General Securities Sales Supervisor (Series10) Practice Exam

If a new issue is "hot," to whom may the issuer direct sales of that issue?

1. Only to employees of the issuer

2. Only to creditors of the issuer

3. To any individual not prohibited from purchasing under FINRA rules

4. Only to customers of the issuer

The correct answer is: To any individual not prohibited from purchasing under FINRA rules

The correct choice indicates that the issuer can direct sales of a "hot" new issue to any individual not prohibited from purchasing under FINRA rules. This is important because FINRA (Financial Industry Regulatory Authority) has established guidelines that govern the sale of new issues, particularly to prevent abuses related to allocation and to ensure fair access to investment opportunities. When a new issue is described as "hot," it typically means that there is a high demand for the offering, which can put pressure on the issuer to allocate shares to certain parties. However, the issuer must still comply with regulatory requirements that ensure sales are fair and equitable, avoiding favored treatment of particular individuals or groups. FINRA rules outline the categories of individuals or entities that may be restricted from purchasing such offerings (e.g., certain affiliated persons), but beyond those restrictions, issuers have the flexibility to offer shares widely. This provision aims to promote fairness in the distribution of investment opportunities, allowing a broader segment of the public to participate, provided they are not subject to specific prohibitions. The other options imply restrictions that would limit the potential investor base unduly. It's essential for both issuers and brokers to understand these regulations to navigate the complexities of distributing new issues responsibly.