Series 24 Investment Banking Practice Questions

Correct answer: D. Participating in the issuer's road show to market the offering to prospective investors

Rule 2241 bars research analysts from participating in road shows and other marketing on behalf of an issuer related to an investment banking services transaction. The prohibition protects research independence from investment banking pressure.

• A. After the quiet period, the underwriter may publish research on the issuer.
• B. Discussing published research with the sales force is an ordinary analyst function.
• C. Updating a model for public earnings is routine research and is not tied to the offering.
• D. Correct: analysts may not take part in marketing the offering, such as a road show.

Correct answer: D. Spinning

FINRA Rule 5131 prohibits 'spinning' — allocating new issue shares to executive officers or directors of a company, or to their family members, as a quid pro quo for obtaining or retaining investment banking business from that company. It addresses conflicts of interest in IPO allocation practices distinct from the restricted-persons prohibition in Rule 5130.

• A. Restricted person purchasing describes Rule 5130's categorical bar on certain purchasers; the scenario describes an allocation made as an inducement for business, which is a 5131 spinning issue.
• B. Free-riding and withholding concerns a firm improperly retaining hot-issue shares for its own account/insiders rather than making a bona fide public distribution — a related but distinct new-issue concern from the quid pro quo described here.
• C. Front running involves trading ahead of known orders or information, not allocating IPO shares as a business inducement.
• D. Correct — allocating IPO shares to an executive as an inducement for investment banking business is the classic definition of spinning under Rule 5131.

Correct answer: C. Promptly deposited into a separate escrow account and not released to the issuer until the all-or-none contingency is satisfied

SEC Rule 15c2-4 requires that in a contingency offering (all-or-none, part-or-none, or a minimum-maximum arrangement), funds received from investors must be promptly deposited into a separate escrow account held for the benefit of the subscribers and not released to the issuer until the stated contingency is actually satisfied. If the contingency is not met, funds must be returned to investors.

• A. Immediate transmittal to the issuer regardless of the contingency defeats the purpose of an all-or-none offering and violates Rule 15c2-4's escrow requirement.
• B. Holding investor funds in the broker-dealer's own operating account, rather than a segregated escrow account, doesn't meet Rule 15c2-4's safeguarding requirement.
• C. Correct. Rule 15c2-4 requires that funds from investors in a contingency offering be promptly deposited into a separate escrow account and not released to the issuer until the specified contingency (here, all-or-none) is satisfied.
• D. Investing customer funds in Treasuries pending closing doesn't satisfy the rule's requirement — funds must be held in a proper escrow arrangement, not redeployed into other instruments.

Correct answer: C. 15%

The over-allotment option, commonly called the 'Green Shoe' option, permits underwriters to purchase additional shares from the issuer (typically within 30 days of the offering) to cover over-allotments, and market practice caps this at 15% of the shares in the base offering.

• A. 5% is well below the typical maximum allowed for a Green Shoe over-allotment option.
• B. 10% understates the customary maximum percentage for a Green Shoe option.
• C. Correct. Underwriters may typically purchase up to 15% of the base offering from the issuer under a Green Shoe over-allotment option to cover over-allotments.
• D. 25% overstates the customary maximum — the typical Green Shoe cap is 15% of the base offering.