Deck 17: Financial and Securities Regulations

Question 1

A plaintiff in a Rule 10b-5 suit is not required to prove damages in order to prevail.

Answer 1

False
Explanation: A plaintiff in a suit under Rule 10b-5 must prove damages.

Question 2

Contracts to buy and sell securities are finalized during the posteffective period.

Answer 2

True
Explanation: The end of the waiting period is the beginning of the posteffective period. During this period, contracts to buy and sell securities are finalized.

Question 3

The Securities and Exchange Commission has both quasi-legislative and quasi-judicial powers.

Answer 3

True
Explanation: The SEC has both quasi-legislative and quasi-judicial powers.

Question 4

Sarbanes-Oxley has increased the statute of limitations for various infringements of both the 1933 Act and the 1934 Act.

Question 5

It is legal to sell a covered security during the prefiling period.

Question 6

A person cannot be considered an insider unless he/she owns at least 51 percent of a security.

Question 7

The law prohibits the sale of worthless securities.

Question 8

Proof of negligence leading to corporate mismanagement is not enough to prove a case of seller's fraud under Rule 10b-5.

Question 9

Fraud occurs when any material fact is omitted from a prospectus causing a statement to be misleading.

Question 10

Under the 1933 Act, the statute of limitations begins to run the moment the untrue statement or communication containing an omission is made public.

Question 11

The prospectus provides expert analysis of a particular security's expectations of future worth.

Question 12

A tipster is a person who learns of nonpublic information from an insider.

Question 13

The SEC applies the misappropriation theory of insider trading to force executives who file or certify incorrect financial statements to return bonuses and additional compensation received.

Question 14

The burden of proof when alleging a due diligence defense is on the expert.

Question 15

The Securities Act of 1933 is a disclosure law with respect to the initial sale of securities to the public.

Question 16

The Securities Exchange Act makes it illegal to sell a security on a national exchange unless a registration is effective for the security.

Question 17

Plaintiffs can recover for harm done by false or misleading information in a prospectus even if the prospectus was not read or reviewed.

Question 18

Liability traditionally has been imposed against violators even though they lacked any wrongful intent.

Question 19

Securities laws are designed to protect the buying public by requiring accurate information so that they can make intelligent investment decisions based on factual information.

Question 20

A defrauding seller usually benefits from an increase in the value of the securities.

Question 21

An individual who participates in the original distribution of securities by selling such securities for the issuer or by guaranteeing their sale is referred to as the:

A) seller.
B) controlling person.
C) issuer.
D) underwriter.
E) bailee.

Question 22

Under the Sarbanes-Oxley Act, whistleblowers that suffer retaliation are able to recover civil damages and can be reinstated if terminated improperly.

Question 23

A certificate of interest or participation in any profit-sharing agreement is an example of a(n):

A) stock.
B) bond.
C) treasury stock.
D) security.
E) debenture.

Question 24

Restatements of financial reports have risen in number as a result of Sarbanes-Oxley because companies have made efforts to maintain appropriate compliance with the law.

Question 25

The Consumer Financial Protection Board was established under the Dodd-Frank Act.

Question 26

Sarbanes-Oxley limits personal loans from a company to its executives to one loan of no more than $10,000, amortized over five years, at a time.

Question 27

Sarbanes-Oxley provides protections for whistleblowers so that individuals are more willing to report the corruption that can lead to major scandals.

Question 28

Under the 1933 Act, proof of intentional violation is usually required to impose:

A) criminal sanctions only.
B) criminal or civil sanctions.
C) criminal and pragmatic sanctions.
D) criminal, civil, and equitable (injunctive) sanctions.
E) pragmatic sanctions.

Question 29

The Public Company Accounting Oversight Board (PCAOB) permits auditing firms to conduct a variety of nonauditing services.

Question 30

The registration statement to be filed with the SEC includes:

A) statements which gives the holder the right to purchase securities at a stipulated price within a specified time limit.
B) a written promise to repay a specified sum of money plus interest at a specified rate and length of time to fulfill the promise.
C) statements that show ownership of a bond, stock or other security.
D) financial statements and a report on operations, issued by a company to its shareholders at the company's fiscal year-end.
E) a detailed disclosure of financial information about the issuer and the controlling individuals involved in the offering of securities for sale to the public.

Question 31

The Uniform Securities Act has been the model for blue sky laws.

Question 32

The regulation of securities began as a program to:

A) prohibit an individual's service as an officer or director.
B) recover triple damages in civil actions against a user of nonpublic information.
C) help the United States overcome the Great Depression of the 1930s.
D) eliminate liabilities for short-swing profits made by insiders.
E) help potential investors to make investment decisions based on less certain criteria.

Question 33

The blue sky laws can apply to securities subject to federal laws as well as to those securities exempt from the federal statutes.

Question 34

The Security Act of 1933 requires the preparation and distribution to potential investors of the:

A) registration statement only.
B) registration statement and prospectus.
C) prospectus and licensing agreement.
D) registration statement, prospectus, and licensing agreement.
E) licensing agreement.

Question 35

Congress, through the PCAOB, limits the amount of damages private plaintiffs can recover and restricts attorney fees.

Question 36

A(n) _____ is the individual or business organization offering a security for sale to the public.

A) seller
B) controlling person
C) issuer
D) underwriter
E) financial sponsor

Question 37

The _____ is a disclosure law which makes it illegal to use mails or any other means of interstate communication or transportation to sell securities without disclosing certain financial information to potential investors.

A) Securities Exchange Act of 1934
B) Sherman Antitrust Act of 1890
C) Sarbanes-Oxley Act of 2002
D) Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
E) Securities Act of 1933

Question 38

The SEC's adoption of rules and regulations relating to financial and other information furnished to the Commission comes under its _____ power.

A) quasi-judicial
B) executive
C) quasi-executive
D) quasi-legislative
E) bargaining

Question 39

The SEC's right to conduct investigations is based on:

A) their quasi-executive power.
B) their quasi-legislative power.
C) their quasi-judicial power.
D) an executive order.
E) an injunction.

Question 40

Whistleblowers who first use a company's internal processes before reporting to the SEC are entitled to potentially higher financial rewards.

Question 41

According to the Securities Act of 1933, which of the following is considered legal during the prefiling period?

A) Selling a covered security.
B) Negotiations and agreements with underwriters.
C) Offering to sell a covered security.
D) Offering to buy a covered security.
E) Sellers may solicit offers for later acceptance.

Question 42

Sarbanes-Oxley requires that information pertaining to an insider's transaction be filed:

A) by mail, postmarked within two business days of the transaction.
B) electronically within two business days of the transaction.
C) by any effective means within 10 business days of the transaction.
D) by any effective means within 10 business days after the close of the calendar month in which the transaction occurred.
E) electronically on the day of the transaction.

Question 43

Prohibitions against insiders from engaging in short-swing profits are enforced by the:

A) SEC.
B) FTC.
C) SEC and FTC.
D) issuer of the security or by a person who owns a security of the issuer.
E) issuer of the security or the SEC.

Question 44

Which of the following is NOT true of the statute of limitations?

A) The statute of limitations is a defense for both civil and criminal liability.
B) The basic limitations period is one year.
C) In no event may a suit be brought more than one year after the sale.
D) The one year limitations period does not start to run until the discovery of the untrue statement or omission.
E) The one year limitations period does not start to run until the time such discovery would have been made with reasonable diligence.

Question 45

A(n) _____ is one who controls or is controlled by the issuer, such as a major stockholder of a corporation.

A) seller
B) bailee
C) underwriter
D) guarantor
E) controlling person

Question 46

According to the Securities Act of 1933, which of the following is illegal during the waiting period?

A) Soliciting buyers for a company's securities.
B) Receiving offers to buy a company's securities.
C) Selling security subject to the act.
D) Soliciting through the use of a summary prospectus.
E) Soliciting offers for later acceptance.

Question 47

Which of the following statements is true of a seller?

A) It refers to anyone who contracts with a purchaser or who is a motivating influence that causes the purchase transaction to occur.
B) It refers to the individual or business organization offering a security for sale to the public.
C) It refers to anyone who participates in the original distribution of securities by selling such securities for the issuer or by guaranteeing their sale.
D) It refers to a person with whom some article is left, usually pursuant to a contract who is responsible for the safe return of the article to the owner when the contract is fulfilled.
E) It refers to anyone who controls or is controlled by the issuer, such as a major stockholder of a corporation.

Question 48

Short-swing profits:

A) refer to any profits made by insiders who buy and sell company stock within a three-month time period.
B) rule of Section 16 depends on any misuse of information.
C) by insiders, regardless of the insiders' states of mind, are absolutely prohibited.
D) requires proof of intent to deceive under Section 10(b).
E) liability is created by the Securities Act of 1933.

Question 49

The damages of a defrauded purchaser of securities:

A) are measured at the time of purchase.
B) include a punitive amount to discourage further fraud.
C) are measured at the time the fraud is discovered.
D) are considered a "sunk cost" and are not recoverable.
E) include speculative damages.

Question 50

A prospectus is filed during the:

A) prefiling period.
B) waiting period.
C) preeffective period.
D) posteffective period.
E) elimination period.

Question 51

_____ ads are brief announcements identifying the security and stating its price, by whom orders will be executed, and from whom a prospectus may be obtained.

A) Tombstone
B) Institutional
C) Coupon
D) Adjunct
E) Overlay

Question 52

An insider is any person who owns more than _____ percent of any security.

A) 5
B) 10
C) 15
D) 20
E) 50

Question 53

Under Rule 10b-5, plaintiffs are entitled to:

A) contemptuous damages.
B) consequential damages.
C) aggravated damages.
D) restitutionary damages.
E) punitive damages.

Question 54

Section 10(b) and Rule 10b-5 are usually referred to as the _____ provisions of the 1934 Act.

A) civil
B) discretionary
C) general duties
D) antifraud
E) rulemaking

Question 55

"Benefit of the bargain" refers to the damages awarded to the buyer which is:

A) designed to restore the injured party to the economic position he/she occupied at the time the contract was entered.
B) equal to the out-of-pocket expenses such as the legal fees incurred by the plaintiff.
C) equal to what the security was represented to be worth in the market.
D) equal to the combination of the out-of-pocket expenses and what the security was represented to be worth in the market.
E) equal to the difference between what he/she paid and what the security was represented to be worth.

Question 56

Due diligence defense requires that an expert prove that a reasonable investigation of the financial statements of the issuer and _____ was conducted.

A) sellers
B) bailees
C) underwriters
D) controlling persons
E) guarantors

Question 57

Tombstone ads refer to:

A) solicitations made during the waiting period.
B) notices filed during the posteffective period announcing that the sale of securities has ended.
C) announcements issued by the SEC warning potential investors that a company is being investigated for fraud.
D) feedback from the SEC requiring additional information or a clarification of supplied information needed to complete a filed registration statement.
E) the statement that is required to be filled with the SEC.

Question 58

The registration process waiting period typically lasts:

A) 10 days.
B) 20 days.
C) 30 days.
D) 45 days.
E) 60 days.

Question 59

The _____ regulates transfers of securities after the initial sale.

A) Securities Exchange Act of 1934
B) Sherman Antitrust Act of 1890
C) Sarbanes-Oxley Act of 2002
D) Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
E) Securities Act of 1933

Question 60

_____ refers to the intent of a defendant-seller to deceive or mislead.

A) Handhabend
B) Double jeopardy
C) Per minas
D) Mens rea
E) Scienter

Question 61

The Public Company Accounting Oversight Board was created by the:

A) Securities Act of 1933.
B) Securities Exchange Act of 1934.
C) Security Fraud Enforcement Act.
D) Sarbanes-Oxley Act.
E) Sherman Act.

Question 62

Under the 1934 Act, a business organization found guilty of filing false or misleading documents with the SEC may be fined up to:

A) $81,000,000.
B) $55,000,000.
C) $25,000,000.
D) $50,000,000.
E) $75,000,000.

Question 63

According to the Sarbanes-Oxley Act, auditors are required to preserve audit records for a period of:

A) three years.
B) five years.
C) two years.
D) nine years.
E) seven years.

Question 64

According to the SEC, a person should be considered to be a temporary insider if that person conveys nonpublic information that was to have been kept confidential. This philosophy has become known as the:

A) quasi-insider theory.
B) implied-insider theory.
C) temporary insider theory.
D) misappropriation theory.
E) mosaic theory.

Question 65

What are tombstone ads and when do they occur?

Question 66

The Financial Stability Oversight Council was established by the:

A) Securities Exchange Act of 1934.
B) Sherman Antitrust Act of 1890.
C) Sarbanes-Oxley Act of 2002.
D) Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
E) Securities Act of 1933.

Question 67

The Public Company Accounting Oversight Board members are appointed by the:

A) President.
B) Senate.
C) FTC.
D) Congress.
E) SEC.

Question 68

The Securities Enforcement Remedies Act:

A) allows for the prohibition of an individual's service as an officer or director of a business organization.
B) created the SEC.
C) changes membership requirements of corporate audit committees.
D) requires proof of criminal violation for individual and organizational fines to be imposed.
E) refrains from imposing liability on a theory of fraud on any person who shall make or cause to be made any false or misleading statements.

Question 69

What are the sanctions recognized by the 1933 Securities Act in case of untrue or misleading information being provided to a potential investor?

Question 70

Sarbanes-Oxley provides that whenever there is a restatement of the company's financial condition, then the executives:

A) would be morally rather than legally culpable for the bonuses paid as a result of the incorrect financial statements.
B) have to forfeit their salaries to cover for the amount of the bonuses paid to them on the basis of incorrect financial statements.
C) would not be legally bound to return any bonuses paid as a result of the incorrect financial statements.
D) must return any bonuses paid as a result of the incorrect financial statements along with the interest.
E) must return any bonuses paid as a result of the incorrect financial statements.

Question 71

The Private Securities Litigation Reform Act mandated that:

A) plaintiffs could proceed with minimal evidence of fraud.
B) only the SEC could pursue claims against third parties not directly responsible for a securities law violation.
C) the PCAOB was given the authority to decide whether third parties not directly responsible for a securities law violation were nevertheless involved so closely with the violation that they could have claims pursued against.
D) private plaintiffs who suffered injury could maintain private causes of action against third parties not directly responsible for a securities law violation.
E) the FTC could pursue claims against third parties not directly responsible for a securities law violation.

Question 72

The process of registration created by the Uniform Securities Act is known as registration by:

A) coordination.
B) notification.
C) qualification.
D) pronouncement.
E) announcement.

Question 73

When is a prospectus issued, what is its purpose, and what has the SEC specified as requirements to be contained in the prospectus?

Question 74

The Insider Trading and Securities Fraud Enforcement Act of 1988 provides that suits alleging illegal use of nonpublic information may be filed up to a maximum period of _____ years after the wrongful transaction.

A) six
B) ten
C) eight
D) five
E) seven

Question 75

Registration by notification:

A) is required by those issuers who do not have a proven record and who are not subject to the Securities Act of 1933.
B) refers to documents filed with the Securities & Exchange Commission (SEC) by a privately held company, declaring its intent to offer shares of its stock to the general public.
C) is required for those issuers of securities who must register with the SEC and the duplicate documents are filed with the state's administrative agency.
D) refers to the quality certification process in which an independent and accredited quality auditor conducts an on-site audit of a firm.
E) allows issuers to offer securities for sale automatically after a stated time period expire unless the administrative agency takes action to prevent the offering.

Question 76

According to the Sarbanes-Oxley Act, the accuracy of the company's financial records is certified by the:

A) CEO and COO.
B) COO and CFO.
C) CEO and CFO.
D) CEO and CIO.
E) CFO and CIO.

Question 77

Parties who are involved with or who promote the initial sale of securities fall into one or more of four roles. Mention these roles.

Question 78

What are the three questions that a court will seek to answer when determining whether a person has purchased a security?

Question 79

The civil penalty provided by the Insider Trading and Securities Fraud Enforcement Act of 1988 for profits gained with nonpublic information is:

A) imprisonment up to two years.
B) return of illegal profits gained.
C) recovery of double damages.
D) recovery of triple damages.
E) imprisonment up to a period of 10 years.

Question 80

Under the 1934 Act, an individual found guilty of filing false or misleading documents with the SEC may be imprisoned up to:

A) 5 years.
B) 10 years.
C) 15 years.
D) 20 years.
E) 25 years.