Bankers learn of deals before the market does. Most rules here control that knowledge inside the firm or govern how deals reach investors.
You must develop and maintain policies, procedures and controls, and supervise related investment banking activities from mandate to syndicate settlement. Written procedures should name who approves mandates, certifies due diligence, makes Financial Industry Regulatory Authority (FINRA) and Securities and Exchange Commission (SEC) filings, reviews new issue allocations and logs wall crossings (outsiders brought into a deal).
An information barrier keeps material nonpublic information (MNPI) inside the group that needs it. Section 15(g) of the Securities Exchange Act of 1934 (Exchange Act) requires written policies reasonably designed to prevent its misuse. Typical tools: separate deal-team systems, a confidential surveillance watch list and a restricted list limiting trading and research.
Under Rule 14e-3(b), a firm is not liable for a tender offer target trade if the decision maker lacked the MNPI and reasonable information barriers existed.
Definitions and application of title appear in Exchange Act Section 3: a broker effects transactions for others' accounts (Section 3(a)(4)); a dealer trades for its own (Section 3(a)(5)).
Common mistakes
- Using the old 13D clock. It's now five business days.
- Filing on Schedule 13E-4. Issuer tender offers file on Schedule TO.
- Giving issuers the actively traded exception. It's Rule 101 only, never Rule 102.
Bottom line
- Section 11 holds the issuer strictly liable; underwriters escape only by proving a documented, reasonable due diligence investigation.
- Rule 504 allows $10 million in 12 months, Regulation A Tier 1 $20 million and Tier 2 $75 million; Rule 506(c) permits general solicitation only with verified accredited buyers.
- FINRA filings: Rule 5110 within three business days of the SEC filing, Rule 5122 at or before first use, Rule 5123 within 15 calendar days of first sale.
- New issues cannot go to accounts more than 10% owned by restricted persons, and spinning to executives of banking clients is banned.
Exam shortcut
"Before contracting" is Rule 2262, "at or before completion" Rule 2269, "at or before first use" Rule 5122. Tender offer, Form 4 and 13D clocks count business days; HSR, Form D, Rule 5123 and Forms 3 and 5 count calendar days. For what protects the firm, pick the documented control.
The full lesson (about 4,721 words, 31 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- E16
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