Deck 23: Rules Governing the Issuance and Trading of Securities

Question 1

Which of the following is true of securities?

A) They have no value in and of themselves.
B) Since they are paper, they can be produced in limited numbers only.
C) They are easily regulated in terms of hazards or merchantability.
D) Since they are paper, they cannot be easily manipulated by their issuers.

Answer 1

A

Question 2

Which of the following is true of the Securities Investor Protection Corporation (SIPC)?

A) It protects investors from losses up to $750,000 due to the financial failure of a brokerage firm.
B) It has the monitoring and bailout functions that the Federal Deposit Insurance Corporation (FDIC) has in banking.
C) It does not use trustees in any of its functions.
D) It supervises the liquidation of brokerage firms that are in financial trouble.

Answer 2

D

Question 3

The gives the Securities and Exchange Commission cease-and-desist powers and the power to impose substantial monetary penalties in administrative proceedings.

A) International Securities Enforcement Cooperation Act of 1990
B) Securities Enforcement Remedies and Penny Stock Reform Act of 1990
C) Private Securities Litigation Reform Act of 1995
D) Foreign Corrupt Practices Act of 1977

Answer 3

B

Question 4

Which of the following was established by the Securities Investor Protection Act of 1970?

A) the Securities and Exchange Commission (SEC)
B) the Securities Investor Protection Corporation (SIPC)
C) the Federal Deposit Insurance Corporation (FDIC)
D) the Federal Savings and Loan Insurance Corporation (FSLIC)

Question 5

Chapter 11 of the gives the Securities and Exchange Commission the authority to render advice when certain debtor corporations have filed for reorganization.

A) Private Securities Litigation Reform Act
B) Market Reform Act
C) Bankruptcy Abuse Prevention and Consumer Protection Act
D) Securities Enforcement Remedies and Penny Stock Reform Act

Question 6

Which of the following factors resulted in the federal regulation of securities in Congress?

A) corporations playing off one state against another by limiting their securities sales to states that had less stringent regulations
B) corporations' ability to thwart state efforts at regulation rather easily
C) securities being easily manipulated by issuers
D) the collapse of the stock market in 1929

Question 7

Which of the following acts requires all companies to set up a system of internal controls to provide reasonable assurance that the company's records accurately and fairly reflect its transactions?

A) the Foreign Corrupt Practices Act of 1977
B) the Private Securities Litigation Reform Act of 1995
C) the Market Reform Act of 1990
D) the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

Question 8

The Division of is responsible for setting and administering the disclosure requirements prescribed by the 1933 and the 1934 Securities Acts, the Public Utility Holding Company Act, and the Investment Company Act.

A) Market Regulation
B) Corporation Finance
C) Enforcement
D) Investment Management

Question 9

The Market Reform Act of 1990 authorizes the Securities and Exchange Commission to regulate trading practices during .

A) issuance of new stock by existing corporations
B) periods in which stock prices have failed to fluctuate significantly for two consecutive calendar quarters
C) periods of extreme market volatility
D) initial public offerings

Question 10

The Public Utility Holding Company Act of 1935 requires that public utility and holding companies .

A) set rates as low as possible without sacrificing a reasonable profit
B) register with the Securities and Exchange Commission and disclose information about their finances and operations
C) notify the Environmental Protection Agency before building new power facilities
D) elect board members at annual elections

Question 11

The Investment Advisers Act of 1940 requires persons and firms giving investment advice to clients to .

A) attend education seminars
B) demonstrate expertise in economics and finance
C) impose administrative sanctions on securities buyers
D) register with the Securities and Exchange Commission

Question 12

No more than three of the five commissioners of the Securities and Exchange Commission can be .

A) male
B) over the age of 60
C) from the same political party
D) stockbrokers

Question 13

The Division of supervises investigations and the initiation of injunctive actions.

A) Market Regulation
B) Corporation Finance
C) Enforcement
D) Investment Management

Question 14

The Securities Act of 1933 regulates the initial offering of securities by public corporations by prohibiting an offer or sale of securities not registered with the Securities and Exchange Commission.

Question 15

The Trust Indenture Act of 1939 regulates the public issuance of in excess of $5 million.

A) commodity fixtures
B) preferred stock and other debt securities
C) bonds and other debt securities
D) stock dividends

Question 16

The Securities Act of 1933 regulates the .

A) prices on the New York Stock Exchange
B) initial offering of securities by public corporations
C) elections of boards of directors of closely held corporations
D) interest rates on bonds

Question 17

Which of the following is true of the Securities Litigation Uniform Standards Act of 1998?

A) It is a safe harbor from liability for companies that make statements to the public about future risk factors.
B) It gives the Securities and Exchange Commission cease-and-desist powers and the power to impose substantial monetary penalties in administrative proceedings.
C) It is an amendment to the Private Securities Litigation Reform Act of 1995.
D) It sets national standards for securities class action lawsuits involving nationally traded securities.

Question 18

Which of the following is true of the Division of Market Regulation?

A) Accountants, lawyers, financial officers, and underwriters all rely heavily on advice from this division.
B) This division reviews all registration statements, prospectuses, and quarterly and annual reports of corporations, as well as their proxy statements.
C) It can recommend to the full commission the suspension of an exchange for up to three years.
D) It seeks to discourage manipulation or fraud in the issuance, sale, or purchase of securities.

Question 19

The Private Securities Litigation Reform Act of 1995 .

A) enables private investors to sue public corporations for securities violations
B) enables the Securities and Exchange Commission to sue private corporations for securities violations
C) provides a safe harbor from liability for companies that make statements to the public about future risk factors
D) provides payment of punitive damages and attorney fees to successful plaintiffs in cases of securities litigation

Question 20

Which of the following acts exempts all documents given to the Securities and Exchange Commission by foreign regulators from Freedom of Information Act disclosure requirements?

A) the Market Reform Act of 1990
B) the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
C) the Foreign Corrupt Practices Act of 1977
D) the International Securities Enforcement Cooperation Act of 1990

Question 21

The Securities and Exchange Commission is not charged with evaluating the worth of a public offering of securities by a corporation.

Question 22

Which of the following is true of the Sarbanes-Oxley Act of 2002?

A) It follows the traditional approach to corporate governance.
B) It established the Public Company Accounting Oversight Board.
C) It requires external auditors to certify financial reports.
D) It requires a separate team to be formed to certify financial reports.

Question 23

The 1990 Remedies Act allows the federal courts to bar anyone who has violated the fraud provisions of the federal securities laws from ever serving as an officer or director of a publicly held firm.

Question 24

The Securities and Exchange Commission (SEC) was created under the Securities Investor Protection Act (SIPA) of 1970.

Question 25

Credit rating agencies evaluated and rated billions in mortgage securities, and both the private sector and governments at all levels relied on these ratings.

Question 26

Hedge funds larger than $250 million must register with the Securities and Exchange Commission and provide some information as to trades and their individual portfolios.

Question 27

Which of the following is true of the Financial Stability Oversight Council?

A) The council will identify banks or nonbanks that pose a threat to the financial system.
B) The council was to be subject to oversight by the Government Accountability Office for a short period during 2008.
C) It does not include members of the Treasury and the Federal Reserve.
D) It was established by the Securities Exchange Act of 1934.

Question 28

Describe the Dodd-Frank legislation with regard to credit rating agencies.

Question 29

The Fed, with the approval of the Financial Stability Oversight Council, has the power to break up large firms and require such firms to increase their reserves against future losses.

Question 30

The Division of Corporation Regulation administers the Public Utility Holding Company Act of 1935.

Question 31

According to the Dodd-Frank legislation, Federal Deposit Insurance Corporation-insured institutions are allowed to have only percent of their capital invested in hedge funds and private equity funds.

A) 2
B) 3
C) 4
D) 5

Question 32

Which of the following is true of the Dodd-Frank Act with regard to regulating executive compensation?

A) Shareholders were allowed a nonbinding vote on executive compensation, as directed by the Federal Reserve.
B) Company executives received lower compensation when firms sold mortgage-backed securities and derivatives.
C) Companies cannot take back compensation if it is based on inaccurate accounting statements.
D) Only independent directors of a company could sit on compensation committees of the board.

Question 33

Derivatives cannot be used as hedges against risk.

Question 34

The Private Securities Litigation Reform Act of 1995 gives the Securities and Exchange Commission cease-and-desist powers and the power to impose substantial monetary penalties in administrative proceedings.

Question 35

Derivatives are synthetic securities that are dependent upon the movement of underlying variables.

Question 36

Discuss the risks taken by large banks and how the Dodd-Frank legislation restricts them.

Question 37

The Securities Investor Protection Act of 1970 gives the Securities and Exchange Commission authority to regulate the finances of public investment companies that invest in and trade in securities.

Question 38

Which of the following is true of the Dodd-Frank legislation?

A) Federal Deposit Insurance Corporation-insured institutions are required to keep their interests in hedge funds and private equity funds.
B) Investment banks have to set aside reserves to cover all forms of expenditure.
C) Originators of mortgage securities must hold 5 percent of the credit risk, thus retaining an interest in the performance of the securities.
D) Banks will be allowed to trade in a proprietary manner but cannot continue to buy or sell from their own accounts to hedge against other investments.

Question 39

Which of the following is true of the Dodd-Frank Act with regard to derivatives?

A) The Dodd-Frank statute will standardize derivatives traded on exchanges to decrease transparency.
B) Derivatives must be routed through a subsidiary to ensure that companies using them post collateral.
C) Banks can continue to trade derivatives in-house based on interest rates and foreign exchanges, and for purposes of hedging risk.
D) Banks will have to spin off their riskier derivatives and trade them through a clearing house.

Question 40

The Dodd-Frank Act did not deal with executive compensation.

Question 41

The Sarbanes-Oxley Act of 2002 requires CEOs and CFOs to certify financial reports.

Question 42

During the post-effective period, the registration statement usually becomes effective days after it is filed.

A) 10
B) 20
C) 60
D) 90

Question 43

Describe the criminal penalties under the Sarbanes-Oxley Act of 2002.

Question 44

An organizational directive is the first part of the registration statement the SEC requires from issuers of new securities. It contains material information about the business and its management, the offering itself, the use to be made of the funds obtained, and certain financial statements.

Question 45

A negotiable instrument is a stock, a bond, or any other instrument of interest that represents an investment in a common enterprise with reasonable expectations of profits that are derived solely from the efforts of those other than the investor.

Question 46

Under the Securities Act of 1933, Section allows the Securities and Exchange Commission to exempt offerings not exceeding $5 million.

A) 11(a)
B) 17(a)
C) 3(b)
D) 6(b)

Question 47

A red herring is an investment banking firm that purchases a securities issue from the issuing corporation with a view to eventually selling the securities to brokerage houses, which, in turn, sell them to the public.

Question 48

The maximum penalty for securities fraud under the Sarbanes-Oxley Act is years in prison.

A) 10
B) 25
C) 35
D) 45

Question 49

Which of the following is true of registration of securities under the Securities Act of 1933?

A) The act authorizes the Securities and Exchange Commission to decide whether or not a public offering of stock is meritorious and should be sold to the public.
B) The prospectus of a registration statement does not include pending lawsuits.
C) The registration statement provides the use to be made of the funds garnered by a public offering of stock and the risks involved for investors.
D) Part II of a registration statement is given to prospective buyers, but it is not open for public inspection at the Securities and Exchange Commission.

Question 50

Describe the exemptions from the registration process under the Securities Act of 1933.

Question 51

An underwriter is an investment banking firm that agrees to purchase a securities issue from the issuer, usually on a fixed date at a fixed price, with a view to eventually selling the securities to brokers who, in turn, sell them to the public.

Question 52

The Howey test for defining a security is based on three elements or characteristics: a) a common enterprise; b) a reasonable expectation of profit; and c) profits derived exclusively from one's own efforts.

Question 53

The Securities and Exchange Commission recognizes an issuer that has reported continuously under the 1934 Securities Exchange Act for at least three years as a(n) issuer.

A) unseasoned
B) seasoned
C) non-reporting
D) well-known seasoned

Question 54

Shelf registration under the Securities and Exchange Commission's Rule 415 allows .

A) a quicker form of registration than would otherwise be permitted under the 1933 Act
B) a more thorough examination of a company's registration statement than would otherwise occur under the 1933 Act
C) the sale of a limited number of securities prior to registration
D) the sale of securities over a period of time rather than immediately

Question 55

David, the chief executive officer of a bank in the United States, has been embezzling money from the bank's clients. In order to avoid being caught, David destroyed all the financial records. Due to these actions, David can be prosecuted under the .

A) Securities Act of 1933
B) Sarbanes-Oxley Act of 2002
C) Foreign Corrupt Practices Act of 1977
D) International Securities Enforcement Corporation Act of 1990

Question 56

State the new rules regarding written communication by issuers before and during registration of securities.

Question 57

Which of the following is true of a red herring prospectus?

A) It can be distributed to potential buyers during the pre-filing period, and limited sales can be finalized during this period.
B) It can be distributed to potential buyers during the pre-filing period to finalize sales.
C) It can be distributed to potential buyers during the waiting period, but no sales can be finalized during this period.
D) It can be distributed to potential buyers during the post-effective period to finalize any sales.

Question 58

The Securities and Exchange Commission recognizes an issuer that is permitted to use Form S-03, thus disclosing even less detail in the 1933 Act registration, as a(n) _ issuer.

A) non-reporting
B) seasoned
C) unseasoned
D) well-known seasoned

Question 59

The first element of the Howey test requires that the investor enter the transaction with a clear expectation of making a profit on the money invested.

Question 60

Which of the following is a characteristic of the Public Company Accounting Oversight Board?

A) It regulates all firms providing financial services.
B) It is a six-member board with legislative and disciplinary power.
C) A majority of the board is dependent on publicly held accounting companies.
D) The board is funded by publicly held companies overseen by the Securities and Exchange Commission.

Question 61

Diane is the chief executive officer of a U.S.-based pharmaceutical firm. Over the years, she has been purchasing significant amounts of stock in the company. The rejection of the company's new drug, by the FDA, resulted in a huge drop in the company's stock value. Diane knew of the rejection before it was made public and sold her stock. Diane is guilty of .

A) false accounting
B) black marketeering
C) insider trading
D) influence peddling

Question 62

State the amendments made to Rule 14(a) in 1983 with respect to exclusion of a shareholder proposal.

Question 63

Atlas Consultancies, a financial consulting firm, has received a tender offer for a takeover from a rival firm. In order to retain the goodwill of its management, Atlas gave its employees large bonus packages and other forms of compensation. Which of the following defensive strategies is Atlas using?

A) porcupine provision
B) golden parachute
C) white knight
D) greenmail

Question 64

The Uniform Securities Act has been adopted in part by some states to bring to state security laws.

A) diversity
B) accessibility
C) uniformity
D) accountability

Question 65

Which of the following is a correct statement regarding securities regulations?

A) Securities are regulated by state law, not federal law.
B) Securities are regulated by federal law, not state law.
C) Securities are regulated concurrently by state and federal laws.
D) Securities are regulated sequentially by state and federal laws.

Question 66

An exchange market is a securities market that provides a physical facility for the buying and selling of stocks and prescribes the number and qualifications of its broker-members. These brokers buy and sell stocks through the exchange's registered specialists, who are dealers on the floor of the exchange.

Question 67

Which of the following is true of state securities laws?

A) They are also referred to as "clear sky" laws.
B) They require that securities be registered with federal authorities only.
C) Securities are only regulated by state laws.
D) They regulate securities purchased and sold in intrastate commerce.

Question 68

State securities laws are often referred to as laws.

A) blue sky
B) dark water
C) open prairie
D) barbed wire

Question 69

The Securities Exchange Act of 1934 regulates the .

A) actions of brokers and dealers who trade in securities
B) use of public utility and holding companies
C) public issuance of bonds
D) structure and operation of public investment companies

Question 70

A person engaged in the business of buying and selling securities for others' accounts is called a dealer.

Question 71

State laws require that securities be registered (or qualified) with authorities.

A) state, not federal
B) federal, not state
C) both state and federal
D) neither state nor federal

Question 72

The Regulation Fair Disclosure (FD) required companies to .

A) publicize all potentially market-moving data at the time the data become available
B) make market-moving data available only to certain analysts
C) have more open relations with analysts who ask for data about the company's market performance
D) not share market-moving data with analysts or the public

Question 73

A tender offer is a public offer made by an individual or a corporation made directly to the shareholders of another corporation in an effort to acquire the targeted corporation at a specific price.

Question 74

The regulates the trading in securities once they are issued.

A) Trust Indenture Act of 1939
B) Securities Act of 1933
C) Securities Exchange Act of 1934
D) Investment Company Act of 1940

Question 75

Supreme Motors, a car manufacturer in the United States, decides to move to Delaware to avoid a hostile takeover bid. Delaware is known to have strong antitakeover laws. Which of the following defense strategies is Supreme Motors using?

A) scorched-earth policy
B) porcupine provision
C) white knight
D) shark repellent

Question 76

Which of the following terms refers to buying out a hostile shareholder at a price far above the current price of the target company's stock in exchange for the hostile shareholder's agreement not to buy more shares for a period of time?

A) golden parachute
B) poison pill
C) porcupine provision
D) greenmail

Question 77

Which of the following defensive strategies refers to bankrupting a company?

A) porcupine provision
B) scorched-earth policy
C) shark repellent
D) white knight

Question 78

What is Regulation Fair Disclosure? Explain the views of those favoring and opposing Regulation FD.

Question 79

Amendments to the Securities Exchange Act in 1975 required any exchange or over-the- counter market to .

A) register each individual market transaction with the Securities and Exchange Commission
B) obtain advance approval from the Securities and Exchange Commission prior to any rule changes
C) report profits and losses to the Securities and Exchange Commission on a monthly basis
D) cease all trading activity in times of severe recession

Question 80

Which of the following is a difference between an exchange market and an over-the-counter (OTC) market?

A) An exchange market is a securities market, whereas an OTC market is a goods market.
B) An exchange market has no membership qualifications, whereas an OTC has membership qualifications.
C) An exchange market provides a physical facility for the buying and selling of securities, whereas an OTC market has no physical facility.
D) An exchange market involves brokers buying directly from the public, whereas an OTC market involves brokers buying and selling stocks through registered specialists.