1. Regulation of Securities Activities Explain the role of the SEC, the NASD, an
ID: 2738640 • Letter: 1
Question
1. Regulation of Securities Activities Explain the role of the SEC, the NASD, and the stock exchanges in regulating the securities industry.
3. Investment Banking Services How do securities firms facilitate leveraged buyouts? Why are securities firms that are better able to raise funds in the capital markets preferred by corporations that need advice on proposed acquisitions?
4. Origination Process Describe the origination process for corporations that are about to issue new stock.
5. Underwriting Function Describe the underwriting function of a securities firm.
7. Failure of Lehman Brothers Why did Lehman Brothers experience financial problems during the credit crisis?
8. Direct Placement Describe a direct placement of bonds. What is an advantage of a private placement? What is a disadvantage?
13. Systemic Risk Why was the Federal Reserve concerned about systemic risk due to the financial problems of Bear Stearns?
Explanation / Answer
Answer (1)-
“Stock exchanges impose regulations on securities firms to prevent unfair or illegal practices, ensure orderly trading, and address customer complaints … Both the ex-changes and the NASD have surveillance departments that monitor trading patterns and behaviour by market-makers and floor traders. They also have enforcement divisions that investigate possible violations and can take disciplinary actions. They can take legal actions as well and sometimes work with the SEC to correct cases of market trading abuse. The SEC tends to establish general guidelines that can affect trading on security exchanges, but the day-to-day regulation of exchange trading is the responsibility of the exchange… In addition to the SEC, NASD, and exchanges, the Federal Reserve Board has some regulatory influence because it determines the credit limits (margin requirements) on securities purchased”
Answer(3)-
“An acquirer may not be able to afford an LBO because of constraints on the amount of funds it can borrow. Securities firms can help the acquirers issue stock or bonds, as explained earlier. They may also provide a bridge loan that serves as temporary financing until the acquirer has access to other funds. Some securities firms may even provide equity financing, whereby they become part owner of the acquired firm”.
Answer(4)-
.First corporations are likely to contact a securities firm for a recommendation on the appropriate amount of stock to issue. The securities firm then will evaluate the corporation’s financial health and determine the appropriate price for the new stock. After that is accomplished, the corporation must register with the SEC all data relevant to the security and the agreement made between the corporation and the securities firm. After registration is approved, a prospectus must be filed to the SEC Finally, the stock offering can begin, usually with an initial road show.
Answer(5)
An IBF may be willing to underwrite the stock of an issuing corporation, which guarantees the price to be received by the corporation .The IBF assumes the risk that the securities could sell for a lower price than anticipated.
Answer (7)
Lehman Brothers had much exposure to mortgage-backed securities. It had a relatively low level of cash, and its high degree of financial leverage created more pressure. For every dollar of equity, it had about $30 of debt.
Lehman Brothers could not find funding at the appropriate cost. By that time, the share price of Lehman Brothers had also declined so they couldn’t approach the market to raise fresh funds. As the credit crisis progressed, their liquidity position became more and more dire. Finally Lehman Brothers had to file for bankruptcy protection.
Answer (8)-
Direct placement of bonds: direct placement refers to the issuer placing their new offering directly to the investor. Underwriting fees can be significant for the issues of new securities. Some issuer tries to avoid the underwriting fee by placing the bonds directly with the investors. This presumes that the issuer knows the potential investors. In case of direct placement, bonds are not issued to the general public. A securities firm may still be involved in advising the issuer on various aspects of the firm.
Advantages of a private placement: a key advantage for the issuer is saving in terms of the underwriting fee. It is also possible that the issuer may already be financially too weak to raise funds from the general public. So, they approach large investors, like pension funds and asset management companies, directly. From investors’ point of view, they are in a position to customize the offering to suit their requirement. This may involve customized maturity, interest rate payment schedules and other provisions. They are also able to analyze the company more thoroughly.
Disadvantage of a private placement: among the disadvantages, bonds are not offered on a competitive basis. So, there is a possibility that large investors are able to reduce the price of the offering. This will make the issue costly for the issuer. Large institutions may also demand more monitoring and reporting. This will result in issuer spending a significant time in reporting throughout the life of the issue,
Answer(13)-
The Board of Governors recognized that the bankruptcy of Bear Stearns could be contagious and create chaos in the financial markets. Since Bear Facilitated various Financial transactions For many people and firms, its bankruptcy could cause liquidity problems For all the people and firms that were relying on it to complete financial transactions in its intermediary role.
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