Affiliate

Under SEC Rule 144, restricted stock must generally be:

1. A.Held for a required period before public resaleCorrect - the Rule 144 holding period.
2. B.Converted to bonds firstRule 144 never changes the security into something else. It governs when and in what quantity restricted shares may be resold, and they are resold as the same stock.
3. C.Sold immediately with no limitsThis describes freely tradable registered shares. Restricted stock came into the holder's hands through an unregistered sale, which is exactly why a holding period must run before public resale, with volume limits on top for affiliates.
4. D.Never soldThis overcorrects a real restriction into a permanent ban. Rule 144 is a safe harbor whose purpose is to make resale possible once its conditions have been satisfied.

Why: Rule 144 requires a holding period before restricted securities can be resold publicly, plus volume limits for affiliates.

To process a customer's subscription, a firm must send her name, address and taxpayer identification number to the program sponsor's unaffiliated transfer agent. Must the firm first give her an opportunity to opt out?

1. A.Yes, because the recipient transfer agent is not an affiliate of the broker-dealer.Wrong. Corporate relationship is not the test that decides whether an opt-out attaches.
2. B.No, because disclosure necessary to process a transaction the customer requested falls outside the opt-out right.Correct. The carve-out for servicing a requested transaction is exactly what this disclosure is.
3. C.Yes, unless she has already been given the firm's initial privacy notice at account opening.Wrong. Delivering the initial notice does not by itself extinguish an opt-out right where one exists.
4. D.No, because these rules reach only information the firm obtains from consumer reporting agencies.Wrong. The rules cover nonpublic personal information generally, not merely credit-report data.

Why: The privacy rules give a customer the right to opt out of a firm's disclosure of nonpublic personal information to nonaffiliated third parties, but they carve out disclosures necessary to effect, administer or enforce a transaction the customer asked for. Sending identifying information to the transfer agent so the subscription can actually be recorded sits squarely in that carve-out, so no opt-out attaches. The test is the purpose of the disclosure, not the corporate relationship of the recipient. Had the firm instead wanted to hand the same list to the sponsor's marketing arm to promote future offerings, that is not necessary to the transaction and the opt-out right would apply.

A person who has never been an affiliate of a reporting issuer acquired restricted stock from that issuer well over a year ago and now wants to sell it publicly. Which Rule 144 conditions must she satisfy?

1. A.The volume limitation and the Form 144 notice, but not the current public information condition.Wrong. Those two are affiliate conditions and do not reach a long-held non-affiliate position.
2. B.All of the rule conditions, since restricted securities never lose their character.Wrong. The rule relaxes its conditions with time precisely so that non-affiliate positions can clear.
3. C.Only the manner of sale requirements, which apply to every seller under the rule.Wrong. The manner of sale requirements apply to sales for the account of affiliates.
4. D.Essentially none, because after a year a non-affiliate is free of the information, volume, manner of sale and notice conditions.Correct. Time plus non-affiliate status removes the conditions the rule imposes.

Why: Rule 144 relieves a non-affiliate of most of its conditions once time has passed. For a non-affiliate of a reporting issuer, the current public information condition applies between six months and one year after acquisition; once a year has elapsed since the later of acquisition from the issuer or from an affiliate, that condition falls away too. The volume limitation, the manner of sale requirements and the Form 144 notice apply to sales for the account of affiliates, not to a long-held non-affiliate position. So after a year this seller is essentially unconditioned under the rule.

A broker-dealer's affiliate holds an existing equity ownership stake in the issuer of a private placement the firm's representatives are recommending to customers. Is this ownership stake a conflict of interest requiring disclosure, separate from any placement fee the firm earns for selling the offering?

1. A.No -- only compensation earned specifically for this offering, such as a placement fee, constitutes a disclosable conflict of interest; a pre-existing ownership stake is irrelevant.Wrong. A pre-existing ownership interest in the issuer's success is itself a conflict, distinct from and in addition to any placement fee.
2. B.No -- but only because ownership stakes held by an affiliate, as opposed to the broker-dealer itself, are never considered conflicts of interest under any circumstances.Wrong. An affiliate's ownership stake is not automatically excluded from being a conflict of interest simply because it is held by the affiliate rather than the broker-dealer directly.
3. C.Yes -- an affiliate's ownership stake gives the firm's broader corporate family a financial interest in the issuer's success independent of any placement fee for this offering, and that ownership-based incentive is itself a separate conflict of interest requiring disclosure.Correct. The ownership-based financial interest in the issuer's success is a separate conflict requiring its own disclosure, beyond the placement fee.
4. D.Yes -- but only if the affiliate's ownership stake exceeds a majority of the issuer's outstanding equity, since minority stakes are not considered material.Wrong. There is no described majority-ownership threshold required before an ownership stake becomes a disclosable conflict; the existence of the financial interest itself is what matters.

Why: An affiliate's existing ownership stake in the issuer gives the firm's broader corporate family a financial interest in the issuer's success that exists independently of, and in addition to, any placement fee earned for this specific offering; this ownership-based incentive is itself a conflict of interest requiring disclosure, separate from the transactional placement-fee conflict.