Series 23: Investment Banking and Research

Series 23 Investment Banking and Research questions help you isolate one part of the FINRA outline before returning to a mixed practice test. The questions below are original Securities Prep practice items aligned to this topic and are not copied from any exam sponsor.

Topic snapshot

Sample questions

Question 1

A firm’s investment banking group wants to begin investor meetings for a best-efforts private placement. During the principal’s offering review, the issuer’s last two periodic filings were late, the most recent annual report includes going-concern language, and the draft materials do not clearly explain several senior preferred classes with liquidation preferences. The firm’s WSPs require material diligence exceptions to be resolved or escalated before marketing starts. What is the best next step?

• A. Permit investor meetings to begin now, provided bankers verbally mention the late filings and preferred stock terms.
• B. Immediately terminate the engagement and notify regulators before reviewing additional issuer records.
• C. Require enhanced due diligence, obtain legal and financial support for the issues, and withhold marketing approval until the risks are documented and properly disclosed.
• D. Approve the materials now and require a follow-up diligence memo before any subscriptions are accepted.

Best answer: C

Explanation: Material red flags must be investigated and resolved or formally escalated before offering materials are approved for use.

The principal should pause marketing approval and direct enhanced due diligence when the issuer’s financial condition, reporting history, or capital structure raises material concerns. Late filings, going-concern language, and unclear senior securities all require review and disclosure before investors are solicited.

This tests supervisory due diligence in an offering review. When an issuer shows multiple red flags—late periodic reporting, going-concern language, and a capital structure that may materially affect investor economics—the principal should not let marketing proceed on incomplete diligence. The proper sequence is to require enhanced review of the issuer’s financial condition and senior claims, involve appropriate legal and financial personnel, document the findings, and make sure any offering materials accurately describe the risks before approving use.

A sound workflow is:

• identify the diligence exceptions
• gather and verify supporting issuer records
• resolve or escalate material concerns internally
• approve materials only after disclosures are complete

The key point is that supervisory review comes before investor outreach, not after it.

• Start marketing now fails because verbal disclosure does not cure unresolved written-material diligence issues.
• Immediate regulator notice is too early because the facts call first for enhanced internal diligence, not automatic external escalation.
• Approve first, document later is too late because WSPs require material diligence exceptions to be addressed before marketing begins.

Question 2

A research analyst will appear on a live webcast discussing Issuer Q. The event invitation has already been approved under the firm’s normal retail-communications process.

Exhibit:

WSP excerpt — research analyst public appearances
- If the analyst knows the firm and its affiliates beneficially own 1% or more
  of any class of the issuer's common equity, that ownership must be disclosed
  during the appearance.
- General communications approval does not substitute for this disclosure.

Issuer Q data
- Firm trading account: 310,000 shares
- Affiliate asset manager: 240,000 shares
- Common shares outstanding: 50,000,000

Which action should the supervising principal take?

• A. Require public-appearance ownership disclosure; combined holdings are 1.1%.
• B. Rely on the retail-communication approval; no separate disclosure is needed.
• C. Obtain a written analyst certification instead of an on-air disclosure.
• D. No disclosure is needed because direct firm ownership is only 0.62%.

Best answer: A

Explanation: The firm and affiliate holdings total 550,000 shares, which is 1.1% of 50,000,000, so the webcast requires the specific public-appearance disclosure.

This is a research analyst public-appearance disclosure issue, not just a general communications-review issue. Adding the firm and affiliate positions gives 550,000 shares, and 550,000 divided by 50,000,000 equals 1.1%, which exceeds the 1% threshold in the WSP.

The key concept is that research analyst public appearances have conflict-disclosure requirements that are separate from broader communications-review standards. Here, the supervising principal must apply the WSP’s ownership test for a public appearance, not rely only on the fact that the invitation was already approved as a retail communication.

• Add known firm and affiliate holdings: 310,000 + 240,000 = 550,000
• Compare to shares outstanding: 550,000 / 50,000,000 = 1.1%
• Because 1.1% is above the 1% trigger, the ownership must be disclosed during the webcast

The closest trap is treating normal communications approval as sufficient, but that does not replace the analyst-specific public-appearance disclosure obligation.

• Communications approval fails because ordinary retail-communications review does not replace analyst public-appearance disclosures.
• Written certification fails because analyst certification is associated with research-report views and is not a substitute for a live appearance disclosure.
• Direct holding only fails because the WSP requires using firm and affiliate holdings, not just the firm’s standalone position.

Question 3

A firm’s WSP routes materials to investor-disclosure review when they are intended for use with customers or prospective investors, rather than only for internal deal-team analysis. Which item best matches material that should follow that investor-facing review path?

• A. A pitch book prepared for meetings with prospective institutional investors
• B. A due diligence issue list shared among bankers and outside counsel
• C. A valuation model summary for the firm’s internal fairness committee
• D. A transaction timetable deck for syndicate, legal, and operations staff

Best answer: A

Explanation: Its intended external audience makes it investor-facing material, so it should receive investor-disclosure review rather than be treated as internal-only banker content.

The key distinction is intended audience and use. Material prepared for meetings with prospective investors is not an internal banker presentation; it is investor-facing and should be reviewed under the firm’s controls for offering or disclosure materials.

For this supervisory judgment, the deciding feature is whether the material is meant to be shown outside the firm to customers or investors. A pitch book intended for meetings with prospective institutional investors is likely to influence investment decisions or support an offering discussion, so it belongs in the firm’s investor-disclosure or offering-communications review process. By contrast, materials used only for internal valuation, diligence tracking, or transaction logistics are internal work product, even if they relate to the same deal.

A useful screen is:

• external audience or investor meeting use
• offering or issuer information presented for investor consideration
• likelihood the material could function as sales or disclosure support

If those features are present, the material should not be treated as internal-only banker content.

• Internal valuation use stays within internal committee analysis and is not prepared for investor distribution.
• Due diligence tracking supports deal execution and investigation, not customer or investor communication.
• Process management for syndicate, legal, and operations is an internal workflow tool, not investor-facing material.

Question 4

A general securities principal reviews controls for a confidential sell-side M&A mandate involving a public issuer. The investment banking team uses a code name for the deal, but the managing director also adds the publishing research analyst and the retail sales manager to a weekly internal update email so they can “be ready when clients ask questions.” Neither person has been formally wall-crossed, and the issuer has not been placed on a restricted list. What is the primary supervisory red flag?

• A. The firm did not obtain issuer permission before research discussed the industry.
• B. Using a code name for the transaction creates misleading books and records.
• C. Confidential M&A information is being shared across information barriers without a need-to-know process.
• D. The weekly update email was not preapproved as a retail communication.

Best answer: C

Explanation: The key risk is improper cross-barrier sharing of confidential advisory information with research and sales personnel who were not formally wall-crossed.

The main issue is that confidential M&A advisory information is being given to research and sales personnel outside a controlled wall-crossing or need-to-know process. That is the core information-barrier failure, especially because the transaction is still confidential and no restricted-list control has been applied.

Information barriers are designed to keep confidential investment banking and M&A advisory information from reaching research or sales personnel unless there is a legitimate need, formal control steps, and heightened handling of the information. In this scenario, the research analyst and retail sales manager were included so they could be “ready,” which is not the same as a documented need-to-know advisory function. That creates the primary risk of misuse of material nonpublic information, improper influence on research, and tainted sales activity.

A code name can be a reasonable confidentiality tool, but it does not cure the improper sharing. Likewise, restricted-list placement is an important supporting control, but the more fundamental weakness is that confidential M&A information crossed the barrier to research and sales without a proper wall-crossing process.

• Communication approval fails because an internal deal-update email is not primarily a retail-communication issue.
• Issuer permission misses the point because the stem focuses on internal sharing of confidential advisory information, not permitted public research commentary.
• Code name concern is weaker because using a code name is generally a confidentiality aid, not the core defect here.

Question 5

A broker-dealer releases new research reports only through a controlled electronic platform that gives entitled recipients access at the same time and blocks ad hoc early delivery to selected salespersons or customers. This control is primarily designed to support which concept?

• A. Equitable distribution of research reports
• B. Restricted list
• C. Quiet period
• D. Information barrier

Best answer: A

Explanation: Equitable distribution addresses controlled dissemination so favored internal or external recipients do not receive research ahead of others.

The key concept is equitable distribution of research reports. In research supervision, firms use controlled dissemination channels to reduce the risk that selected employees or preferred customers receive a report before other entitled recipients.

This scenario describes a dissemination control, not a conflict-separation control. In the research context, firms are expected to maintain policies and procedures reasonably designed to promote equitable distribution of research reports and prevent selective dissemination to favored internal or external recipients. Using a controlled platform with simultaneous access for entitled users is a classic way to manage that risk. The main issue is fairness and consistent release timing, not whether research and investment banking personnel are separated. A close distractor is the concept of an information barrier, but that addresses improper information flow between functions rather than equal release of a finished research product.

• Information barrier addresses separation of sensitive information between departments, not the timing of report access among recipients.
• Restricted list limits activity in certain securities because of conflicts or material information concerns; it is not a distribution-channel control.
• Quiet period refers to communication limits around certain offerings or events, not equalized research release procedures.

Question 6

A broker-dealer is the placement agent for a private offering sold offshore to non-U.S. persons under Regulation S. After closing, a registered representative drafts instructions for purchasers and operations staff about resale requests and legend removal. The principal reviews the draft. Which statement is INCORRECT?

• A. A restrictive-legend removal request may require issuer or counsel support.
• B. Because the original sale was offshore, purchasers may immediately resell into the U.S. market without further conditions.
• C. Legends and transfer limits should remain until resale conditions are met.
• D. Resale-related communications about restricted shares should receive principal review.

Best answer: B

Explanation: An offshore sale under Regulation S does not automatically eliminate distribution compliance conditions, resale limits, or legend controls.

The inaccurate statement is the one treating an offshore sale as a free pass for immediate U.S. resales. Regulation S offerings can still involve distribution compliance conditions, restrictive legends, and transfer controls that require supervisory attention before securities move into the U.S. market.

The core issue is supervision of distribution restrictions after an exempt offshore offering. A principal should not assume that securities sold under Regulation S may be freely resold into the U.S. market immediately just because the initial transaction occurred offshore. Restricted securities may carry legends, transfer limits, and conditions tied to the exemption and the distribution compliance period. When resale questions arise, the firm should follow its controls for restricted securities, including reviewing customer communications, confirming whether conditions have been satisfied, and obtaining any needed issuer, transfer-agent, or counsel support before legend removal or transfer processing.

The closest distractors describe normal supervisory controls: keep restrictions in place until conditions are met, review legend-removal requests carefully, and escalate resale communications for principal oversight.

• Keep legends in place is acceptable because restrictive legends and transfer limits remain relevant until the resale conditions are satisfied.
• Require support for legend removal is acceptable because firms commonly need issuer, transfer-agent, or counsel documentation before processing removal.
• Principal review of communications is acceptable because resale guidance on restricted securities creates supervisory and distribution-risk issues.

Question 7

An investment banking principal approves a distressed-issuer marketing memo without requiring legal review. The memo states that, if the issuer files for Chapter 11, existing common shareholders would recover value after secured lenders but before the issuer’s unsecured bondholders. The memo is then sent to prospective investors. What is the most likely consequence of this control failure?

• A. The Chapter 11 case would automatically convert to Chapter 7.
• B. Customer losses would become SIPC-protected in the bankruptcy.
• C. Unsecured bondholders would immediately control the issuer’s board.
• D. Investors may be misled because common stock ranks below unsecured debt.

Best answer: D

Explanation: The memo reverses bankruptcy priority by placing common equity ahead of unsecured creditors, which can materially misstate likely investor recovery.

The immediate consequence is misleading disclosure about bankruptcy recoveries. In Chapter 11, common equity is generally junior to both secured and unsecured creditors, so the memo could cause investors to overestimate shareholder recovery prospects.

This tests bankruptcy priority and supervisory review of offering or advisory materials. A principal who allows a distressed-issuer memo to circulate with the claim that common shareholders recover before unsecured bondholders has approved a materially misleading statement about creditor hierarchy. In a bankruptcy, equity holders are generally last in line, behind secured creditors and unsecured creditors. That means the most likely near-term consequence is investor misunderstanding about probable recoveries, not an automatic legal result in the bankruptcy case.

A sound supervisory control would require review of distressed-issuer materials for accuracy on:

• creditor priority
• likely recovery assumptions
• bankruptcy terminology
• investor-facing disclosure

The key takeaway is that the control gap most directly creates disclosure risk and potential investor harm by misstating where common equity stands in the capital structure.

• Automatic liquidation is wrong because inaccurate marketing material does not by itself convert a Chapter 11 case into Chapter 7.
• Immediate control shift is wrong because unsecured bondholders do not automatically take over governance upon a filing.
• SIPC confusion is wrong because issuer bankruptcy losses are not transformed into SIPC-protected claims by the existence of a securities communication.

Question 8

A firm’s WSP for private offerings requires additional principal review before accepting a subscription if projected illiquid private-placement holdings will exceed 25% of a customer’s liquid net worth, if the customer expects to need the funds within 24 months, or if issuer eligibility is not met.

Customer A: liquid net worth $1,200,000; existing illiquid private placements $100,000; proposed purchase $150,000; no cash need for 5 years; meets eligibility.

Customer B: liquid net worth $800,000; existing illiquid private placements $40,000; proposed purchase $200,000; no cash need for 5 years; meets eligibility.

Which supervisory action best matches the firm’s policy?

• A. Escalate neither customer because both meet eligibility.
• B. Escalate only Customer B for additional principal review.
• C. Escalate both customers because private offerings are illiquid.
• D. Escalate only Customer A for additional principal review.

Best answer: B

Explanation: Customer B’s projected illiquid private-placement holdings would be 30% of liquid net worth, exceeding the firm’s 25% review threshold.

The key issue is the firm’s concentration-review trigger, not the general fact that private offerings are illiquid. Customer B crosses the stated 25% limit after the proposed purchase, while Customer A does not and neither customer has a near-term liquidity need or eligibility problem.

When a firm’s WSP sets explicit escalation triggers for private offerings, the principal should apply those triggers to the specific customer facts before accepting the subscription. Here, both customers meet issuer eligibility and both state no need for the funds within 24 months, so the deciding factor is concentration in illiquid private placements.

• Customer A: projected holdings are $250,000 on $1,200,000 of liquid net worth, or about 20.8%
• Customer B: projected holdings are $240,000 on $800,000 of liquid net worth, or 30%

Because only Customer B exceeds the firm’s 25% threshold, only that subscription requires additional principal review. The closest distractor confuses a general product risk with the firm’s actual escalation standard.

• Wrong customer fails because Customer A remains below the 25% concentration threshold.
• All private offerings fails because illiquidity alone does not trigger extra review under these facts; the firm listed specific conditions.
• Eligibility only fails because meeting investor eligibility does not override a concentration-based review trigger.

Question 9

A member firm will co-manage a follow-on offering for an issuer in which the firm’s parent owns 18%. The lead banker on the deal receives an additional internal bonus only if the offering closes. During principal review, a draft roadshow deck does not address the affiliate relationship, and the firm’s WSPs require heightened review when issuer affiliations or deal-contingent compensation could create conflicts. Which action best aligns with sound principal supervision?

• A. Let the banker approve the deck if the bonus is disclosed internally.
• B. Escalate for independent conflict review and document required disclosures before use.
• C. Wait until pricing to review the conflict unless investors ask about it.
• D. Use the deck now because final prospectus delivery addresses conflicts later.

Best answer: B

Explanation: A parent-issuer affiliation plus deal-contingent compensation creates a conflict that warrants independent supervisory review and disclosure control before the deck is used.

The facts show two conflict indicators: an issuer affiliation through the firm’s parent and compensation tied to deal completion. A principal should respond with heightened, independent review and make sure any needed conflict disclosures are evaluated and documented before offering materials are used.

This is a disclosure-control and reasonable-supervision issue in an underwriting context. When a firm or its affiliates has a relationship with the issuer, and a deal professional has compensation that increases if the offering closes, the principal should treat the matter as a potential conflict that can affect marketing content, approvals, and fair dealing. The sound supervisory response is to escalate under the firm’s WSPs, use an independent reviewer rather than the conflicted deal professional, and document whether the prospectus and related offering materials contain any required conflict disclosure before dissemination.

Waiting for later prospectus delivery, relying on the conflicted banker, or postponing review until pricing all weaken controls at the point when investors are first being solicited. The key takeaway is that underwriting conflicts should be identified, reviewed, and documented before marketing materials are used.

• Later cure theory fails because roadshow materials still require proper supervisory review before they are used with investors.
• Conflicted self-approval fails because internal awareness of a bonus does not replace independent principal oversight.
• Delay until pricing fails because the conflict exists during marketing, not only at the end of the transaction.

Question 10

A principal reviews the following memo.

Exhibit: Research review memo

Issuer: West Harbor Biotech
Offering: Follow-on common stock
Firm role: Co-manager
Engagement letter: Signed today
Analyst coverage: Active
Research note: Earnings preview set to auto-release tomorrow
Current issuer status: Not on restricted list
Analyst included on due-diligence call: No

Which action is the only one fully supported by the exhibit?

• A. Wait until the offering prices before adding the issuer to any restricted process.
• B. Keep the report scheduled because the analyst is not on the due-diligence call.
• C. Permit the report if it uses only publicly available information.
• D. Apply offering-related restricted and publication controls now, and stop the auto-release pending review.

Best answer: D

Explanation: Once the firm has signed on as co-manager, the issuer should be subject to deal-related controls, and the queued research note should not auto-release without required review.

The exhibit shows that the firm is already participating in the offering because it has signed as co-manager. That participation is enough to trigger deal-related supervisory controls, so the principal should place the issuer under restricted/publication review and prevent an automatic research release.

The key concept is that offering participation can trigger supervisory controls before pricing and even before an analyst joins diligence. Here, the firm has already signed an engagement letter as co-manager in a follow-on offering, so the firm has an active investment banking role with the issuer. At that point, the principal should apply the firm’s deal-related information barrier, restricted-list, and publication-control process as required by its policies.

The exhibit also shows an earnings preview is set to auto-release tomorrow while the issuer is not yet on the restricted list. That is the immediate control gap. The principal should stop the automatic dissemination and route the report through the firm’s offering-related review process. The fact that the analyst was not on the due-diligence call does not remove the conflict created by the firm’s underwriting participation.

• Analyst not on diligence misses the point because the firm’s co-manager role itself creates the need for offering-related controls.
• Wait for pricing reads in a later trigger than the exhibit supports; the engagement is already signed.
• Public information only infers a safe harbor the exhibit does not provide; publication controls still apply during offering participation.

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