Can A Registered Representative Buy An Ipo

Can a registered representative buy an ipo

Series 24

Chapter 1

Preregistration Period

Prepares statements ( no discussion w/ customers)

Filing date ends the Preregistration Period

Waiting Period (cooling off)

Sec reviews the statement

Lasts around 20 days from last amendment.

Can a registered representative buy an ipo

If filing is not correct SEC will send deficiency letter

Not Permitted to : Sell new issue or accept payment for new issue

Can: Discuss the issue, Provide Red-Herring and Record the names of potential purchasers

Ended by the effective date

Post Effective Period

Issuing of final prospectus (no later than the time a sale is confirmed)

If the firm has not filed before they need to supply a preliminary prospectus at least 48 hours before and then a final prospectus

Reporting status at time for filing: Exchange or Nasdaq Listing Status: After the offering, dealers must provide prospectus for:

Non Reporting Will be Listed 25 days Non Reporting Will not be listed and is not an IPO 40 days Non Reporting Will not be listed and is an IPO 90 days Reporting Aftermarket prospectus requirement does not apply

Unlawful representation • Failing to file the registration statement • Making a material misstatement and/or material omission • Selling security publicly before registration is effective • Failing to give a copy of final prospectus to purchaser

Small businesses (Less than $25 million) (become effective 20 calendar days after filing)

• Form SB-1: enables issuer to raise $10 million or less within any 12 months

• Form SB-2: enables issuer to raise capital in an unlimited amount for unspecified time period.

(as long as it falls under the definition of small business issuer.

Trust indenture Act of 1939

• Bonds must register under the Securities act of 1933

• If issuing more than $10 million dollars must provide a indenture (agreement) between the issuer and a trustee who acts on behalf of the bondholders interest

Series 24 CH1 8-15

Well- Known Seasoned Issuer (issuer is required to file reports under section 13(a) or 15(d) With in 60m days of determination of eligibility must have - Worldwide market value of common equity by non-affiliates of $700 million or more.

- Or in last 3 years have at least $1 billion aggregated principal amount of nonconvertible securities.


- Eligible to register on From S-3 (short form) or F-3(foreign private issuers)

Majority-owned subsidiary- (subsidiary of a well-known seasoned issuer)

Securities are nonconvertible, and the parent company guarantees the securities fully and unconditionally

Seasoned issuer- Eligible to use form S-3 or F-3

Unseasoned issuer- reports under section 13 or 15(d) but does not meet requirements to file on from S-3 or F-3

Non-Reporting issuer- does not require filing of reports under section 13 or 15(D)

Ineligible issuer-

- Issuer that has not filed reports - Blank Check Company - Shell Company - Issuer offering penny stock - Using a form of selling other than firm commitment underwriting - Has filed for bankruptcy or issuer insolvent in past 3 years - Issuer of entity of issuer have been convicted of a felony or misdemeanor with securities or anti-fraud in the last 3 years - Has been is of a refusal or stop order

Free writing prospectus- Well-known seasoned issuers that will be subject of registration statement.

It is an offer to sell or a solicitation of an offer to buy securities in the form of a written communication.

(issuer free writing prospectus must be retained for 3 years)

New Issue Communications Examples of illegal communication


Research reports- if it contains info about the new offering 2. Advertising- ad campaign related to the new off 3. Oral Communication- discussions between registered reps and customers regarding new offers, Permitted after filing date 4.

Internal syndicate memoranda- not allowed to be distributed to customers

Cooling off period- Generally underwriters may discuss new offer but may not offer in writing except with preliminary prospectus.

Also applies to research reports

Exceptions to communication rules:

Gun- Jumping Provisions:

Rule 134: Communication not deemed a prospectus

Tombstone ads may include- o The name of the issuer o The full title of the security o The amount being offered o A brief description of type of business o Price o Date of sale o Identify of underwriters

Other ok info - Contact info of organization sending communication ( name, address, phone number and email) - Anticipated schedule for the offering (approximate commencement date) and a description of marketing events - Exchanges where securities will be listed - Name of selling securities holders

Rule 135a: Generic Advertising

Does not mention specific investment company, but provided general info about investing or generic types of funds

Can also contain request for further info with name and address of broker-dealers

Rule 137: Persons not participating in an offering

In order to be allowed to have a research report the issuer cannot have had a blank check, shell or penny stock offer within last 3 years

Research reports can be distributed by non-affiliated dealers who receive no direct compensation

Rule 138: Nonequivalent Securities (nonconvertible debt or preferred stock)

The broker dealers can distribute and publish research reports.

If the report covers common stock, convertible debt or convertible preferred stock of an issuer, the report maybe published if it is regarding the nonconvertible debt or preferred stock.

Rule 139: Research Reports Are allowed to publish and distribute if the issuer is subject to 1934 act or is a well-known seasoned issuer.

If certain criteria are met

Cannot be initiation or re- initiation coverage of the issuer or security

Industry specific reports cannot display one security with more prominence

Rule 144a offering are also not considered offering or advertising

Reg S is not considered a selling effort

Rule 168: allows the issuer to continue to publish or disseminate regularly released factual business and forward looking information at any time.

Factual info includes: o Information about the issuer o Information about the business or financial development of the issuer o Ads of info about the issuer’s products or services o Dividend notices o Info in reports filed with eh SEC under Securities Exchange Act of 1934

Forward –looking info: o Earning Forecasts o Future management operation plans o Statement about future economic performance o Information in reports filed with the SEC This does not include info about a registered offer or activities in the registered offering does not quality as factual business info.

Rule 169 : allows a Non-reporting issuer to continue to publish or disseminate regularly released factual business information.

Electronic Road Show Road show conducted over the Internet (a graphic communication) considered a free writing prospectus

Live shows (oral) Taped (Graphic communication)

If the issuer is non-reporting (equity or convertible securities) then the issuer must file the road show with the SEC at time of registration.

Unless it is a Bona Fide electronic road show (discussed shortly used for IPOs only)

Rule 415:

Reforms: if meets the requirement can be used 3 years after initial effective date other wise should be sold with 2 years

§ An offer that begins immediately and last greater than 30 days § Registered on Forms S-3 or F-3 and is sold immediately and in the future on a continuous basis

Rule 145: Reclassifications

Subject to 145: § Reclassifications § Mergers/Consolidations § Transfer of assets

Not subject: § Stock Splits § Reverse Stock splits § Change in Pas value

ADR’s (American Depositary Receipts)

Carry voting rights, Priced in $’s , pay $ dividends but ADRs are sensitive to currency risk Series 24 CH1 21-24

Exemptions (No matter what are still subject to Anti-fraud provisions of Securities act of 1933)

Exempt Securities:

• US Government and agency securities • Municipal Securities • Securities issued by Nonprofit orgs • Short-term corporate debt (less than 270 days) • Securities issued by domestic banks and trusts (but not bank holding companies) • Securities issued by small business investment companies (exempted by federal legislation)

Rule 147: Intrastate sales exemption


Issuer derives 80% of its gross revenues within the state 2. 80% of issuers assets are within the state 3. 80% of proceeds of the sale must be used for business within the state

100% of the securities sold pursuant to Rule 147 must be to residence of the state

Must wait 9 month before selling to someone outside the state Before the 9 months must sell to someone in the state

Regulation A:

Aggregate offering price: max of $5 million with in 12 months may be sold.

No more than $1.5 million by selling shareholders

Offering Statement: Cannot make a written or oral offer unless Form 1-A offering statement has been filed with SEC. Considered qualified on 20th calendar day after filing

Preliminary and final offering circular: must be furnished to prospective buyers at least 48 hours prior to mailing of confirmation statements (with final prospectus)

Exempt Transactions:

Private Placements or REG D

Regulation D • Must file Form D with SEC no later than 15 days after first sale • Under $1 Million can sell to any one accredited and 35 non accredited investors (needs offering memorandum) • Over $1 Million allows an unlimited number of accredited investors to purchase must sign a investment letter which states that the securities are unregistered and can only be resold if registered.

• Cannot advertise within the general public or open investment seminars • Over $5 million non accredited investors but have ability to gauge the risk • Securities are Restricted because they need to be registered in order to Resell • Must disclose relationship between issuer and purchase rep

Accredited investors • Financial institutions • Any director, executive office, or general partner of issuer • Individuals who meet financial tests (Net worth greater than $1 million) or Income over $200,000 (w/ spouse $300,000) Purchaser Representative- a person who represents potential purchasers who are solicited to buy securities pursuant to REG D and Cannot own 10% or more of company, nor be affiliated with issuer unless a close relative to the offeree.

Ep 155: Before Trading or Investing in an IPO: What YOU Should KNOW!

Offering Memo- issued only if nonaccredited investors are offered securities it in tales detailed financial information of issuer

Series 24 CH1 27-30

Rule 144: permits the resale of restricted stock under certain conditions

Control Stock: stock acquired by an affiliated person of the issuer in the open market

Holding Period: 1 yr holding period for restricted stock, begins with purchase and must be fully paid at time of purchase.

Holding period applied to:

• Individuals who purchases and wished to sell • Individual who acquires stock as a gift • Securities acquired by a trust from a beneficiary • Securities acquired by a pledged from a pledgor

If person is deceased then it can be sold but estates are subject to rule 144

Control Stock does not have a holding period

Exception- Person has not been affiliated for 3 months prior to sale and has held the stock for at least 2 years.

Broker transaction- transactions not involving solicitation Exception: • A broker may make inquiry of a customer who has indicated an unsolicited interest in the securities with in preceding 10 days • The broker may make inquiry of another broker that has indicated an interest in the security within the last 60 days.

Notice of Sale : must file a Form 144 unless it is less than 500 shares or $10,000

Limitation of Amount: 3 month time period, IF exchange listed cannot exceed 1% of total shares outstanding or the average weekly volume of the past 4 weeks.

IF over the counter the limit is 1% total shares outstanding

Rule 144a- Permits the sales of restricted stock ( except for the sales by the issuer) to Qualified Institutional Buyers QIBS with out conditions of rule 144 (seller does not need to be QIB)

QIBS (three part test)

1) Insurance companies 2) Registered investment companies 3) Small business development companies 4) Private and public pension plans 5) Certain bank trust funds 6) Corporations, partnerships, business trusts, nonforprofits 7) Registered investment advisers

Second: must buy for its own account or other QIBS

Third: Buyer must own $100 million of securities of issuers not affiliated with the buyer

Regulation S: Sale of U.S.

company stock issued outside the U.S.

Transaction must be offshore. (no offer is make to a person in the US or the transaction is not facilitated in the US

Reg S may not be resold to US investors because of the Distribution compliance period. Usually 40 days for debt securities and 1 year for equity

CH2 1-4

Underwriting securities

TYPE Liab for unsold shares

Firm Commitment YES Syndicate must absorb losses in unsold shares Best Effort NO Unsold shares are returned to issuer Best Effort: All or None NO Offer is canceled if all shares are not sold Best Effort: Mini-Maxi NO Offering is canceled if set minimum is not sold, but sale may continue up to preset maximum Stand-by YES Syndicate agrees to buy any shares not purchased by shareholders in rights offering

Distribution of Securities

Syndicate- Broker-dealer forms a syndicate and takes the role of syndicate manager (managing underwriter)

They then create an agreement among underwriters or syndicate agreement.

The role of the syndicate is to guarantee (underwrite) the sale

Selling Group- the syndicate will sometimes recruit other broker dealer to assist in the sale. Must sign a selling group agreement, which describes the relationship.

Selling group does not assume financial liability.

Syndicate Practices

Underwriting Spread- difference between investing public and issuing company

Typical Spread Manager's fee 0.1 Underwriting fee-earned by syndicate 0.2 Concession (selling group) 0.5

CH2 8-12

REG M Rule 101- Helped to prevent manipulation

Restricted period – can range from 1-5 days before pricing or when ever the broker-dealer becomes a participant.

Exception: • Transactions involving government and muni bond, investment grade nonconvertible and preferred stocks and RICS (2-9) • Actively traded securities , which are those with ADTV of at least $1 million , where public float is $150 million • Odd-lot transactions • Exercise of any options, warrant, right, or similar instrument • Unsolicited brokerage transactions and unsolicited purchases when acting as a principal

Research- Referring to covered securities reports they my be distributed during the restricted period if they meet the conditions of rules 138 and139 of securities act of 1933

Rule 102: Activities of issuers

Issuing insiders are prohibited from supporting or raising the price of stock before an IPO

Exception- • Issuers may not bid for or purchase the following: • Actively traded securities of the issuer or an affiliate • Basket transactions involving a covered security • Inadvertent transactions

Rule 103:Passive Market Making

Permits distribution participants to continue making markets in a Nasdaq stock that is the subject of an offering during the rule 101 restricted periods but only on a passive basis.

Rule 104: Stabilizing- is the placing of any bid or effecting of any purchase, for the purpose of pegging, fixing , or other wise maintaining the price. Although it is manipulation the SEC has considered it benefits

The max price a stabilizing bid can be initiated is the public offering price.


Stabilizing when the Principal market is open-

The bid must be initiated in any market at a price no higher than the last independent transaction price for the principal market.

IF: 1) security traded in principal market, when day stabilizing is initiated or the preceding business day

2) Current ask price is equal to or greater than the last independent transaction price


The price stabilization may be initiated is generally limited to the lower of the price at which stabilization could be initiated in the principal market at its previous close or the last independent transaction or bid in the market.

Can be raised to match independent bids of the market

Disclosure: If stabilization occurs, the market must disclose the purpose of the stabilizing bid

Rule 105: Short Sales in Connection with an offering

Securities from an offering may not be used to cover short sales affected during a period beginning five business days prior to the pricing of the offering and ending with the pricing of the issue Does not apply if not conducted on a firm-commitment basis

Underwriters cannot make all- or none unless 1) all the securities being offered are sold at a specific price and time 2) issuer receives the total amount it is due by a specific date

Disclose of interest- broker/ dealer must give or send the customer written notice disclosing its participation in the distribution before the completed transaction

CH 2 16-18

Selling syndicate- is a group distributing securities under an agreement that imposes a financial commitment on its members.

Can a registered representative buy an ipo

Selling group-is a group distributing securities under an agreement that does not impose a financial commitment on its members.

Nonmembers: (suspended nasd members) : nonmembers cannot join in syndicate or selling groups.

This does not apply to foreign broker-dealers. Although they must follow the same rules

If issuer if selling to public and has hired agent, then no nasd member firm can participate.

Review of Underwriting Agreements Usually submitted by managing underwrite (to nasd for review)

• Estimated max public offering price • Estimated max underwriting discount • Estimated max reimbursement for underwriting expense

Filing is required for most offers including REG A and intrastate offerings

Filing must be no later than one day after filing of any registration

Exempt: U.S.

government sec, Municipal sec, redeemable share investment companies, variable contract and private placements.

Exempt from filing requirement: Investment grade debt and preferred stock, other securities of issuer outstanding (debt and preferred stock)

Fairness of compensation

Nasd Reviews all that a member firm participates, but will not pass judgment on merits of issue of public offer price.

Factors: # of shares purchased by the underwriter, time when shares are purchased, cost of stock in relation to public off price.

Shares received from the issuer by the underwriters that exceed 10% of the total offering will be considered unreasonable.

Option or warranty are considered unfair if they exceed 5 years duration or can be exercised on more favorable terms.

Compensation- in addition to the underwriting discount, any payments to underwriters for costs not usually borne by issuer are included in compensation

Examples of expense not considered compensation: blue-sky fees, printing costs, accountant fees

Restrictions- the sale of securities acquired in connection with an offering is restricted for a period of 6 months following the effective date

Selling Concessions: Can only be given to bona fide service providers who are broker-dealers in investment banking.

Must sign a written agreement that is will comply with the NASd rules on selling concessions

Settlement of syndicate accounts: syndicate manager of a firm-commitment must no later than 90 days following the settlement date, provide each syndicate member with an itemized statement of syndicate expenses.

CH2 22-27

Rule 2790 (The New Issue Rule)

NASD member firms should make a bona fide offering of new issues and not withhold any shares for its own account, any employees or industry insiders.

Can an IPO Representative enforce a trademark?

Also restricts the sale to accounts with restricted persons have beneficial interest.

Exception: personal of Limited broker dealers

New Issues are ALL IPOs of equity securities that are sold under a registration statement or offering circular.

NOT NEW Issues: • Secondary offering • All debt offerings, (convertible and non-investment grade) • Private offerings • Preferred stock and rights offerings • Investment company offerings • Exempt securities as defined under the securities act of 1933

Preconditions fro sale

Affirmative statement- a form that positively declares that an account is eligible

Firms using electronic communication may not rely on oral statements

Selling firms must re-verify eligibility every 12 months and retain copies of all information and records for a minimum of 3 years

Prohibited Sales: Cannot sell to a restricted person and a member firm cannot buy new issues unless it is exempt

Restricted Persons Is not permitted to purchase any shares of a new issue unless an exemption applies.

Nasd member firms an any associated person of the member firm Immediate family of an employee of a member firm (spouse, children, parents, siblings, In-laws)

Immediate family is considered restricted if all 3 condition apply 1. The employee gives/receives material support to immediate family. Material support is 25% or more of the persons income 2. The employee is employed by the member firm that is selling new issues 3. Employee has the ability to control the allocation of the new issue

Other restricted persons: Finders and fiduciaries, Portfolio managers, person who owns a broker-dealer

General Exemptions:

New issues can be sold to the following accounts

• Investment companies registered under the investment company act of 1940 • The general or separate account of an insurance company • A common trust fund • Account were beneficial interest is less than 10% • Public traded entities other than broker-dealer or its affiliates that engage in the public offering of new issues • Foreign investment companies • Erisa accounts, state and local benefit plans

Broker-dealer can purchase shares of new issues if the offer is undersubscribed

Restricted persons can purchase shares of new issues in order to keep the their equity at the same level (Anti-Dilution).

Must have owned the shares at least 1 year prior and new shares must be held for three months following the effective date

Issuer-Directed Securities Entites that control or are controlled by an issuer may purchase shares of a new issue if the issuer specifically directs them to.

EX. The parent company of an issuer, the subsidiary of an issuer, employees and director of an issuer

Allows registered representative to purchase shares of equity IPO if the issuer is the employing broker-dealer

Securities taken in trade: Can exchange owned shares and trade for securities being distributed. Principal capacity (must be purchased at fair market) , Agent capacity (member charged a normal commission for securities that are sold)

Affiliate- an entity that controls, is controlled by, or is under control with member.

Assuming that corporation owns 10% or more of stock member or partnership where any partner owns 10% or more.

Employee purchases- Employees can purchase if the sold being sold is: • The member company • A parent company of the member • An entity, which wholly owns the member • An entity, which owns at least 51% of the stock of the member • An entity that would become a member or parent of a member as a result of the transaction

Qualified independent underwriter (needed when underwriter is selling its own stock) • Participates in the preparation of any offering documents and would exercise the same due diligence as any underwriter, even if not actively selling the securities • Unless the security is investment grade, then the underwriter must provide a pricing option for the new issue and the new issue can not be sold at a price.

International forex market view

• Must have engaged in investment or securities business for 5 years and has seen offers of similar size • Cannot have been convicted of fraud in the past 5 years

Disclosures (Registration statement, offer circular, or similar docs) • Must disclose that the offer is made under the provisions of the NASD • Must include a date by which the offer is expected to be complete • Include the name and responsibilities of any qualified independent underwriters

Recommendations- Member firms are required to maintain on file the basis for its recommendation to its customers.

(On discretionary power , must obtain the clients written consent, even though it holds discretionary power)

Filing • Underwriting agreements for member proprietary offers must be filed under the corporate financing rule.

• When firm is issuer, it is responsible for filing the required docs and fees • In case of affiliated, the managing underwriter is responsible for filing • If no manager then the member affiliated with issue must file

Direct Participation Programs (DPP) A direct participation program is an investment that provides for the flow-through tax consequences to the investors in this security. Types: Limited partnership, joint venture, subchapter S corporation and similar programs

NOT DPP’s Real Estate Investment Trust(REITS), Pension plans, investment company securities, and tax-sheltered annuities


Full disclosure must be made on this areas: Compensation, Physical properties, tax aspects, the financial condition and experience of the sponsor, risk factors and appraisals on properties.

Must also believe that the client: • Will be in a financial position to realize the tax benefits of the program • Has the financial resources to assume the risks and lack of liquidity • Meets all suitability standards

Members must maintain records showing the basis for determining suitability.

Need written approval on discretionary accounts for transaction

Limits to DDP Compensation Max compensation is 10% gross dollar amount of securities plus .5% of the proceeds for the reimbursement of bona fide due diligence expenses. If firm is an NASD member then the total cap is 15%

Rollups- a limited partnership rollup transaction is one that involves the combination or reorganization of one or more limited partnership.

NASD Compensation on Rollups • No more than 2% of the exchange value of the newly created securities • Paid regardless of whether or not the partners reject the proposal

CH3 1-3

Exchange Markets


Distribution and size- Public shares of at least 1,100,000 with market value of $100,000,000 ($60,000,000 for IPO/Spin-off)

Financial criteria- • Pretax income over three years of $10,000,000 • Operating cash flow of $25,000,000 over last 3 years, with positive amounts each year • Average Global Market Capitalization of $750,000,000 with revenues of $75,000,000 for last fiscal yr

Unlisted Trading Privileges- in some cases the securities are not listed because of inability to meet exchange requirement.

Yet these can still trade on other exchanges such securities are said to have Unlisted Trading Privileges.

The Role of the Specialist

Specialist- must be approved by NYSE for each stock in which they specialize. In addition to maintaining the book of orders, they are responsible for balancing buy and sell orders to arrange an equitable opening price.


Agent- matching the customer with counterparty when market conditions allow

Principal- Trading from their own account. This trading must be down in order to maintain a fair and orderly market. They are prohibited from make a transaction other wise

Fair and orderly- means one in which there is price continuity and reasonable depth. This also covers the idea of Trade imbalances. which is where the specialist act to create liquidity.

The specialist also cannot compete with public orders

Stopping Stock- is a guarantee given by a specialist to a floor broker that the broker’s order will be executed at a specific price unless a better price can be obtained in the crowd. (only for public accounts)

Automated Trading Systems-

NYSE- uses SUPERDOT (designed order turnaround) It can take market and limit and takes round and odd lots

Orders are entered at the branch and are routed directly to the specialist

CH2 7-9

Types of Orders

Market order- Executes at whatever price the market is when it reaches the floor.

Will always be executed

Limit order- Wanting to buy or sell at a specific price. It can only execute at a specific price or better.

Buy limit- executes at limit or lower Sell limit- executed at limit or higher

Usually it is given to a specialist to hold until he can execute.

It is possible that the order will not be executed if the limit is never met or there might be stock ahead (other orders at the same price with a higher priority)

Stop Order- a stop order becomes a market order to buy or sell once a stock trades to or thought a specific price.

The Stop price is the specific price that activates the market order. Thus the order will execute but there is no guarantee of the execution price.

Sell Stop Order- A sell Stop order is always placed below the current market price. It is used to limit a loss and protect profits

Buy Stop Order- - A order that is always placed above the current market price. It is typically used to limit a loss or protect a short sale

Stop Limit Order: a stop- limit order is similar to a stop order except that it becomes a limit order when the stop price causes the activation.

It is a combination of a stop order and a limit order. But exposes the risk that the investor misses the market

Sell Stop- Limit Order- is always placed below the market price and once activated it become a sell limit order.

Buy Stop-Limit order- Always placed above the market price and once activated it becomes a buy limit order


Day-Order= If not executed in the days trading it is canceled

Good-Till-Canceled(GTC) or Open Order= remains in effect until executed or canceled

At-the-Open= order to buy or sell at opening price. If not executed it is canceled

At the Close= order executed at the Closing Price.

If closing price cannot be obtained to the order must be canceled.

MOC- Market on close LOC- Limit on Close

Not-Held(NH) = this gives the broker discretion as to the time and price on and order.

If the broker cannot execute or find the best price the order is canceled and the broker is not held responsible.

Immediate- or- cancel (IOC)- State execute as much of the order as possible immediately and cancel the rest


1) Price 2) Time 3) Size

CH2 12-15


Bids and offers NYSE Brokers- must communicate promptly their bid and offer(size) to a reporter for dissemination to the public If a bid or offer is revised or canceled it must be reported Reporting can be suspended if accurate reporting is not possible

Rule 61- All bids and offers in the NYSE trading crowd be for round lost or multiples of round lots.

Thus if I am selling 500 and 41 but someone is buying 200 at 41 I would be left with 300 shares with 200 sold at 41

NYSE Rules 91- A member(acting as a specialist) is prohibited from filling an order to purchase securities by selling the securities from any account in which it or for any account that an approved person of the firm

NYSE Rule 92- A firm member is prohibited from entering a proprietary order for a listed security if the person entering the order has knowledge of an existing customer order on the same side of the market that may be executed at the same price.

Also prohibits members from trading along with a customer who is an individual investor trading in his own name.

In order to trade along a customer must be an institutional investor and must provide permission to the firm on a case-by-case basis.

Circuit Breakers- Are periods of high volatility

Rules 80a- restricts index arbitrage strategies if the NYSE composite changes by at least the ( 2% value) at the beginning of each calendar quarter

Rule 80B- Dow Jones Industrial Average (DJIA)

Cause Level 1 10% Before 2pm- 1 Hour 2-3PM: 30 Minutes 2:30+: trading continues Level 2 Level 2 20% Before 1pm- 2 Hour 1-2 PM: 1 hour 2:00: trading is halted for the remainder of the day Level 3 30% Suspended for the day Pending and open customer- turn into GTC

NYSE Rule 97- Block positioned- min net capital- $1,000,000, A block of stock is considered to have a value of $ 500,000 or more.

Prohibits a member firm, that has purchased stock as a principal from a customer in a block sale, from purchasing additional shares of subject security on a plus tick during the last 20 min of trading day

Exceptions: • Has information barrier procedures that would limit knowledge of customer orders throughout the firm • Is effecting a transaction to hedge a position that is economically equivalent to a short position acquired in the course of facilitating a customer order • Makes a transaction for bona fide arbitrage reasons or to participate in the trading of securities of a company that is part of publicly announced reorganizations (merger, acquisition, consolidation) • Is trading to offset another transaction that was made in error • Is facilitating the conversion of options • Has a specialist that is trading stocks in which he is registered • Is facilitating a block sale or basket of stocks by a customer • Is facilitating a customer’s existing order to purchase a block, or specific stock within a basket, or a stock that is being added to reweighed in an index at or after the close of trading.

Can a registered representative buy an ipo

Must record transaction and show that the # of shares does not exceed the number needed to fill the customer order • Is enacting a transaction because of a stock’s addition to an index or an increase in stocks weight to an index. Cannot exceed the number of shares required to rebalance.

NYSE RULE 127- Crossing a Block: (block of at least 10,000 shares or $200,000 market value which ever is less)

If a member firm receives a large block order of stock that might not be absorbed by the market .the firm should explore the market.

If the firm intend to cross the block at a set price , they will need to follow certain procedures.

Proxies- rule 450: member firm cannot vote on proxies of securities that it hold in street name for customers. Proxy should be forwarded to the customer at issuing corporation expense.

If the customer fails to respond then the member firm may vote.

Except if it is a investment manager of stock held by an ERISA plan which reserve the right to vote the proxies itself

Erroneous Reporting: Rule 411- the price at which an order is executed is binding even if an erroneous report is rendered to a customer. An Erroneous report of a transaction that was not in fact executed is not binding on the member firm.

Conversely, if an order is transacted and an erroneous report is sent indicating that the order was not transacted, the execution will be binding on the person entering the order

Prohibited Activities-

Manipulative activities- this includes a series of purchases at successively higher prices, or a series of sales at successively lower prices. If the purpose was to improperly influence the price of the security.

Circulation of rumors- a sensational nature designed to influence the price of a security is prohibited.

Prearranged trades- are not permitted. An offer to sell coupled with offer to buy at a higher price

Prohibited from publicly offering to: • Buy or sell dividends • Bet on the course of the market • Buy or sell privileges to receive or deliver securities

NYSE 409: for every account that there was money or securities in the preceding quarter.

A member firm must send an account statement showing securities and money positions and entries. Can hold mail for 2 months if traveling domestically and 3 months if it is a broad.

CH4 1-5

Securities Exchange Act 1934 Focus is on the registration and sale of new issues

Covers: • Regulation of transactions in the secondary market, including antimanipulation rules and regulation of the extension of credit in securities transactions • Registration and regulation of broker-dealers • Oversight of industry self-regulatory organizations (SRO) • Registration and regulation of companies with securities trading in the secondary market, including regular financial disclosure, proxy rules, and insider reporting

Exempt: US Government securities and municipal securities

SEC: The Act of 1934 created the Securities and Exchange Commission.

It is in charge of enforcing the securities laws and with creating rules to implement. Members are appointed by the president with consent with the Senate.

5 total commissioner, with 3 or less of one party affiliation. Members are appointed for five years

Interstate Commerce: “trade, commerce, transportation, or communication among the several states, or between any foreign country and state”

Does not cover: Foreign stock exchanges

Violations of the Exchange Act Max fine of $1,000,000, imprisonment for ten years, or both, for individuals. For business entities the max fine is $2,500,000.

If violators can prove they were not aware of the rule, can opt to not be imprisoned

Registration and Reporting Requirements

• Stock exchanges must register with the SEC • If a Public Company has more than $10,000,000 in assets or 500 shareholders or is traded on an exchange it must be registered with the SEC (in addition to 1933 securities act) • Rules 13a-11 and 13a-13 require issuers of securities to file an annual 10-K and quarterly reports 10Q (except foreign governments, foreign private issuers, ADRS) • 8-K forms are needed to report material events • Nasdaq interdealer quotation system- File reports on 10-C under certain circumstances.

5% of greater change in amount of securities outstanding or changes in the corporate name

Insiders- is a director, officer or owner of 10% or more of the stock of a corporation. Have ability to control the corporation. Must report becoming an insider with in 10 days to the SEC. Must report changes in positions within 2 business days. Form 3 is initial filing form and Form 4 is beneficial ownership changes.

Short Swing Profits- are profits earned within six months of purchase.

• Insiders are prohibited from selling affiliated stock short.

• Also applies if insider sells stock held over 6months is sold and the bought back for less within 6 months

Disgorgement- when a corporation sues for recovery of profits

5% owners- anyone who acquires 5% or more of issuers securities should notify the issuer, the exchange and the SEC.

Proxies- Sec does not require proxies but does require certain rules on them

• Must be filed with SEC

Purchases of Equity Securities by issuer

• If a registered company purchases its own stock or a tender offer then it must file a report with the SEC • Schedule 13e-3: is used to report repurchases to cause any class of equity securities that effect the listing of a stock or that would cause less than 300 shareholders • Requires financial statements for the last 2 fiscal years and latest ytd period

Rule 10b-18: was created to control how and issuer, or its affiliate, may buy its own stock in the secondary market.

If the following conditions are met the SEC will assume it is not manipulation • One broker-dealer to place bids and makes purchases on any trading session • Avoid making purchases at certain times of the day. If the securities are actively traded it is prohibited to trade in the last 10 min of trading. For most securities cannot be first transaction or during the last 30 mins. • Limit the bids or purchases of at certain prices.

May not be higher than the last highest independent bid or last transaction. For all others no higher than highest independent bid obtained from three independent dealer • Limit the amount of stock purchased on any single day. Total single day volume cannot exceed 25% of the ADTV. If trading under 25% then the issuer may effect one block purchase a week if not other 10b-18 purchases were made

Block Purchase- quantity has a purchase price of over $200,000 or is at least 5,000 shares w/purchase price of at least $50,000 or is at least 20 round lots that total 150% or more of trading volume

After market wide trading suspension is relaxed provided • The reopening of trading to the close of trading on the same day as the imposition of the market-wide trading suspended or • At the next day’s opening, if the market-wide trading suspension was in effect at the scheduled close of trade

In either event volume of purchase cannot exceed 100% of ADTV

Ch 4 9-14

Antimanipulation Rules- prohibits (a) short sales of listed securities and (b) manipulative or deceptive device or contrivance” employed on an exchange or over-the counter

Short Sales: (regulated by SEC rule 10a-1 and SHO)

May be made only on a plus or zero-plus tick.

Ex. Plus tick 49 49.1 (+) 49.2 (+) 49.1 (-)

Ex. Plus zero 49 49.1(+) 49.1( + zero)

Can not trade on minus ticks or minus zero ticks

All Sell orders are marked Long or Short: if the broker believe the stock is in possession can be marked long but if it is not held should be a short sale

Position is Long for purpose of short sale if • Has time to security • Has entered into an unconditional contract to purchase the security but has not yet received delivery • Owns a security convertible into the one sold and has tendered it for conversion • Is long an option or warranty and has exercised the option or warrant

If you hold a convertible security but has not been tendered it is not considered long Also if warrants or options are held but not exercised the position is not long

Selling short against the box: owns the stock that is being sold but intends to effect the delivery by borrowing the same number of share, retaining the stock held in the long account.

Investor Information Menu

Same up-tick requirements as short sale

Senior officers cannot sell the securities of there own company short!

Dividends: if a dividend is declared on a stock, the price of the stock will be reduced by the amount of the dividend. This is not considered a down tick and the price will be adjusted at close

Exceptions- some short sales are beneficial to the market or carry little risk of manipulation. • Arbitrage activities • Hedging activities of block positioners • Odd-lot offsets by odd-lot dealer • Overallotment in a new issue • Activities of exchange specialists exchange market makers and third market makers

Short Sales and Recommendations: If a customer accepts a purchase recommendation from a broker-dealer that supplies the stock to the customer by selling it short, the brokers is required to make a covered purchase promptly in order to effect delivery to the customer

Insider Trading- the purchase or sale of securities using material, nonpublic information about those securities in a fraudulent manner.

If a corporation has material information, it must release it to the public before anyone may use the information to do a transaction

Unlawful with the purchase or sale of security • Employ and device, scheme, or artifice to defraud • Make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statement made , in light of the circumstances under which they were made , not misleading • Engage in any act, practice or course of business that operated or would operated as a fraud or deceit upon any person

A sales of a security based upon untruthful statements or omissions of material fact can be held liable to the purchaser unless the sell was not aware of the untruthful statement or omission

Tippers/ Tippees If a tipper tells a tippee confidential info, then both are in violation of insider trading rules.

The Insider Trading and Securities Fraud Enforcement Act of 1988 ( and ITSA insider trading sanctions act)

Broker/dealers are required to establish, maintain, and enforce written policies and procedures reasonably designed. Key Procedures • A system for monitoring employees’ personal trading and trading in firm proprietary accounts • Restriction or monitoring of trading in securities when the firm has access to inside information • Procedures to restrict access to file containing confidential information, including the establishment of information barriers • Education of employees regarding insider-trading issues

Information barrier procedures- a set of procedures for preventing the transmission of confidential information from one department to another within the broker-dealer (Chinese walls)

The burden is on the dealer to be able to show that they are adequate

Consequences of insider trading violation

Civil Penalties- up to 3 times the amount of the gain, or loss avoided.

SEC can also ask for disgorgement of profits

Criminal Penalties- ITSFEA states: fines up to $5million and imprisonment up to 20 years, for each violation. Corporation and other non-natural persons may be fined up to $25 million per violation

Bounties- the acts allows for granting of bounties for information leading to payment of penalties not greater than 10% of the penalty.

Manipulation: consists of wash sales, matched orders and poll activities

Wash sales- represents the purchase and sale of securities by an individual without an beneficial change of ownership for the purpose of raising or depressing the price of the security .

Matched orders are similar to wash sales, they are when two persons acting together to buy and sell a security for the purpose of raising or lowering the price of a security

Manipulator can be sued but the suit must be within 3 years of the activity or 1 year of the discovery

Trading Suspensions and Emergency Authority

The Sec may: • Suspend trading in any security(except exempt) for a period not exceeding 10 business days • Suspend all trading on any national securities exchange or otherwise (except exempt) for a period not exceeding 90 days.

Can be overturned if the president disapproves of the suspension

Emergency authority- the sec must determine that the order is in the publics interest and for the protection of investors: • Maintain or Restore fair and orderly securities markets (except exempt) • Ensure prompt, accurate and safe clearance and settlement of transactions in securities (other than exempt)

Emergency order must be less than 10 days

Emergency- means a major market disturbance characterized by a) sudden and excessive fluctuation of securities prices generally, or a substantial threat of such fluctuations, that threaten fair and orderly markets b) substantial disruptions of the safe or efficient operations of the national system for clearance and settlement of securities

Ch 4 20-23

SEC rule 11Ac1-5

Requires market centers to disclose order execution information.

Market center- is any national securities exchange, alternative trading system, OTC market maker, national securities association, or a member firm that internalizes order.

Required to produce monthly electronic reports that include uniform statistical measures of execution quality for covered orders.

Registered Representative (RR)

Covered securities- are defined as any Global market system security and any other security for which transactions repost, last sale data or quotation information is disseminated

Covered order- is any market or limit order received and executed during normal business hours.

This includes immediate or cancel, but exclude any order in which the client provides special instructions. (Must be made public)

SEC Rule 11Ac1-6

Requires that broker/dealers disclose non-direct customer order-routing information through quarterly reports.

Directed order- designates where the customer want the order to be executed

Non-direct order- has no market center designation, the broker-dealer chooses the place of execution

Report must disclose • Market center that non-direct orders were routed • Payment for order flow • Internalization • Profit-sharing arrangements • Info is also posted on the internet website, free of charge and accessible to the public Upon request: The market center to which a person’s order was routed can only be done within 6 months at no charge to the customer.


De Minimus level of orders- firms that route less than 500 orders a quarter are exempt from quarterly reporting. But upon request must prove to customers and notify them of this annually

Insignificant Execution Venues- broker/dealers must disclose only the execution centers to which the most orders are route. Less than 5% of non-directed order is not mandatory for report inclusion.

Tender Offers- is an offer to buy stock of a company at a specific price. Often done to gain control. A person who is making a tender for stock may not buy the stock or a convertible bond of the same issue during the period of tender is open.

Tender offer practices: • The offer must be made public no later than 9am(eastern) on the business day after the scheduled expiration date (the offer must state the approximate # of shares tendered to date.

• Shareholder must be notified of tender no later than 10 business days from date tender was made

• Management of the subject company must advise shareholders of whether they recommend or decline the tender offer

• Tender offers must generally be held open for at least 20 business days from the time they are announced to holders

• If the person making the offer increased or decreased the % of the class of securities being sought, the consideration offered, or the dealer’s soliciting fee, the offer must remain open for at least 10 business days from the date that notice of the change is given to holder

• It is considered fraudulent for a person making a tender offer to fail to pay the consideration offered, or to return securities tendered, promptly after the offer is terminated or withdrawn.

Inside information and tender offers: associated person with knowledge of material nonpublic information that has been obtained through the offeror, the company subject to the offer, are prohibited from trading in securities on the target company.

Associated persons of the company attempting a tender include: • Officer • Director • Partner • Employee • As well as anyone acting on behalf of the offeror

Partial tender offers- the exact number of shares that will be accepted from any person tendering stock is unknown until the tenders are accepted. Once the tendered securities are accepted, the investor must convert the equivalent securities into the tendered security and make delivery

It is illegal to short tender(tender when one does not own)

Partial tender offer (long owner) • Has title to stock • Has entered into an unconditional contract to buy the stock but has yet to receive it • Owns a call option and has exercised the option

When determine a investors net long position- long puts are not obligated to sell thus are not considered in the position

Ch4 26-31

Registration of Broker-Dealer

Firms must file Form BD with the SEC

They are then subject to Exchange Rules covering: • Minimum financial standards • Protection of customer funds and securities • Books and records to be created and maintained • Disclosures to customers • Manipulative, deceptive, or fraudulent practices

Foreign Broker-Dealer

If a foreign broker/ dealer operates an office in the U.S.

generally must register with the SEC. Unless it is a subsidiary that is not engaged in the securities industry. Also exempts foreign brokers that don’t have U.S.

home offices from registration under certain circumstances • If the foreign dealer only effect unsolicited transactions. § Solicitation- includes phone calls encouraging to use the dealer, ads on broadcast or publications, investment seminars for US person. • Research reports are considered solicitation under this rule unless. • 1) the reports are distributed by a U.S. Registered broker-dealer • 2) U.S.

Broker accepts responsibility for the content • 3) report directs all orders to the U.S. Broker • 4) all orders are in fact executed by registered broker-dealer • Foreign broker-dealers may contact U.S. institutional investors if trades are booked through U.S. Registered dealer, with in person visits must have a U.S. Broker dealer present (unless assets exceed $100 million or a major institutional investor) • Foreign broker-dealers may directly contact and execute transactions for select groups • Banks • Registered broker-dealers • Supranational agencies (world bank) • Foreign persons in the U.S.

• U.S. Persons outside the U.S NASD allows member firms to pay non-registered foreign persons a transaction related fee. Must provide the document to the ‘Referred” client

NASD- the power to manage and administer the affairs of the NASD and to promote the welfare, objectives and purpose of the NASD is vest in the Board of Governors

NASD administrative districts, which is headed by a district committee, which is an agent of the board of governors .

Membership- A broker or dealer that is authorized to transact investment banking or securities business in the United States is eligible for membership in the NASD. Except: • Individuals trading for their own accounts, but not as part of a regular business would not be a dealer thus not eligible • Broker or dealers that have been suspended or expelled from NSA or NSE • Brokers or dealers that are barred or suspended from association w NSA or NSE for conduct inconsistent with just and equitable principle of trade • Broker or dealer enjoined by a court from engaging as investment advisor, underwrite of broker, dealers, or another capacity in the securities industry • Broker or dealer that are deemed unsuitable for membership by NASD Board of Governors

Membership is dependant on compliance with the Board if Governors requirements on training, experience, and financial responsibility.

NASD members pay an annual assessment based on annual gross revenues from muni’s, OTC securities, U.S. government securities and exchange transactions.

Department of Member Regulation decides on applications, if the application is denied, Can appeal National Adjudicatory Council.

Can further appeal to the SEC

Failure to Pay Fees Failure to pay can result in suspended or cancellation upon 15 days written notice from the NASD

Executive Representative- is an associated person appointed by a member firm who is authorized to act on behalf of the firm in all official business between the firm and the NASD

Dealing with Nonmembers- Nonmembers must be treated in the same manner as members of the public.

This limits the ability for nonmember firms to transact business by not allowing them price concessions and discounts

Suspended Members- become a nonmember on the effective date of the expulsion.

All admission fees, dues, assessments and other charges paid to the NASD cannot be recovered

Broker-dealer membership is terminated if there registration is revoked by the SEC or if they resign from the NASD

Restrictions of dealing w/nonmembers • Securities issues or guaranteed by the United States • Securities issued by municipalities • Transactions on an exchange • Commission for execution of an order on an exchange even if the exchange member is not a member of the NASD

Member firms may not pay commission to a nonmember for execution of an order in the over the counter market

Foreign Broker-Dealers: are not treated like nonmembers, but must comply with the restriction of the rule as though it were a member of the NASD.

The Foreign Broker-dealer should treat non-members like the general public

Continuing Commissions- prior to retirement if there is a contract with member firms to receive such compensation.

Thus they would be a former member of the NASD and would not be allowed to solicit new order or accounts.

Penny Stock Regulations-

Penny stock- Low-priced OTC stocks, often quoted in pink sheets or NASD OTC bulletin An Equity that is priced less than $5 not included on any exchange or Nasdaq and whose issuer has not met financial standards of listed equity companies

Disclosure- Prior to effecting any transaction the broker-dealer must furnish the customer with a Risk Disclosure Document on penny stocks

For each penny stock transaction, the broker-dealer must disclose to the customers • Current Quotation for the security • Compensation the Broker-dealer will receive for the transaction • Compensation the registered rep will receive for the transaction

Monthly statement are required if the customer has a penny stock in his account for the month.

It must include: 1) the identity and number of shares of each penny stock 2) Estimated maker value of the security.

Exemptions: to penny stock disclosure rules

• Transactions with an institutional accredited investor • Private placements • Transactions with issuer, officer, director , general partners, of 5% owners • Transaction that are not recommended by the broker-dealer • Transactions by a broker-dealer whose commission and marker ups from penny stock do not exceed 5% of its total commissions and markups

Sales Practice required for penny stocks Prior to purchase must: Approve the person’s account for penny stock transactions Obtain from the customer a written agreement to the transaction w/identity and quantity of purchase

Account Approval Procedure: • Determine that the customer is suitable for penny stock transactions based on info about financials and investment objectives • Deliver to customer a written statement regarding the suitability determination • Obtain from the customer a manually signed and dated copy of the statement

Exempt from the cold call rule: 1.

Transactions w/ an Institutional accredited investor 2. Private Placements 3. Transactions with the issuer, officer, directors, general partners, or 5% owners 4. Transactions that are not recommended by the broker dealer 5.

Transactions by a broker-dealer whose commission and markup from penny stocks do not exceed 5% of its total commission 6. Transactions with established customers

Established customer- is one for whom the broker-dealer carries an account and who Has effected a securities transaction or made deposit more than one pervious year Has made three purchases of penny stocks (3 different issuers on 3 different days) Being established does not exempt it from Penny Stock Disclosure Rules

CH5 1-4

OTC Markets:

Most are unlisted securities • OTC has a wider range of capitalization • OTC is really a collection of markets developed to suit the trading characteristic of various issues • OTC is a Negotiated dealer market, Market makers competing with each other.

Broker-dealers in OTC • Don’t have to purchase a seat • Can act as an Agent or a Principal (or counter party • In the Agent or Broker transactions receive commissions • Where are Principal transactions profit are made by bid ask spread • Cannot act as both at the same time • Some Firms only conduct broker transactions in the OTC these firms rely on commissions and rarely act as principals • Riskless principal- Acts as a pass threw from another broker-dealer to customer account • Dealers are at the core of the OTC, help to provide liquidity

Market makers- a dealer that stands ready to buy and sell a specific security and is willing to take the other side of a customer transaction and helps provide liquidity

Market-Maker Quotes

Bid- willing to pay for security Ask- what you are willing to sell for

Size: it is assumed that the stock is sold in round lots of 100 thus if you are willing to buy 2000 and sell 3000 it would be 20by30

Retail customers orders are usually down(for the bid) or up(of the offer)

Mark up- The price the retail customer pays compared to what the broker bought it for

The inside market: Each security has on average 11 market makers at most 50 Lowest offer and highest bid is called the inside market Backing away- market maker fails to honor it quote and is a violating if NASD and SEC Rules This can result in $ fines or suspension of the firm

CH5 8-11

Pink Sheets: • Traditional OTC trading- • Paper version- from Pink Sheets, LLC • Electronic: EQS (electronic quotation services) • Pink sheets list, Market makers and their phone numbers (sometimes give bid ask) • Pink Sheet are Subject (static)- which means it’s not a quote and should be verified • There is uncertainty with companies traded and with making sure best price was obtained

NASD (best execution)- In any transaction for or with a customer, a member and persons associated with a member shall use reasonable diligence to ascertain the best interdealer market for the security and buy or sell in such market so that the resultant price it the customer is as favorable as possible under the prevailing market conditions

Should contact at least 3 dealer to get a real-time quote for customers.

Problem is the offer is only good when you are on the phone with the broker

NASDAQ- began Automated quotation system in 1971

Nasdaq helps to collect and disseminate real-time, firm quotes in selected OTC stocks. OTC Bulletin Board (otcbb)-is and automated version of pink sheets

The Third market- Over the counter sales of exchange-list securities or (The Nasdaq Intermarket)

Restrictions on IPOs : Cannot trade an IPO on a third market before the IPO is traded on the primary exchange.

(consolidated tape is proof)

Consolidated Quotation System- (CQS): attempts to reduce this problem by collecting quotes for all markets in which a listed stock trades and displaying them on one screen.

This includes common stocks, preferred stock, warrants and right that are registered or allowed unlisted trading privileges. CQS operates between 9:30am-6:30 pm

ITS- Intermarket Trading System: links national and regional exchanges.

I allows for one exchange to send and execute on another floor.

NASD members who are registered as market makers are permitted to participate in ITS thought Supermontage. NASD members not registered third market makers may not use ITS

The Fourth Market: Direct institution-to-institution trading, with out services of a broker dealer.

PTS- Propriety trading system- is set up to facilitate institution-to-institutional accounts.

The true fourth market activity is impossible to estimate, since there is no reporting requirement

Ch6 1-5

The NASDAQ stock market:

Corporate governance standards include • Keeping a min of 2 independent directors on the board • Maintaining an audit committee with majority independent directors • Provide shareholder with annual reports and make quarterly and other reports available • Solicit proxies and provide statements for all meeting • Refrain from taking certain actions or issues securities that would disparately reduce or restrict the voting right or existing shareholders

Issuers must amend registration statements if there is a material change

Although not technically a exchange it still has listing requirements, apply of listing , and be accepted by NASDAQ.

Securities not registered with the SEC like Eurobonds are not eligible

If an issuer is delisted, the issuer must reapply for listing as other non-listed companies and must meet initial listing standards

initial listing standards 1.

$15 million of stockholder equity 2. $1 million of pretax income (latest fiscal year or 2 of last 3) 3. Public float of at least 1,100,000 shares w/ MKV of $8million 4. $5 minimum bid price 5. 400 round-lot shareholders 6. at least 3 market makers

Initial Listing alternative 2 1. $30 million of stockholder’s equity 2. Public float of at least 1,100,000 shares with market value of $18 million 3.

2-year operating history 4. $5 min bid price 5. 400 round-lot shareholders 6. at least 3 market makers

Initial List Alternative 3 1. Either $75 million market cap or $75 million total assets, or $75 million total revenue 2. Public Float of at least 1,100,000 shares w/MV $20 million 3. $5 min bid price 4. 400 round-lot shareholders 5. At least 4 market makers

Once list it must meet one of the 2 alternative standards

Continued listing alternative 1 1. $10 million of stockholders equity 2.

public float of a least 750,000 share w/MV of $5million 3. $1 min bid price 4. 400 round-lot shareholders 5.

Permitted Activities of Registered Representatives

at least 2 market makers

Continued listing alternative 2 1. Either $50 million market Cap, or $50 million total assets, or $50 million total revenue 2. Public float of at least 1,100,000 shares w/ MV $15 million 3. $3 min bid price 4. 400 round-lot shareholder 5. A least 4 market makers

NASDAQ Capital Market Standards:

Capital Market Initial Listing Standards: 1.

Either $5 million of stockholders equity, or $50 million market cap, $750,000 net income 2. public float at least 1,000,000 shares w MKV $5million 3. $4 min bid price 4. at least 3 market makers 5. 300 round-lot shareholders 6. either 1 yr operating history or $50 million market Cap

Alternative 1 1.

Either $2.5 million equity, or $35 million market cap, of $500,000 of net income(latest fiscal year or 2 of last 3) 2. Public float of at least 500,000 shares with MV of $1million 3.

Can a registered representative buy an ipo

$ 1 min bid 4. at least 2 market makers 5.

Pre-market Purchases

300 round-lot shareholders

Nasdaq Service and Systems

Level 1- provides subscribers with inside market for each Nasdaq security was well as last sale and volume. Used mostly by individuals and registered reps

Level 2 Service- provides subscribers w/names and quotes of all registered market makers in each Nasdaq security

• Also shows the inside market • Displays Current total volume for the day, the last sale, high low price for the day and net change • From the screen can easily determine which market maker has the best price • All NASDAQ quotes are firm

Level 3- is only available to registered market makers in a particular security.

The info is interactive and quotes can be updated through level 3

Normal business hours 9:30 am eastern and closes no earlier than 4pm eastern. Business can stay open past 4:00pm eastern voluntarily remain open but must notify Nasdaq operations. Can close no later than 6:30 pm. Between 4:00pm and 6:30 pm is called extended hours

Registration as a NASDAQ market maker:

A broker dealer may enter quotes into Nasdaq only if it is registered as a Nasdaq market maker.

Must file an application with NASD It is effective when notified by the NASD Must also register in specific issues it wished to make market


• No NASD member or associated person may accept, direct or indirect for: § Publishing a quote § Acting as a market maker § Submitting an application in connection with market-making activity

Consideration- granting or offering securities on terms more favorable than those granted or offered to the general public.

Promoter- all persons other than the issuer or its affiliates who would have an interest in influencing a broker-dealer to makes a market in a security.

Ex. Advisor, accountant, attorney, someone who owns restricted securities of an issuer or who owns 5% or more of public float

The rule does not prohibit a member from accepting Payment for bona fide services Reimbursement for registration fees paid to the SEC

Primary market makers- is those that provide liquidity to market, as measured by specific performance standard however due to SEC order handling rules all NASDAQ market makers in securities are considered primary market makers

Ch6 9-12

Nasdaq Market Center (SuperMontage)

Supermontage: Is an order display, quotation, and execution system.

It allows for trading on Nasdaq Global Market, Nasdaq Capital market, and exchange listed securities and acts as the only system to access the quotes of Nasdaq market maker.

• Supermontage: displays 5 price levels for each security. o Including inside market and four best levels beneath

Order-entry firm: is a firm that enters an order into SuperMontage.

Navigation menu

Orders can be for customers and broker-dealers thus they may be market makers or non-market makers

Supermontage: accepts= market orders, marketable limits order and limit orders. Order of up to 999,999

Will accept short sales but will only execute if they comply w/ NASD short sale rules

NASDAQ market velocity- measures order activity within NASDAQ.

Including quotes, orders, updates and cancellations.

Quote types: 1. Market participant Entered- The market participant maintains its quote 2. Summary quote- allows several quotes at different price levels. 3. System Generated- When market participant quote is exhausted, Supermontage will generate a quote based on the market price

Automatic Quote Refresh (AQR) – Refreshes quotes when previous quote size falls below one round lot.

With price and size preselected by market participant. If participant has multiple quotes that might be better priced than the quote that would not be created by the AQR, then better-priced quote will be displayed

EX. MM#1 has 2 quotes 15.40 and 15.45 and AQR is set at $.1 and MM1# best offer is (15.40) but is decremented down to zero.

Then MM1# quote will increase to 15.45 not 15.50 because it is better-priced quote.

If there are no other participants quoting in the stock, the price will be refreshed by no lower than one tick inferior from the last valid inside market or no lower than one tick inferior from the market participant’s last displayed quote before the 30 seconds expired, which is less.

Reserve- Allows firms to maintain an additional amount of securities to trade unknown to market participants. In order to maintain must have at least 100 share (one round lot)

Once a Market Maker displayed and reserve size is exhausted then the market maker: • Manually enter new quote • Use automatic quote refresh

If a quote is not entered or automatic quote refresh is not used them Nasdaq will enter a quote on its behalf

New types of orders:

Non-Directed Orders- Liability orders are orders that create an obligation to buy or sell a security.

They are delivered to or executed against a market maker’s display, or reserve size or delivered to ECN. If orders are not sent non-directed may either be market orders or marketable limit order.

Preferenced order: are orders that are sent to a specific market participant that is at the inside market. Perferenced orders are entered into the non-directed order process previously described and considered liability orders.

If the market participant who receives the order is not at the inside market, the order will be rejected. IF partial fill then unexecuted portion will be returned to the sending firm

Trades on Supermontage- occur automatically(locked-in), except with manual executions.

Nasdaq market makers and UTP exchanges must accept automatic executions. Upon trade both parties are notified of the transaction and report is sent to NASDAQ and Clearing agency.

Ch6 16-19

Nasd operates: SuperMontage, CQS and the OTC Bulletin Board

ECN (not NASD operated)- an electronic system that widely disseminates to third parties orders entered by market makers and permits such orders to be executed against in whole or in part.

(doesn’t include- Crossing systems: such as ITG/Posit or internal broker-dealer order routing system

Can include institutional investors as well as broker-dealers ECNS are either operated by a broker-dealer, are registered as broker-dealer themselves or are registered with SEC Orders from ECN’s are included in NASDAQ quote montage.

ECN Interaction w/ SuperMontage ECN are not required to maintain two sided quote and act only in an agency capacity to execute order.

Since ECN quotes can access internally by subscribers to the system.

Can a registered representative buy an ipo

Plus they would be able to execute on SuperMontage creating double jeopardy making them take a principal position or (proprietary positions)

2 types of participation in Supermontage as Order Delivery ECN or Full Participation ECN.

Order Delivery ECN: has the ability to post aggregate subscribers order and enter non-directed orders into SuperMontage to access other market participant quotes.

Market participates can interact with order delivery ECN’s by sending non-directed SuperMontage orders to them.

Supermontage will decrement the ECN’s displayed size by the amount for which the order is sent.

An order delivery ECN can accept, decline, partially fill, price improve, or allow an order to time-out.

If an order times-out after being sent to an ECN, it is canceled by SuperMontage and sent to the next market participant at the inside market.

If the ECN’s displayed quote is partially decremented, the remaining interest will be canceled or set to the next price provided to SuperMontage by the ECN. If no price level is set by the ECN, SuperMontage will be set to zero

Full Participation ECNs: an ECN that has agreed to accept automatic executions by SuperMontage participants.

The can also send order to other market participant for execution. Full participation ECNs have 5 character identifier ex ECNA+

UTP Exchanges: • Can participate in SuperMontage • Must accept automatic executions • Can enter directed and non-directed order • National securities exchanges that trade unlisted securities only enter multiple quotes if they are agency orders, designated as non-attributable orders • UTP that do not accept automatic executions and are not part of SuperMontage can submit quotes to SIP (securities information processor) or the NASDAQ Stock Market.

• The UTP Exchange must be accessible by telephone or a self-created alternative link

Advanced Computerized Execution System (ACES) Pass-Thru

• Aces Pass-thru is a customizable order-routing systems • Allows order-entry firms with granted access to market maker’s internal trading systems to route orders to the system via ACEs. • Execution reports back through ACES • Market makers can add, delete or restore order-entry firm routing their orders.

o Order entry firms send orders through ACES Pass-Tru to market makers with whom they have arrangements • Fees for the use of ACEs are paid for by the Market maker

Nasdaq international services

Supports European trading sessions from 3:30 am to 9am eastern Coincided with the London market

European market maker – operating only during the European session International market maker- operating during both European and regular domestic session.

Securities qualified for NASDAQ international: • Nasdaq Global Market Securities • Any non- Canadian foreign security or ADR that is included in Nasdaq but is not an NGM security • Any Equity security listed on a U.S. Exchange Plus • Market making commitment by at least one broker-dealer • If affiliated with NASD members but not part of the NASD are limited to European status only. • Quotes must be two-sided and firm and trading reports similar to U.S. Nasdaq

Transactions in NASDAQ international service require • Securitys symbol • Volume • Type of transaction (buy,sell, or short sale) • Date of Transaction • Account Number • Market Center were the trade was executed • Price (exclusive of commission and markup or down)

The Alternative Display Facility (ADF)

It is the Alternative choice of Nasdaq equities instead of SuperMontage, it operated 8 am.

EST to 6:30 pm Gives the ability for participants to post quotes and reports and compare trade executions ADF Quotes are not accessible over SuperMontage but are included in the inside market ADF does not provide order delivery or execution capabilities

Thus there is NASD rule 4300(A): The Order Access Rule- ADF market participants must provide direct electronic access to other market participants and all other NASD Members and allow for indirect electronic access to its quote.

Under the rule, market participants are either ADF, ECNS, ATS

Direct Electronic Access: ability to deliver an order fro execution directly against another ADF market participant without the need for voice communication. The Access must have: equivalent speed, reliability, availability, and costs

Indirect Electronic Access: is the ability to route an order through a market participant’s customer broker-dealer for execution against the market participant’s best bid and offer without the need for voice communication.

The Access must have: equivalent speed, reliability, availability, and costs available to the market participant customer broker-dealer providing access to the market participant’s quote.

Performance Standards:

Minimum standards for ADF Linkages: 2 Second turnaround for an order that will be accepted or declined 3 or fewer second turnaround for communication between market participants

must be meet in order to ensure adequate technology to send and receive executions in a timely manner. Must be able to meet peak standards before any authorization is given to post quotes

Multiple Market Center Quotations- if a Non-Nasdaq member is posting 2 or more venues the posted quotes must be the same

Same as for ADF’s except posting different size quotations in different venues is not prohibited although the price must be the same

Ch6 22-30

OTC Bulletin Board (OTCBB) 7:30 am-6:30pm- is an electronic quotation service for OTC equity securities.

Displays real-time quotes, last-sale prices and volume information.

• OTC Equity security- is generally any equity that is not listed or traded on Nasdaq or a national securities exchange. Including Domestic and foreign equity issues, warrants, units, ADRS and direct participation programs. • Does not have listing requirements • But must file periodic financial information with the SEC or other regulators and must remain current.

If not filed with in the 30-60 days grace period will be delinquent

Quotes included in OTCBB • 2-sided quote (bid and off) • Bid only • Offer price only • Un priced indications of interest (such as bid wanted or offer wanted • Bids or offers accompanied by a modifier reflecting unsolicited customer interest

During normal business hours quotes must be firm except for (DPPS) direct participation programs securities

Minimum quote size: 5,000 shares @ prices up to $.5 To 50 shares @ process above $200

OTCBB is a real time system- quotes may be updated by market makers at anytime.

DPPs are updated twice a day between 8:30-9:30 and 12-12:30

With at least 2 market makers showing 2 sided quotes for any OTCBB security, the system will then display the inside market based on all quotes in the system for the given security.

Is shoirting the same as trading options

Including 1 sided price quotes. Like all Non-Nasdaq equities, trades must report within 90 seconds of execution.

When referring to OTCBB Securities. Reps must be careful because OTCBB securities should not be mislead to allow investors to believe that it is the NASDAQ market. Since bulletin board stocks do not meet listing standards.

For instance the NASD is concerned that because the equity has a ticker symbol then it will be seen as a NASDAQ equity.

Initiation of Quotes for Non-NASDQ OTC securities

Rules 15c2-11- requires that broker –dealers who wish to publish quotes for a non-Nasdaq OTC equity security must collect and review certain information about the issuer.

Meaning to initiate or resume quotes in an inter-dealer quote medium.

Information to be collected (must have one unless exception) 1. A prospectus that’s effect for less than 90 days 2. An offer circular effective within the preceding 40 days 3. The issuers latest form 10-k and subsequent forms 10-Q’s and forms 8-ks 4. For certain foreign securities, financial filing under rules 12g3-2(b) during the last fiscal year 5. Sixteen specific items of information about the issuer similar to the aforementioned items

The dealer is to review the information and reasonable believe that all the material aspects and sources from which the information was obtained are reliable

Must also have the following information: • A record of the circumstances involved in the publication of the quote, including the identity of the person for whom it is being published and any information regarding the transaction provided to the dealer by those persons • A copy of any SEC trading suspension order for any security if the issuer during the proceeding 12 months, or a copy of the SEC public releases announcing the suspension • A copy or written record of any other material information about the issuer that comes into the dealer’s knowledge or possession before the publication of the quote

Submission of Information to the NASD The Form 211 must be completed within at least 3 business days to prior to enter a quote The firm must specify: • The issuer • The issuer’s predecessor in the event of a merger or reorganization within 12 months • The type of security to be used • The member’s initial or resumed quote • The particular subsection of Rule 15c2-11 with which the dealer is demonstrating compliance

Any filing must be signed by a principal of the member firm

The NASD will review the material and within 2 business days, and notify the dealer if the application has been cleared.

SEC-Imposed Trading Suspension-

If the SEC imposes a trading suspension it should alert the broker-dealer to information in its possession could be inaccurate. The broker-dealer should update the information and or receive reassurances of additional information about the suspension

Exception to Rule 15c2-11

• If the security is listed on an exchange or Nasdaq, the rule does not apply • Compliance wit 15c2-11 is not required if a dealer is publishing a quotation on behalf of a customer where it represents Unsolicited customer interest in buying or selling the security.

The piggyback Exception: • The quotation must have appeared on at least 12 of those 30 day • And there can be no more than four business days in succession during the 30-days period without quotation

If the dealer qualifies for piggybacking exception and begins publishing quotes, it can continue to publish without complying with 15c2-11.

If it ceases publishing then it must comply before resuming quotations.

A Stock that has been delisted from NASDAQ may be quoted on the OTCBB without filing form 211 if • The market maker has quoted the stock on NASDAQ during the 30-days period prior to its removal • The security has been quoted continuously on Nasdaq during the 30 calendar days preceding its delisting, exclusive of any trade halt • The issuer must not be the subject of bankruptcy proceedings • The issuer must be current in the filing with the SEC

The Piggyback exception does not transfer from one quotation medium to another.

But if the security is eligible for piggybacking in another quotation medium (pink sheets) then dealer can if it meets the regular and continuous conditions initiate or resume quotations in the OTCBB with out 15c2-11

Characteristics of Non-Nasdaq securities • Lack of liquidity • Thinly traded and prone to manipulation • Now requires transactions involving member firms to be reports • Most Non-Nasdaq issues are domestic companies

Third-Market Trading

OTC transactions in listed securities (Nasdaq Intermarket transaction)

Consolidated Quotation System (CQS)- the avenue by which third market quotes in exchange-list securities

A Market maker must apply to the NASD to function as a CQS market maker

Market maker must enter quotes into CQS within 5 business days or lose its registration

Market- maker obligation: Quotes must be firm at the price and size displayed If no size assume normal lot (100) If multiple exchange quotes must be identical

Withdrawals: if a Market maker withdrawals its quotes of a security, it terminates its registration.

Cannot register until 2 business days.

Excused withdrawals: are available upon application to NASD Market Operations, for illness, vacation, physical circumstance (up to 5 days) , for legal and regulatory ( up to 60)

Trading Practices- Specific guidelines to cover transactions by members in the third market.

1) Members may not execute transactions that are fraudulent, manipulative, or deceptive. Such as wash sales or painting the tape 2) Circulating information that the members know or has reason to believe is false or misleading is prohibited 3) Members may not engage in third-market transactions in order to influence the closing price 4) NASD members may not execute third-market transactions in a security that is subject of an IPO until the security has opened for trading in the primary exchange.

5) Members may not trade ahead of customer orders that they are holding. EX: if a customer has a unexecuted customer order to buy a listed stock in the third market, it may not sell stock from its own account.

Likewise can’t execute a trade that would suffice the buy price of the unexecuted order



Market-Maker Obligation Regarding Quotes:

Firm quote rule-The member is obligated to execute an order presented to it at a price at least as favorable as its published quote.

The obligation to fill the order begins when the order is presented regardless of how it was transmitted

Except: • The market maker communicated to NASDAQ a revised price or size prior to the presentation of the order.

Can a registered representative buy an ipo

• The market maker just effected or is in the process of effecting a transaction at the time the order is presented and immediately upon completion of the transaction, communicates a revised quote to NASDAQ (Trading Ahead exception)

Backing away- failing to buy or sell a normal unit of trading

NASD Rules on Quotations:

If one member firm disseminates a quote on behalf of another firm, it must have reason to believe the quote was bona fide. Quotes include indications such as Bid wanted or offer wanted not just priced quotes

If a member give a priced bid or offer the member must be prepared to honor it at the price and under the conditions stated.

(NASD version of the Firm quote rule)

If a member published a subject quote but will not update firm quote it is considered backing away

Nasdaq Quote rules: Must be two sided and firm. (Except when the market maker is publishing a stabilizing bid.)

If a market maker updates its quote, but does not specify a size for the update, a new quote will assume the previous quote size

Trade- or Fade:

If a market maker is required to honor its quoted size, failure to honor a larger size order would force the market maker to change its quote.

The rule requires that NASDAQ market makers to publish an inferior quote anytime they fail to execute the full size of an incoming order that is at least one normal unit of trading greater than the market maker’s published quotation size.

Anticompetitive activities regarding quotations: • A market maker moves an offer down at the request of another market maker • A market maker provided information to another member firm’s trader regarding an institutional customer strategies • A market maker reveals to another member firms trader a larger net long or short position

Locked or Crossed Markets:

Crossed- occurs when a market maker enters a bid quote that is higher than the ask quote of another market maker or the ask quote is lower than the bid quote of another market maker.

A situation arising when the bid price of a security exceeds the ask price.

Contrary to normal markets where the bid-ask spread is positive; in a cross-market the spread is negative.

Series License/General Securities Principal

This scenario occurs mainly in volatile and high volume

Locked- occurs when the highest bid and lowest offer are equal

A short-term situation occurring within a market where both the bid and ask are identical, resulting in no bid-ask spread.

Locked markets are typically corrected immediately through subsequent trades. This abnormal market condition occurs mainly on the Nasdaq exchange for orders entered before the opening bell.

Opening Quotes:

Opening Nasdaq- 9:25 am EST. At this point quoting is firm and becomes auto-executable.

Any quotes that order or carry a price that would lock the market are placed in Queue.

Queue- is a holding state in which the order are placed until they can be executed

The quotes and orders are executed in time priority against the best bid (for sell orders) and best ask (for buy orders). If a quote or order is reached for execution, but is not executable at the time is added to the book

Inside Market: Bid 19.95 ask 15.97

Would lock or cross the book: MM1 Bid for 100 shares 16.25 LLCL bid 500 shares 16.00 MM2 ask 100 shares 15.44 MM1 ask for 200 shares at 15.40

Anti-internalization qualifier will prevent the automated system from executing a market participant’s order with its own quote and will send the order to the next market participant.

When an order is entered after 9:25 am it is added to the In Queue Based quotes and orders in time priority.

If a Nasdaq market maker enters a quote after 9:25 that would lock or cross the market, an execution occurs at the inside market

Opening Cross:

Begins 9:28 am orders in the NASDAQ market center are automatically executed.

At this time orders cannot be canceled but can be changed to be more aggressive (order that is better in price or size)

All ordered executed in the Opening Cross are automatically reported in to ACT with a .T modifier

Order imbalance indicator: is an electronic messaging that provides information about orders involved in the opening process.

Messages are sent out every 15 seconds until 9:28:20 am and then increases to every 5 seconds until the market opens.

Info provided on the Order Imbalance Indicator • The inside match price • The number of shares represented by each order type paired at the inside match price • The size of an imbalance • The buy or sell direction of any imbalance • The indicative prices at which the opening cross would take place if executed at the time of the dissemination and the percent outside the current inside market on the Nasdaq Market center

Often indicative prices are termed Near Clearing Price and Far Clearing Price

Near Clearing price is the price at which all quotes and orders during the opening cross would execute

Far Clearing price- is the price at which MOO,LOO,IO and early regular hours orders only would execute

How is the official Opening price determined ?

(one of the 3) 1. A price that maximizes the volume of MOO,LOO,IO and early regular hours orders and executable quotes executed- if more than one price exists, the system would check for the next price 2.

A price that minimizes imbalances –if more than one price exists, the system would check for the next price 3. A price that minimizes the distance from the bid-ask midpoint of the inside quote

The Nasdaq Official Opening price- is based on the orders that are in queue what NASDAQ opens for trading at 9:30 am. It is the price of the first trade executed and reported within Nasdaq market center, if at 9:30:15am there is no opening match then the NOOP is based on the last eligible sale reported in the Market Center.

NASDAQ Closing Cross-the process begins at 3:50 pm

This is when an order imbalance indicator begins dissemination.

The indicators provides info on Market-on close(MOC), Limit- On-close (LOC) and imbalance only orders (IOO)

Imbalance indicator is sent at the following times

3:50- 3:55- every 30 seconds 3:55-3:59- 15s 3:59-3:59:59-5s

at 4:00pm est SuperMontage executes the max number of shares at a single price, this represents the NASDAQ official closing price .

Voluntary and Excused Withdrawals

Nasdaq market maker may terminate its registration in a security by withdrawing its quotes on a voluntary (unexcused) basis. May not register as a market maker in the security for 20 business days.

Excused circumstances 1. An excused withdrawal for up to 5 business days may be granted for circumstance beyond the market maker control 2. Withdrawals of up to 60 days may be granted for legal or regulatory reasons, if supporting documentation is provided and the conditions are not permanent in nature.

3. Excused withdrawal status for religious holidays may be granted, application must be made one business day in advance and must be approved by the NASD 4.

Small firms (defined as market maker with 3 or fewer Level 3 firms) may have difficulty because of vacations by key personal. Excused withdrawals because of vacations may be granted if the application is made one business day in advance and included a list of securities for which withdrawal is requested 5.

Market makers that are participants in a securities distribution are covered by special rules. (Passive Market Making) 6. If a firm fails to maintain a clearing relationship with a registered clearing agency or a member of a clearing agency. It may reenter quotes after reestablishing a clearing relationship. If a market makers’ failure to maintain a clearing relationship is voluntary, its withdrawal is considered voluntary, not excused 7.

If a firm has a fail to deliver in a threshold security at its clearing firm for a period of 13 continuous settlement days and the security cannot be borrowed in order to effect a short sale transaction as part of a bona-fide market making, the firm qualifies for an excused withdrawal

Passive Market Making:

• Market makers involved in distribution may not enter a bid or effect a purchase at a price that exceeds the highest independent bid on NASDAQ • In a falling market, when the last independent bid drops below the passive market maker, the passive maker can maintain its bid until § Its purchases have reached or exceeded the lesser of 2 time the minimum quotation size for the security or the maker remaining daily limit.

• At that point ,the passive market maker must drop its bid to below the independent bid. • In a rising market the passive makers do not have to raise the bid when the independent bid rises. • If there is no independent market maker then passive market making is not allowed

Daily Purchase Limit: a passive market makers limit is the greater of 30% of its ADTV in the stock or 200 shares.

Once a passive maker’s net purchases for the day are more than its purchase limit ,it must then withdrawal from the market for the rest of the day. If close to the limit can execute one more trade that would put them over the limit.

If execution of a buy and sell order are within 30seconds then the order will only count as a net purchase

CH7 13-15

Stabilizing Bids on Nasdaq

A market maker must submit to the requirements of Regulation M by entering a request to Nasdaq Market Operations to enter a one-sided bid.

SYND is the abbreviation for stabilizing bid.

Additional conditions: • Only one market maker may enter a stabilizing bid in a security • In order to enter a stabilizing bid, there must be one independent market maker entering quotes in the security • A stabilizing bid must be available for all freely tradable outstanding securities of the same class as the security being offered.

The request doesn’t need to be in writing, but the market maker must confirm its request in writing no later than the close of business on the day the stabilizing bid is entered. this can be accomplished by: • Sending a request to Nasdaq Market Operations and Underwriting Activity Report • Or a written conformation that included: i. The identity of the security and its Nasdaq symbol ii.

Contemplated effective date and pricing date of the offering iii. The date and time that an identifier should be included on Nasdaq iv. A copy of the cover page of the preliminary or final prospectus.

Market-Maker Status:

A Market maker may need to be granted excused withdrawal status or passive market-maker status by the NASD. The syndicate manager must apply for this status on behalf of any affected syndicate member no later than the business day prior to the first entire trading session of the one or 5 day restricted period under rule 101.

This can be accomplished by submitting a Regulation M Restricted Period Commencement Form.

The manager then notifies each affected syndicate member that it will have a passive market-maker status or that its quote will be withdrawn on an excused basis, unless that market –market directly notifies the NASD otherwise.

PSMM- identifies passive market makers

Penalty Bids and Syndicate Covering Transactions

Written notice must be provided for prior to the start of: • Syndicate covering transactions • Penalty bid • Reference security under rule 101