What is the restriction on the use of a new issue to cover a short position?

What is the restriction on the use of a new issue to cover a short position?

• A. Within 5 business days after the sale
• B. Within 5 business days prior to pricing a follow-on
• C. At any time during the offering process
• D. Only during the 10 days after pricing

Answer: (B)

The correct answer indicates that there is a restriction on using a new issue to cover a short position within 5 business days prior to pricing a follow-on offering. This aligns with FINRA rules, which aim to prevent market manipulation and ensure fair trading practices. During this critical period before the pricing of a follow-on offering, actions like covering short positions with newly issued shares could impact the stability and pricing of the offering. It may create an artificial demand for a security, jeopardizing the integrity of the market and the fair allocation of shares among investors. Therefore, brokers and underwriters must exercise caution and adhere to this restriction to maintain a level playing field in the market. In contrast, the other options do not accurately reflect the timing of the restrictions associated with using a new issue to cover short positions during follow-on offerings or other related market activities. For instance, covering short positions at any time during the offering process or within 5 business days after the sale would not align with the established regulatory framework designed to prevent potential abuses surrounding new issues.

The correct answer indicates that there is a restriction on using a new issue to cover a short position within 5 business days prior to pricing a follow-on offering. This aligns with FINRA rules, which aim to prevent market manipulation and ensure fair trading practices.

During this critical period before the pricing of a follow-on offering, actions like covering short positions with newly issued shares could impact the stability and pricing of the offering. It may create an artificial demand for a security, jeopardizing the integrity of the market and the fair allocation of shares among investors. Therefore, brokers and underwriters must exercise caution and adhere to this restriction to maintain a level playing field in the market.

In contrast, the other options do not accurately reflect the timing of the restrictions associated with using a new issue to cover short positions during follow-on offerings or other related market activities. For instance, covering short positions at any time during the offering process or within 5 business days after the sale would not align with the established regulatory framework designed to prevent potential abuses surrounding new issues.