Restricted Person

A firm's new issue allocation records do not clearly document the basis on which shares were allocated among competing customer requests for a heavily oversubscribed offering. What is the concern with this recordkeeping gap?

1. A.None, as long as all customers who requested shares ultimately received some allocationWrong. Universal partial allocation does not address whether the basis for the specific amounts allocated was proper and documented.
2. B.None, because allocation documentation requirements apply only to debt offerings, not equity IPOsWrong. Documentation of allocation basis is relevant to equity IPO allocations, not limited to debt offerings.
3. C.None, since the allocation decisions themselves were made, regardless of whether the basis is documentedWrong. This understates the concern; without documentation, the firm cannot demonstrate the allocation process was proper if later questioned.
4. D.The firm cannot demonstrate its allocations were made consistent with its policies and applicable rules without documentation of the basis for those decisionsCorrect. Documentation of the allocation basis is necessary to demonstrate the process was proper and consistent with applicable rules.

Why: Without documentation of the basis for allocation decisions, the firm cannot demonstrate that allocations were made consistent with its policies and applicable rules, such as the restricted person and anti-spinning provisions, if the process is later questioned. The principal must ensure allocation decisions and their basis are properly documented.

An issuer establishes a directed share program allowing the underwriter to allocate a portion of a new offering to a list of friends and family of the issuer's management. The underwriter's principal never cross-checks the issuer's proposed list against the firm's own restricted persons to confirm none of the firm's own restricted persons have been included in the allocation. What is the concern?

1. A.There is no concern, since the issuer, not the underwriter, selected the individuals on the friends-and-family list.Wrong. The underwriter retains its own responsibility for ensuring allocations comply with its restricted-person obligations regardless of who selected the list.
2. B.The concern only arises if a member of the issuer's own board of directors is on the list.Wrong. The cross-check concern applies to the list generally, not only if a board member happens to be included.
3. C.The concern is resolved as long as the issuer provides a written certification that its list complies with all applicable securities laws.Wrong. An issuer certification doesn't substitute for the underwriter's own cross-check against its restricted persons.
4. D.The underwriter remains responsible for cross-checking the list against its own restricted persons, since it retains responsibility for ensuring the allocation complies with its own obligations.Correct. The underwriter retains its own compliance responsibility even for an issuer-directed program.

Why: Even where an issuer directs a friends-and-family allocation, the underwriter remains responsible for ensuring the resulting allocations comply with its own restricted-person obligations; failing to cross-check the issuer's proposed list against the firm's own restricted persons leaves a gap through which a restricted person could improperly receive an allocation.

A representative asks whether an immediate family member who does not work in the securities industry, but who is financially dependent on the representative, is subject to Rule 5130's restricted person provisions. What must the principal confirm?

1. A.Confirm how the specific family relationship and support circumstances are treated under Rule 5130's restricted person definitionsCorrect. Certain immediate family members of industry personnel can fall within Rule 5130's restricted person categories depending on the rule's specific definitions.
2. B.Conclude the family member is automatically excluded, since only people who personally work in the securities industry are restricted personsWrong. This is the exact trap the question describes; certain family relationships to industry personnel can also be covered under the rule.
3. C.Conclude the family member is automatically restricted, since any relationship to an industry professional is coveredWrong. This overstates the restriction; the specific relationship and circumstances must be evaluated against the rule's actual definitions, not assumed to always apply.
4. D.Conclude restricted person status is irrelevant here since the family member does not personally hold a brokerage accountWrong. Whether the person holds a brokerage account personally is not the basis for the restricted person analysis; the relationship itself is what matters.

Why: Certain immediate family members of industry personnel can fall within Rule 5130's restricted person categories depending on the specific relationship and support circumstances defined by the rule -- the principal must confirm how the specific family relationship is treated under the rule's definitions, not assume the family member is automatically excluded simply because they do not personally work in the industry.

A firm receives an indication of interest for a new issue from an account held in the name of a trust. The trust's beneficial ownership is not disclosed on the account documentation, and the representative processes the allocation without requesting that information. A principal reviewing the file questions this. What must the principal require?

1. A.No further information is needed, since the account is properly titled in the name of the trust rather than an individual.Wrong. Proper titling alone doesn't establish who the actual beneficial owners are behind the trust.
2. B.The principal must require the beneficial ownership information behind the trust before the allocation can proceed, since the restricted-person determination depends on looking through to the actual owners.Correct. The restricted-person determination requires looking through to the trust's actual beneficial owners.
3. C.Further information is needed only if the trust is domiciled outside the United States.Wrong. The need to identify beneficial ownership doesn't depend on where the trust is domiciled.
4. D.Further information is needed only if the trust's indication of interest is unusually large relative to the offering size.Wrong. The need to identify beneficial ownership applies regardless of the size of the indication of interest.

Why: Determining whether an account's beneficial owners include a restricted person requires looking through nominee and trust structures to identify the actual beneficial ownership; processing an allocation without obtaining that information leaves the firm unable to confirm whether a restricted person is involved.