a divided (Western) account each member is responsible only for the unsold portion of its own allotment, here 500,000 less 420,000, or 80,000 shares. The 75,000-share figure applies the undivided (Eastern) method to a total of 300,000 unsold shares, which is the wrong account structure. Nothing makes one member answer for the entire unsold amount. A member that sold well in a divided account is not required to cover the shares that other members could not sell.Agreement among underwriters (divided, Western account)

A registered representative sells 5,000 shares of a hot IPO to a customer, who sells them nine days later for a quick gain. The firm wants to take back the commission it paid the representative. Under Rule 5131, may it do so?

• a.Yes, but only if the customer signed an agreement at purchase not to sell the shares quickly
• b.No, because a member may never recoup a commission once it has been paid to the representative
• c.Yes, because a sale within 30 days is a flip, which lets any member recoup the commission
• d.Only if the managing underwriter has assessed a penalty bid on the whole syndicate✓

Rule 5131(c)(1) bars a member from recouping a commission paid to an associated person for selling flipped shares unless the managing underwriter has assessed a penalty bid on the entire syndicate. A sale within 30 days is a flip as the rule defines it, but the flip alone does not authorize a charge-back. Recoupment is not forbidden outright, because the penalty-bid condition opens the door. A customer agreement is not part of the rule's test, so its absence or presence changes nothing.FINRA Rule 5131(c)(1)

A firm received investment banking fees six months ago from a public company. Executive officers of that company together hold 20% of the beneficial interests in a private fund, and the fund asks for a new-issue allocation. The fund is not within the Rule 5130(c)(1) through (3) and (5) through (13) accounts. May the firm allocate shares to it under the spinning rule?

• a.Yes, because executive officers and directors hold no more than 25% of the fund in the aggregate✓
• b.No, because compensation was received from the company in the past 12 months and the fund is not an exempt account
• c.No, because any beneficial interest held by the executive officers of a banking client bars the allocation
• d.Yes, because the fees were received more than three months ago and the spinning window has closed

Rule 5131(b) bars allocations to accounts of a client company's executive officers when the firm was paid for investment banking in the past 12 months, but paragraph (b)(2) does not apply to an account in which those officers and directors hold, in the aggregate, no more than 25%. At 20%, the fund is under the cap, so the allocation is permitted. Any interest alone does not bar the allocation, which is why a blanket no is wrong. The 12-month look-back, not three months, governs the compensation test, so the six-month-old fees would matter if the account were over the cap.FINRA Rule 5131(b)

A member must decide which of four hedge funds may buy shares of an IPO under the restricted-person rule. Each fund is not within any other Rule 5130(c) exemption. Which fund may buy?

• a.An $80 million fund in which restricted persons hold $20 million of the interests
• b.A $40 million fund in which restricted persons hold $4.4 million of its beneficial interests overall
• c.A $25 million fund in which restricted persons hold $3 million of its beneficial interests
• d.A $60 million fund in which restricted persons hold $5.4 million of the beneficial interests✓

Rule 5130(c)(4) permits an account to buy a new issue only if restricted persons' beneficial interests do not exceed 10% of the account in the aggregate. $5.4 million of $60 million is 9%, which qualifies. $4.4 million of $40 million is 11% and $3 million of $25 million is 12%, so both exceed the limit. $20 million of $80 million is 25%, the cap used in the spinning rule, and it is far over the 10% limit here.FINRA Rule 5130(c)(4)

A registered representative at Firm X has a brother who lives in another state and supports himself. The brother opens an account at Firm Y, an unrelated broker-dealer, and buys an IPO there. The representative does not support him, is not associated with Firm Y, and has no say in Firm Y's allocations. Is the brother a restricted person?

• a.Yes, because the representative works for a broker-dealer and shares in the industry's access to new issues
• b.No, because a family member is restricted only if one of the support, selling-firm or allocation-control conditions is met✓
• c.Yes, because a brother of any associated person of a broker-dealer is a restricted person under the rule
• d.No, because only the representative, a spouse and children can ever be treated as restricted persons

Rule 5130(i)(10)(B)(iii) makes an immediate family member of a broker-dealer's associated person restricted only if the associated person materially supports or is supported by that relative, is employed by or associated with the member selling the new issue to the relative, or can control the allocation. None of those conditions applies to the brother, so he is not restricted. Family status alone is not enough, which defeats the blanket yes. Brothers and sisters are immediate family members under the definition, so the limit to a spouse and children is wrong as well.FINRA Rule 5130(i)(10)(B)(iii)

Which of the following offerings is a 'new issue' to which the FINRA Rule 5130 restrictions on purchases by restricted persons apply?

• a.A rights offering of common stock to current shareholders of a company that already trades publicly
• b.A registered initial public offering of common stock by a company that has never been publicly traded✓
• c.A registered initial offering of shares in an open-end investment company that has just launched
• d.A registered initial public offering of preferred stock by a company that has never been publicly traded

Rule 5130(i)(9) defines a new issue as an initial public offering of an equity security made under a registration statement or offering circular. The definition excludes preferred securities, rights offerings and offerings of registered investment companies, among others. An IPO of common stock fits the definition. The preferred stock, rights offering and new open-end fund each appear on the exclusion list, so the restrictions do not apply to them.FINRA Rule 5130(i)(9)

Fourteen months ago a member received a written representation from a hedge fund that it was eligible to buy new issues. The fund now places an order for an IPO that the member is distributing. The member has no reason to doubt that nothing has changed. What must the member do?

• a.Fill the order, because a representation lasts two years when the member has no reason to doubt it
• b.Fill the order only after confirming eligibility orally, since oral confirmation updates the written record
• c.Fill the order, because a representation that was valid when given remains valid until the fund changes
• d.Obtain a new representation first, because the member needs one from within the prior twelve months✓

Rule 5130(b) requires that, before selling a new issue to an account, the member have in good faith obtained a representation within the twelve months before the sale that the account is eligible. A representation 14 months old is outside that window, so a new one is needed even though nothing is known to have changed. The rule has no two-year period and no provision for an open-ended representation. An oral confirmation does not substitute for the representation the rule calls for.FINRA Rule 5130(b)

A book-running lead manager decides to waive a lock-up so that an officer of the issuer may sell shares in the open market on a Monday with no holidays nearby. The waiver is not for a transfer made without consideration or to a family member. What is the latest day on which the manager must notify the issuer and announce the waiver through a major news service?

• a.The following Wednesday, because notice may follow the release by two business days
• b.The preceding Thursday, because notice is due at least two business days before the release✓
• c.The preceding Friday, because the rule requires notice one business day before any release
• d.The Monday of the release itself, because announcement is due before the market opens that day

Rule 5131(d)(2)(B) requires the book-running lead manager to notify the issuer and announce through a major news service at least two business days before a lock-up release or waiver, except for transfers that are not for consideration or are to an immediate family member who agrees to the same terms. This waiver allows an open-market sale, so no exception applies. Counting back two business days from Monday gives Thursday. Friday is only one business day ahead, announcing on the day itself is too late, and notice after the release defeats the purpose of advance warning.FINRA Rule 5131(d)(2)

A firm-commitment offering is planned for 4,000,000 shares. The underwriters ask for an overallotment option. What is the largest number of shares the option may cover without being an unreasonable term under FINRA Rule 5110?

• a.600,000 shares, which is 15% of the 4,000,000 shares offered before the option✓
• b.800,000 shares, which is 20% of the 4,000,000 shares offered before the option is added
• c.400,000 shares, which is 10% of the 4,000,000 offered before the option
• d.690,000 shares, which is 15% of the 4,600,000 shares including the option shares

Rule 5110(g)(9) treats an overallotment option covering more than 15% of the securities offered in a firm-commitment deal as unreasonable, and the base is computed excluding the option shares. 15% of 4,000,000 is 600,000. Applying the percentage to the 4,600,000 total including the option gives 690,000, which counts the option inside its own base. Ten percent is below the permitted size, and 20% is above it.FINRA Rule 5110(g)(9)

A firm-commitment public offering is expected to raise $40 million. The lead underwriter proposes a non-accountable expense allowance as part of its compensation. What is the largest allowance that avoids an unreasonable term under FINRA Rule 5110?

• a.$800,000, since 2% of the offering proceeds is the ceiling
• b.$1.2 million, since 3% of the offering proceeds is the ceiling✓
• c.$2.0 million, since 5% of the offering proceeds is the permitted ceiling
• d.$4.0 million, since 10% of the offering proceeds is the ceiling

Rule 5110(g)(3) prohibits any non-accountable expense allowance in excess of 3% of offering proceeds. Three percent of $40 million is $1.2 million. The 5% and 10% figures would exceed the cap, while 2% is below the cap and so is allowed but is not the maximum asked for.FINRA Rule 5110(g)(3)

An underwriter received warrants as part of its compensation in an IPO. The issuer is not eligible to use Form S-3, the underwriter holds more than 1% of the offering, and the stock is not actively traded. Sales began 121 days ago, and the underwriter wants to sell the warrants to an unaffiliated buyer. May it?

• a.No, because compensation securities may never be sold once an underwriter has accepted them
• b.Yes, because the lock-up on compensation securities lasts 90 days from the start of sales
• c.No, because compensation securities must be locked up for 180 days starting when sales of the offering begin✓
• d.Yes, because the lock-up ended with the 60-day review period that follows the effective date

Rule 5110(e)(1) bars sale, transfer, hedging or other effective economic disposition of securities received as underwriting compensation for 180 days beginning on the date sales of the public offering commence. None of the listed exceptions applies to this issuer or this holding, and 121 days is short of 180, so the sale is prohibited for now. A 90-day lock-up is not in the rule, and the 60-day review period concerns what compensation counts, not when securities may be sold. The restriction is temporary, so a permanent bar is wrong.FINRA Rule 5110(e)(1)

In a 90-day Rule 506(b) offering an issuer sells to 28 non-accredited individuals, 4 accredited individuals, 3 relatives who share a home with purchasers and each bought, and one operating corporation that is not an accredited investor. How many purchasers count toward the 35-purchaser limit?

• a.36, since every person and entity that bought counts as one purchaser toward the limit
• b.29, since accredited investors and household relatives drop out and the corporation counts once✓
• c.32, since only the household relatives are excluded from the count of purchasers here
• d.33, since only the accredited investors are excluded from the count of purchasers here

Rule 501(e)(1) excludes accredited investors and relatives who share the primary residence of a purchaser, and 501(e)(2) counts a corporation as one purchaser. That leaves 28 individuals plus 1 corporation, or 29. Counting everyone would give 36 and appear to break the limit, but the exclusions bring the total well under 35. Excluding only the accredited investors gives 33 and excluding only the relatives gives 32, and each leaves out one of the two exclusions the rule provides.Securities Act Rules 501(e) and 506(b)(2)(i)

An issuer plans a Rule 506(b) offering to 20 accredited investors and 3 non-accredited investors. Under Rule 502(b), to whom must it furnish the specified disclosure information, and when?

• a.To the SEC alone, because the Form D filing replaces any delivery to the purchasers
• b.To all 23 purchasers, because the rule applies equally to every purchaser in the offering
• c.To the non-accredited purchasers, a reasonable time before the sale to them✓
• d.To no one, because a private offering is exempt from every disclosure requirement

Rule 502(b)(1) requires the issuer to furnish the specified information to a purchaser that is not an accredited investor a reasonable time before sale, and it excuses delivery to accredited investors. The three non-accredited purchasers must therefore receive it. The note encourages giving the information to accredited investors as well, but the rule does not require it. A Form D notice does not take the place of delivery to purchasers, and the exemption does not erase the disclosure condition when non-accredited investors take part.Securities Act Rule 502(b)(1)

An issuer running a Rule 506(c) offering wants a method that is deemed reasonable steps to verify that a natural person qualifies as an accredited investor by net worth. Which method meets the rule?

• a.Review tax returns for the two most recent years, plus a written statement that expected income will continue at the same level this year
• b.Review bank and brokerage statements from the prior twelve months, plus a written statement that all liabilities are disclosed
• c.Obtain a signed questionnaire in which the investor states a net worth above $1,000,000, with no documents attached
• d.Review bank and brokerage statements from the prior three months, a consumer report, and a written statement that all liabilities are disclosed✓

Rule 506(c)(2)(ii)(B) deems a net-worth verification reasonable when the issuer reviews asset documents such as bank and brokerage statements dated within the prior three months and a consumer report from a nationwide reporting agency on liabilities, and obtains a written representation that all liabilities are disclosed. Statements dated up to twelve months back are too old, and a bare questionnaire gives no verification at all. Tax returns and an expected-income statement are the income method in paragraph (A), not a way to verify net worth.Securities Act Rule 506(c)(2)(ii)(B)

A non-reporting operating company sold $4.2 million of securities in a Rule 504 offering seven months ago. It now begins a second Rule 504 offering. What is the most it can raise in the new offering?

• a.$4.2 million, because a second offering is capped at the amount of the first
• b.$0, because only one Rule 504 offering is allowed within any 12-month period
• c.$10 million, because each Rule 504 offering carries its own separate $10 million cap again
• d.$5.8 million, because the $10 million cap is reduced by sales in the prior 12 months✓

Rule 504(b)(2) caps the aggregate offering price at $10,000,000 less the aggregate offering price of all securities sold within the 12 months before the start of and during the offering. The earlier $4.2 million sale falls inside the 12 months, leaving $5.8 million. A fresh $10 million cap for each offering would defeat the aggregate limit. Nothing ties the second offering to the size of the first, and the rule does not bar a second offering; it only counts the earlier sales against the cap.Securities Act Rule 504(b)(2)

A purchaser in a Rule 506(b) offering asks the issuer what it can do with the securities it bought. Which statement is correct under Rule 502(d)?

• a.The securities are freely tradable once the issuer has filed Form D with the SEC after the first sale
• b.The securities become freely tradable on a national exchange once the offering has closed
• c.The securities may be resold to any buyer once the purchaser has held them for a period of 30 calendar days
• d.The securities have Section 4(a)(2) status and cannot be resold without registration or an exemption✓

Rule 502(d) gives securities bought in a Regulation D transaction the status of Section 4(a)(2) securities, which cannot be resold without registration or an exemption, and it directs the issuer to use reasonable care such as inquiry, written disclosure and a restrictive legend. A Form D filing is only a notice and does not free the securities for resale. The rule sets no 30-day period, and closing the offering does not register the securities or permit exchange trading.Securities Act Rule 502(d)

A court has enjoined an issuer from further violating Rule 503, which governs the Form D notice of sales. The issuer later plans a new offering under Rule 506(b). Is the exemption available?

• a.No, and the SEC has no power to waive the disqualification for any reason
• b.Yes, because an injunction about a notice filing has no effect on later offerings
• c.Yes, because a disqualification lasts only 12 months from the date of the injunction
• d.No, unless the SEC finds good cause that the exemption should not be denied✓

Rule 507(a) denies the Rule 504 and Rule 506 exemptions to an issuer, or its predecessors or affiliates, that has been enjoined by a court for failure to comply with Rule 503. Rule 507(b) lets the SEC find good cause that denial is not necessary, so a waiver is possible. An injunction over the notice filing therefore does matter. The rule has no 12-month limit, and the SEC's waiver power rules out the claim that the bar is absolute.Securities Act Rule 507(a)

A Delaware corporation has its principal place of business in Ohio and earns 85% of its revenue there. It wants to advertise a stock offering on national social media but sell only to Ohio residents. Which exemption fits?

• a.Rule 147A, since it permits general solicitation and does not require organization in the issuer's state✓
• b.Rule 147A, but only if the issuer first reincorporates in Ohio before it makes the first offer
• c.Rule 147, since the issuer meets the 80% revenue test in the state where it does business
• d.Rule 504, since an intrastate offering by a small company needs no state residency conditions

Rule 147A allows offers by any form of general solicitation and does not require the issuer to be organized in the state, so a Delaware corporation based in Ohio can sell to Ohio residents after a national advertisement. Rule 147 requires the issuer to be incorporated or organized in the state as well as based there, and it limits offers to residents of that state, so national advertising defeats it. Rule 504 is an unrelated Regulation D exemption, not an intrastate one. Reincorporation is not a condition of Rule 147A.Securities Act Rules 147 and 147A

A company based in Texas seeks to qualify under Rule 147A as doing business in Texas. Which single fact satisfies the 'doing business' test?

• a.70% of its consolidated gross revenues come from Texas operations
• b.75% of its assets and its subsidiaries' assets are located in Texas
• c.40% of its employees work at offices that are located in the state of Texas
• d.It will use and does use 85% of the net proceeds of the sales in Texas✓

Rule 147A(c)(2) deems an issuer to be doing business in the state if any one test is met: at least 80% of consolidated gross revenues from the state, at least 80% of assets located there, intended and actual use of at least 80% of net proceeds there, or a majority of employees based there. Use of 85% of net proceeds meets the 80% threshold. Revenues of 70% and assets of 75% fall short of 80%, and 40% of employees is not a majority.Securities Act Rule 147A(c)(2)

Which of the following primary offerings of municipal securities is exempt from Rule 15c2-12 because of its denominations and its buyers or maturity?

• a.A $5 million offering in $5,000 denominations sold to 20 sophisticated institutions buying for themselves
• b.A $5 million offering in $100,000 denominations sold to 50 sophisticated institutions that each buy for their own accounts only
• c.A $5 million offering with a maturity of 12 months, sold in $5,000 denominations to retail customers in the general public market
• d.A $5 million offering in $100,000 denominations sold to 20 sophisticated institutions that each buy for their own accounts✓

Rule 15c2-12(d)(1) exempts a primary offering in authorized denominations of $100,000 or more if the securities are sold to no more than 35 persons who are sophisticated and not buying for more than one account or with a view to distributing. It also exempts securities maturing in nine months or less. The first offering meets the denomination and 35-buyer conditions. Denominations of $5,000 fail the $100,000 requirement, selling to 50 buyers exceeds 35, and a 12-month maturity is longer than nine months.Exchange Act Rule 15c2-12(d)(1)

Before bidding for a municipal offering of $20 million, a participating underwriter reviews a preliminary official statement the issuer deems final. Which items may that document omit under Rule 15c2-12(b)(1)?

• a.The offering prices, interest rates, selling compensation and ratings, with the other pricing-dependent terms✓
• b.The terms of the continuing disclosure undertaking, so long as the issuer later discloses them to investors
• c.The security for the bonds and the source of repayment, so long as they appear in the final document
• d.The issuer's financial information and operating data, because only the underwriter needs those figures

Rule 15c2-12(b)(1) requires the underwriter to obtain and review an official statement the issuer deems final as of its date, except for the omission of no more than the listed items: offering prices, interest rates, selling compensation, aggregate principal amount, principal amount per maturity, delivery dates, competitive-bid terms, ratings, other terms depending on those matters, and the underwriters' identity. Financial and operating data, the security for the bonds and the undertaking terms are not on that list, so a preliminary document that leaves them out is not deemed final.Exchange Act Rule 15c2-12(b)(1)

In a negotiated municipal offering, a firm has agreed to become the participating underwriter, and the final official statement is not yet available. A potential customer requests the preliminary official statement on Tuesday. By when must the underwriter send it?

• a.No later than the next business day, by first-class mail or an equally prompt means✓
• b.By the date of the pricing of the issue, since the preliminary document may not be sent earlier
• c.Within three business days of the request, by any delivery method the underwriter selects
• d.Within seven business days of the request, together with the confirmation of the customer's order

Rule 15c2-12(b)(2) requires a participating underwriter in a negotiated offering, from the time it reaches an understanding with the issuer until a final official statement is available, to send a single copy of the most recent preliminary official statement to a potential customer on request no later than the next business day, by first-class mail or other equally prompt means. Three business days is not the rule's standard. The seven-business-day period belongs to the issuer's delivery of the final statement to the underwriter. Delivery cannot wait for pricing.Exchange Act Rule 15c2-12(b)(2)

An underwriter makes a final agreement to purchase a municipal offering on Wednesday, March 4. With no holidays, the underwriter's contract with the issuer must require copies of the final official statement to be delivered within seven business days. What is the last day for delivery?

• a.Wednesday, March 18, ten business days after the agreement
• b.Thursday, March 12, counting March 4 as the first of seven business days
• c.Wednesday, March 11, seven calendar days after the agreement
• d.Friday, March 13, the seventh business day after the agreement✓

Rule 15c2-12(b)(3) has the underwriter contract to receive final official statements within seven business days after any final agreement to purchase, offer or sell the securities. Counting March 5 as day one gives March 5, 6, 9, 10, 11, 12 and 13, so the last day is Friday, March 13. March 11 treats seven calendar days as the period and only reaches the fifth business day. Counting March 4 itself as day one lands on March 12, one business day early. Wednesday, March 18 uses a ten-business-day period, which is the period for event notices.Exchange Act Rule 15c2-12(b)(3)

An obligated person's municipal bonds are downgraded by a rating agency on Tuesday, April 7. Assume no holidays. Under the continuing disclosure undertaking required by Rule 15c2-12, what is the last day for the event notice to reach the MSRB?

• a.Tuesday, April 21, which is ten business days after the rating change✓
• b.Tuesday, April 14, which is seven days after the rating change
• c.Friday, April 17, which is ten calendar days after the rating change
• d.Monday, April 20, which counts April 7 as the first business day

Rule 15c2-12(b)(5)(i)(C) requires notice of listed events, including rating changes, in a timely manner not in excess of ten business days after the event. Counting from April 8, the tenth business day is Tuesday, April 21. April 14 is only five business days after the event, and April 17 counts calendar days rather than business days. Counting the day of the event as the first day produces April 20, one business day short of the full ten.Exchange Act Rule 15c2-12(b)(5)(i)(C)

An underwriting period for a municipal offering ends on June 1. The final official statement became available to any person from the MSRB on the closing date, before the underwriting period ended. Through what date must the underwriter send the final official statement on request?

• a.July 1, because the duty ends 30 days after the end of the underwriting period
• b.June 8, because the duty ends 7 days after the underwriting period when the MSRB has the document
• c.June 26, because the period lasts at least 25 days after the end of the underwriting period✓
• d.August 30, because the duty runs for 90 days from the end of the underwriting period

Rule 15c2-12(b)(4) runs the duty to send the final official statement on request until the earlier of 90 days from the end of the underwriting period or the time the statement is available from the MSRB, but never less than 25 days after the end of the underwriting period. Availability from the MSRB shortens the 90 days, and the 25-day floor then governs, which makes June 1 plus 25 days equal to June 26. The 90-day date of August 30 ignores the MSRB availability. Seven and 30 days are not periods in the rule.Exchange Act Rule 15c2-12(b)(4)

A dealer wants to recommend a municipal bond in the secondary market to a customer. Under Rule 15c2-12(c), what must the dealer have in place before it makes the recommendation?

• a.Audited financial statements for every obligated person, obtained from the issuer on request every fiscal year
• b.Procedures that give reasonable assurance of prompt notice of the continuing disclosure events in the rule✓
• c.A copy of the issue's final official statement, kept in the customer's file before the sale is made
• d.A signed acknowledgment from the customer that the continuing disclosure filings can be obtained on request

Rule 15c2-12(c) makes it unlawful to recommend the purchase or sale of a municipal security unless the dealer has procedures that provide reasonable assurance it will receive prompt notice of events disclosed under the continuing disclosure undertaking, including the listed material events and failure to file annual information. A copy of the official statement in the file does not give the dealer notice of later events. The rule does not require audited statements for every obligated person or a customer acknowledgment.Exchange Act Rule 15c2-12(c)

A customer opens a brokerage account at a bank branch under a networking arrangement. The member gives the customer the written disclosures at account opening. Does Rule 3160 require anything further for this account?

• a.Yes, the member must also give the not-insured and no-guarantee disclosures orally when the account is opened✓
• b.No, because oral disclosure is required only for customers who open accounts by telephone rather than in person
• c.Yes, the member must also have the bank officer repeat the disclosures to the customer when the first trade settles
• d.No, because a written disclosure delivered at or before account opening satisfies the rule for every customer

Rule 3160(a)(3)(B) requires the written disclosures to be made orally as well for any customer account opened on the premises of a financial institution. Written delivery alone therefore does not finish the job at the branch. The rule puts the duty on the member, not the bank officer, and ties it to account opening rather than to the first settlement. The oral requirement turns on where the account is opened on the premises, not on whether the customer used the telephone.FINRA Rule 3160(a)(3)(B)

A member that sells funds in a bank branch under a networking arrangement is reviewing its retail communications. Which one must include the 'Not FDIC Insured, No Bank Guarantee, May Lose Value' disclosures?

• a.A 30-second radio spot that names the bank, where omitting the disclosures would not mislead
• b.A sign used only to show where in the branch the member's services are, where omission would not mislead
• c.An electronic sign showing time and temperature that names the bank, where omission would not mislead
• d.A brochure handed out at the bank's teller windows that promotes the member's funds✓

Rule 3160(a)(4)(B) requires the disclosures in retail communications that promote the name or services of the financial institution or that the member distributes on the institution's premises, such as a brochure. Paragraph (a)(4)(C) excuses them in radio broadcasts of 30 seconds or less, in electronic billboard-type signs, and in location-indicator signs, so long as omitting them would not make the communication misleading. The brochure is the only item outside those exceptions.FINRA Rule 3160(a)(4)(B), (C)

A member has 40 registered persons. Nine of them were associated in a registered capacity with disciplined firms within the last three years. Two of those nine were registered with a disciplined firm for a total of 60 days and have no disciplinary history. Is the member a taping firm?

• a.No, because a member becomes a taping firm only after FINRA has formally designated it as one
• b.Yes, because 9 of 40 is 22.5%, which is above the threshold for a firm of this size
• c.Yes, because a firm with ten or more registered persons is a taping firm if four qualify
• d.No, because the count is 7 of 40, or 17.5%, which is below the 20% threshold✓

Under Rule 3170(a)(5)(A)(iii) a member with 20 or more registered persons is a taping firm when 20% or more were associated with disciplined firms in the last three years. Paragraph (a)(5)(B) excludes persons registered with disciplined firms for 90 days or less in total who have no disciplinary history, so two of the nine drop out, leaving 7 of 40, or 17.5%. Using all nine gives 22.5% and overstates the count. The four-person test is the tier for firms with 10 to 19 registered persons. A firm that has actual knowledge it is a taping firm is bound without a formal designation.FINRA Rule 3170(a)(5)(A)(iii), (B)

A taping firm records the telephone conversations of its registered persons as Rule 3170 requires. How long must it keep the recordings, and how must they be stored?

• a.Not less than three years from the date of creation, with all three years kept in an easily accessible place, cataloged by customer account number
• b.Not less than three years from the date of creation, with the first two years in an easily accessible place✓
• c.Not less than six years from the date of creation, with the first two years kept in an easily accessible place at the main office
• d.Not less than two years from the date of creation, with the first year easily accessible

Rule 3170(b)(4) requires a taping firm to keep the recordings for not less than three years from the date they were created, the first two years in an easily accessible place, and to catalog them by registered person and date. Keeping all three years accessible is not required, and cataloging by customer account does not satisfy the rule. Six years is the retention period for certain other broker-dealer records, not tapes. Two years is shorter than the rule requires.FINRA Rule 3170(b)(4)