Deck 23: Securities Regulation

Question 1

Which of the following are examples of securities?

A) Debentures
B) Warrants
C) Stocks
D) Debentures, warrants, and stocks
E) Debentures and stocks, but not warrants

Answer 1

D
Explanation: Securities include stocks, bonds, debentures, and warrants.

Question 2

Which of the following was the result on appeal in Liberty Property Trust and Liberty Property Limited Partnership v. Republic Properties Corp., the case in the text involving whether limited partnership units were securities?

A) That the limited partnership units were securities.
B) That ½ of the limited partnership units were securities but that ½ were not.
C) That the limited partnership units were securities only so long as the limited partners refrained from participating in management activities.
D) That the limited partnership units were securities for some respects but not for others.
E) That the limited partnership units were not securities.

Answer 2

A
Explanation: Principles applied in earlier cases lead the court to conclude that the limited partnership units at issue were securities.

Question 3

The SEC issues opinions regarding the worth of securities.

Answer 3

False
Explanation: The SEC does not make any judgment about the worth of securities.

Question 4

If an investor purchased securities and suffered damages as a result of an issuer's false or misleading statement, the investor is entitled to bring a civil suit to recover his or her losses.

Question 5

Under the 1933 Act, any security offered or sold to a permanent resident of the single state where the issuer of the security resides and does business is exempt.

Question 6

Which of the following references stock and bonds issued by corporations to raise capital for corporate expansion?

A) Acknowledgements
B) Securities
C) Stock and bond options
D) Investment options
E) Funding agreements

Question 7

If a violation of federal securities laws is serious enough to merit criminal prosecution, the Fraud Section of the Securities and Exchange Commission prosecutes the action.

Question 8

Which of the following was the result on appeal in Securities and Exchange Commission v. Texas Gulf Sulphur Co, the case in the text in which it was alleged that corporate employees possessed inside information involving the likelihood of a major mineral find precluding them from trading in their company's stock?

A) That the defendants could not be held liable because they were not executives of the company.
B) That the defendants could not be held liable because company policy precluded them from disclosing the information at issue to the public.
C) That the defendants could not be held liable because a significant mineral discovery was not sufficiently certain to require disclosure to the public.
D) That the defendants could be held liable because of their status as insiders regardless of whether the information would be deemed material.
E) That the defendants could be held liable because they failed to reveal material information to the public.

Question 9

Which of the following created the Securities and Exchange Commission?

A) The Securities Act of 1933
B) The Securities Exchange Act of 1934
C) The Depression Act of 1932
D) The Oversight Act of 1935
E) The Stock and Bond Act of 1930

Question 10

Under the Securities Exchange Act of 1934, corporate officers are not considered insiders.

Question 11

Investment contracts are securities.

Question 12

What was the result on appeal in Steven Klein, Warren Brandwine v. General Nutrition Companies, Inc., the case in the text in which the plaintiffs claimed that defendant GNC violated several securities regulations by failing to disclose material facts in its prospectus?

A) That the defendant violated securities regulations by failing to disclose a possible loss of advertising support based on the advertiser's decrease in sales.
B) That the defendant violated securities regulations by failing to disclose a worldwide vitamin E shortage that could affect the defendant's sales.
C) That the defendant violated securities regulations by failing to disclose that same-store sales were being adversely affected by the opening by the defendant of new stores in close proximity to old stores.
D) That the defendant violated securities regulations by failing to disclose a possible loss of advertising support based on an advertiser's decrease in sales; by failing to disclose a worldwide vitamin E shortage that could affect the defendant's sales; and by failing to disclose that same-store sales were being adversely affected by the opening by the defendant of new stores in close proximity to old stores.
E) That there was no violation of securities laws because all alleged omissions were immaterial as a matter of law.

Question 13

Chinese law fails to provide securities regulation.

Question 14

Which of the following was the result on appeal in United States v. Carpenter, the case in the text in which it was claimed that federal securities law was violated by a scheme by which confidential information gained in the course of obtaining news material for the Wall Street Journal was sold to stockbrokers?

A) That the defendants were criminally liable for violating federal securities laws by misappropriating material, nonpublic information for their own profit in the purchase and sale of securities.
B) That the defendants were not criminally liable for violating federal securities laws by misappropriating material, nonpublic information for their own profit in the purchase and sale of securities but that they could be held liable in a civil action to any investors who suffered harm.
C) That the stockbrokers were criminally liable for violating federal securities laws by misappropriating material, nonpublic information for their own profit in the purchase and sale of securities but that there was no basis upon which the newspaper employees could be held criminally liable.
D) That the newspaper employees could be held criminally liable for violating federal securities laws by misappropriating material, nonpublic information for their own profit but that there was no basis upon which the stockbrokers could be held liable.
E) That there was no basis upon which either the newspaper employees or the stockbrokers could be held criminally liable under federal securities law or under civil causes of action brought by investors.

Question 15

A person who violates the 1933 Securities Act can be fined but not sent to jail.

Question 16

Which of the following are acts regulating securities transactions?

A) The Securities Act of 1933.
B) The Securities Exchange Act of 1934.
C) The Anti-Fraud Securities Act of 2001.
D) The Securities Act of 1933, the Securities Exchange Act of 1934, and the Anti-Fraud Securities Act of 2001.
E) The Securities Act of 1933 and the Securities Exchange Act of 1934, but not the Anti-Fraud Securities Act of 2001.

Question 17

The SEC may issue bounty payments to insider-trading whistle-blowers.

Question 18

Which of the following was the ruling by a majority of the court in Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., the case in the text in which the U.S. Supreme Court addressed the issue of the liability of bankers, lawyers, and other third parties who did not directly mislead investors but worked with corporations that did?

A) That bankers, lawyers, and other third parties who did not directly mislead investors but worked with corporations that did can be held liable to the same extent as the primary wrongdoers.
B) That bankers, lawyers, and other third parties who did not directly mislead investors but worked with corporations that did could be held liable to shareholders only if the primary wrongdoers were insolvent and also that the secondary wrongdoers could be punished by criminal prosecution and enforcement actions by the SEC.
C) That bankers, lawyers, and other third parties who did not directly mislead investors but worked with corporations that did could be held liable to shareholders only if the primary wrongdoers were insolvent and also that the secondary wrongdoers could not be punished by criminal prosecution and enforcement actions by the SEC.
D) That bankers, lawyers, and other third parties who did not directly mislead investors but worked with corporations that did cannot be sued by shareholders and also cannot be held criminally liable or subject to enforcement actions by the SEC.
E) That bankers, lawyers, and other third parties who did not directly mislead investors but worked with corporations that did cannot be sued by shareholders but can be subject to criminal prosecutions and enforcement actions by the SEC.

Question 19

Securities may be sold during the prefiling period.

Question 20

The average investor does not have to register securities when he or she wants to sell.

Question 21

Which of the following is the period beginning when an issuer begins to think about issuing securities and ending when the issuer files the registration statement and prospectus with the SEC?

A) The initial filing period
B) The beginning filing period
C) The prefiling period
D) The required filing period
E) The waiting period

Question 22

Which of the following would be considered an accredited investor?

A) Any natural person whose annual income has been at least $200,000 for the two previous years and expects to make at least $200,000 in the current year.
B) Any corporation or partnership with total assets in excess of $5 million.
C) Insiders of the issuers, such as executive officers or directors.
D) Colleges and universities.
E) All of these.

Question 23

Which of the following regulates how companies issue corporate securities?

A) The Securities Act of 1933
B) The Securities Exchange Act of 1934
C) The Depression Act of 1932
D) The Oversight Act of 1935
E) The Stock and Bond Act of 1930

Question 24

Which of the following created the Public Company Accounting Oversight Board to regulate public accounting firms?

A) The Sarbanes-Oxley Act of 2002
B) The Securities Acts Amendments of 1990
C) The Market Reform Act of 1990
D) The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
E) The National Securities Markets Improvement Act of 1996

Question 25

For how long does each member at the head of the Securities and Exchange Commission serve?

A) 5 years
B) 3 years
C) 2 years
D) 1 year
E) Eighteen months

Question 26

How are the heads of the Securities and Exchange Act chosen?

A) They are appointed by the president.
B) Each state has one appointee appointed by the governor of each state.
C) They are appointed by a two-thirds vote of the Senate.
D) They are appointed by a majority vote of the Senate.
E) They are appointed by a majority vote of the House of Representatives.

Question 27

Once an issuer files a registration statement and prospectus, the ___________ period begins.

A) Advertising
B) Post-filing
C) Waiting
D) Approval
E) Prospectus

Question 28

The Securities and Exchange Commission is headed by how many individuals?

A) 50
B) 25
C) 20
D) 10
E) 5

Question 29

Which of the following is an example of an exempt transaction?

A) Limited offers
B) Intrastate issues
C) Resales of securities
D) Limited offers, intrastate issues, and resales of securities
E) Limited offers and intrastate issues, but not resales of securities

Question 30

Which of the following references a brief ad that may be issued by an issuer during the waiting period?

A) An advertisement
B) A special offering
C) An unsolicited offering
D) A tombstone advertisement
E) None of these because no ads may be issued during the waiting period

Question 31

Which of the following must occur in order for the exemption involving intrastate issues to apply?

A) Issuers must do at least 80 percent of their business within the state.
B) Issuers must have at least 80 percent of their assets within the state.
C) Issuers must plan to use at least 80 percent of the profits within the state.
D) Issuers must have their main offices in the state.
E) All of these.

Question 32

Which of the following is a person who controls, is controlled by, or is in common control with the issuer?

A) An affiliate
B) An associate
C) A partner
D) A holder
E) A tipper

Question 33

Which of the following permit(s) the SEC to seek punishment of violators of foreign securities laws?

A) The Sarbanes-Oxley Act of 2002
B) The Securities Acts Amendments of 1990
C) The Market Reform Act of 1990
D) The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
E) The National Securities Markets Improvement Act of 1996

Question 34

Which of the following permits qualified issuers to register securities that they will sell on a delayed or continuous basis in the future?

A) Delayed registrations
B) Continuous registrations
C) Approved registrations
D) Shelf registrations
E) None of these because that practice is illegal

Question 35

Which of the following allows the SEC to suspend securities trading if prices vary excessively in a short time period?

A) The Sarbanes-Oxley Act of 2002
B) The Securities Acts Amendments of 1990
C) The Market Reform Act of 1990
D) The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
E) The National Securities Markets Improvement Act of 1996

Question 36

Which of the following describes investment banking firms that purchase securities from the issuing corporation with the intent of selling them to brokerage houses which then sell them to the public?

A) Underwriters
B) Offerors
C) Issuers
D) Accredited purchasers
E) None of these because that practice is illegal

Question 37

Which of the following permit(s) the SEC to exempt persons, securities, and transactions from securities regulations?

A) The Sarbanes-Oxley Act of 2002
B) The Securities Acts Amendments of 1990
C) The Market Reform Act of 1990
D) The Securities Enforcement Remedies and Penny Stock Reform Act of 1990
E) The National Securities Markets Improvement Act of 1996

Question 38

Which of the following begins when the SEC declares the registration statement effective, and ends when the issuer sells all securities offered or withdraws them from sale?

A) The post effective period
B) The acknowledgement period
C) The approved period
D) The sell period
E) The investment period

Question 39

Which of the following oversees the purchase and sale of securities?

A) The Securities Act of 1933
B) The Securities Exchange Act of 1934
C) The Depression Act of 1932
D) The Oversight Act of 1935
E) The Stock and Bond Act of 1930

Question 40

A[n] ______ prospectus is a prospectus with a warning written in red print at the top of the page warning investors that the registration has been filed with the SEC but has not yet been approved.

A) Red-line
B) Red-herring
C) Red-fish
D) Bait
E) None of these because a prospectus may not be issued prior to approval

Question 41

Reference - Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announce was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a nice profit. In which of the following prohibited practices was Linda engaged by purchasing the shares after she found out about the merger?

A) Insider trading
B) Outlaw trading
C) Presidential trading
D) Officer profiting
E) Prohibited profiting

Question 42

Reference - In Trouble. Bruno, an issuer of stock, may be in trouble. He sold stock in a new health club venture before the effective date of registration. He did so because was in financial trouble involving other ventures of his and needed additional funds. Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale. Unfortunately, he was wrong. The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible. Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus. Investors bitterly complained. Rick, a new lawyer, told Bruno that as far as he knew, the SEC could fine Bruno under the Securities Act of 1933 but could not send him to jail. Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture. Bruno says that he plans to rely on the due diligence defense. Bruno also asks Rick if he is aware of any other defenses. Bruno says that he has never previously been in trouble with the SEC. Is Rick correct in that the SEC would have no authority to send Bruno to jail?

A) Rick is correct because there are no criminal penalties for violating the 1933 Act.
B) Rick is incorrect because the SEC criminally prosecutes some violators although the action would only be a misdemeanor.
C) Rick is correct in that the SEC itself would not send Bruno to jail, but the SEC could recommend criminal action to the Department of Justice resulting in imprisonment for up to five years for a violation.
D) Rick is incorrect because the SEC criminally prosecutes some violators, and a violation of the act is considered a felony that could lead to a prison term of 10 years.
E) Rick is correct in that the SEC itself would not send Bruno to jail, but the SEC could recommend criminal action to the Federal Bureau of Investigation resulting in imprisonment for up to ten years for a violation.

Question 43

Which of the following is a reason Congress passed the Private Securities Litigation Reform Act of 1995?

A) To provide protection to companies who issue forecasts of earnings.
B) To provide stronger penalties against companies who issue forecasts of earnings that turn out to be wrong.
C) To provide stronger penalties against insiders who trade on forecasts of earnings.
D) To provide protection to insiders who trade on forecasts of earnings.
E) To provide protection to companies who issued forecasts of earnings and also to provide protection to insiders who trade on such forecasts.

Question 44

Which of the following refer to state securities laws?

A) Pink-sky laws
B) Blue-sky laws
C) Orange-sky laws
D) Brown-ground laws
E) Green-grass laws

Question 45

Which of the following prohibits the use of manipulative and deceptive devices to bypass SEC rules?

A) Section 15(a)
B) Section 10(b)
C) Section 5
D) Rule 2
E) Rule 2(5)

Question 46

Which of the following prohibits fraud associated with the purchase or sale of all securities?

A) Section 32(c)
B) Section 15(b)
C) Rule 10b-5
D) Rule 5(c)(2)
E) Rule 2(c)(5)

Question 47

Reference - Coffee shops. Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops. Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the SEC. He tells her that she has to provide information to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company, and other matters. He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities. Bernice says that she does not want to do that. She explains to Robbie that insofar as the coffee shop venture is concerned, she does not want to advertise; and she wants to offer securities only to a limited number of wealthy friends. Particularly, she has in mind Scott who has a net worth of at least $3 million and Mary, a psychiatrist. Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office. Although her income for the past couple of years has been in the range of $80,000, business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion. Considering only the information available, which of the following is a term that would describe Scott as an investor?

A) Approved
B) Sophisticated
C) Accredited
D) Unapproved
E) Unaccredited

Question 48

Reference - Coffee shops. Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops. Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the SEC. He tells her that she has to provide information to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company, and other matters. He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities. Bernice says that she does not want to do that. She explains to Robbie that insofar as the coffee shop venture is concerned, she does not want to advertise; and she wants to offer securities only to a limited number of wealthy friends. Particularly, she has in mind Scott who has a net worth of at least $3 million and Mary, a psychiatrist. Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office. Although her income for the past couple of years has been in the range of $80,000, business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion. Considering only the information available, which of the following is a term that would describe Mary as an investor?

A) Approved
B) Sophisticated
C) Accredited
D) Unapproved
E) Unaccredited

Question 49

Reference - Coffee shops. Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops. Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the SEC. He tells her that she has to provide information to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company, and other matters. He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities. Bernice says that she does not want to do that. She explains to Robbie that insofar as the coffee shop venture is concerned, she does not want to advertise; and she wants to offer securities only to a limited number of wealthy friends. Particularly, she has in mind Scott who has a net worth of at least $3 million and Mary, a psychiatrist. Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office. Although her income for the past couple of years has been in the range of $80,000, business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion. Which of the following may allow Bernice to avoid registration with the SEC?

A) The limited exemption.
B) The accredited exemption.
C) The unadvertised exemption.
D) The private placement exemption.
E) Section 4(6).

Question 50

Which of the following did Congress pass in an effort to prevent exploitation of small investors?

A) The Investment Company Act of 1940
B) The Securities Enforcement Remedies and Penny Stock Reform At of 1990
C) The Market Reform Act of 1990
D) The Securities Act Amendments of 1990
E) The National Securities Market Improvement Act of 1996

Question 51

Reference - In Trouble. Bruno, an issuer of stock, may be in trouble. He sold stock in a new health club venture before the effective date of registration. He did so because was in financial trouble involving other ventures of his and needed additional funds. Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale. Unfortunately, he was wrong. The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible. Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus. Investors bitterly complained. Rick, a new lawyer, told Bruno that as far as he knew, the SEC could fine Bruno under the Securities Act of 1933 but could not send him to jail. Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture. Bruno says that he plans to rely on the due diligence defense. Bruno also asks Rick if he is aware of any other defenses. Bruno says that he has never previously been in trouble with the SEC. Which of the following is true regarding Bruno's sale of securities before the effective date of registration?

A) He will be able to avoid liability if he can establish the due diligence defense.
B) He will be able to avoid liability if he can establish that the investors who purchased stock early were aware that the securities were sold before the effective date of registration.
C) He will be able to avoid liability if he can establish that the sales before the effective date did not directly result in any losses to investors.
D) That is not a violation of the securities laws, so there is no question about liability.
E) He will almost certainly be liable because the 1933 act provides no defenses for that violation.

Question 52

Reference - Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announce was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a nice profit. Which of the following would describe Linda in providing information about the asset sale to Frank?

A) Tipper
B) Provider
C) Providee
D) Tippee
E) Revealor

Question 53

Reference - In Trouble. Bruno, an issuer of stock, may be in trouble. He sold stock in a new health club venture before the effective date of registration. He did so because was in financial trouble involving other ventures of his and needed additional funds. Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale. Unfortunately, he was wrong. The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible. Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus. Investors bitterly complained. Rick, a new lawyer, told Bruno that as far as he knew, the SEC could fine Bruno under the Securities Act of 1933 but could not send him to jail. Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture. Bruno says that he plans to rely on the due diligence defense. Bruno also asks Rick if he is aware of any other defenses. Bruno says that he has never previously been in trouble with the SEC. Which of the following, if any, may be defenses for Bruno?

A) Except for the violation of selling securities before the effective registration date, Bruno could raise the defense that an omitted or false statement was immaterial to the sale of the security.
B) Except for the violation of selling securities before the effective registration date, Bruno could raise the defense that the plaintiff was aware of the omission or false statement when the security was purchased.
C) Except for the violation of selling securities before the effective registration date, Bruno could raise the defense that a plaintiff was aware of the omission or false statement when the security was purchased, and that any omitted or false statement was immaterial to the sale of the security.
D) For any alleged violations Bruno could raise the specific filing rule.
E) No defenses are available to Bruno because he had already been held liable to the SEC once.

Question 54

Which of the following is true regarding the Securities Exchange Act of 1934?

A) It regulates the subsequent trading of securities.
B) It requires that certain issuers file periodic reports with the SEC.
C) It permits the SEC to monitor securities markets for fraud and market manipulation.
D) It regulates the subsequent trading of securities, it requires that certain issuers file periodic reports with the SEC, and it permits the SEC to monitor securities markets for fraud and market manipulation.
E) It regulates the subsequent trading of securities and requires that certain issuers file periodic reports with the SEC, but it does not permit monitoring by the SEC.

Question 55

Reference - Coffee shops. Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops. Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the SEC. He tells her that she has to provide information to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company, and other matters. He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities. Bernice says that she does not want to do that. She explains to Robbie that insofar as the coffee shop venture is concerned, she does not want to advertise; and she wants to offer securities only to a limited number of wealthy friends. Particularly, she has in mind Scott who has a net worth of at least $3 million and Mary, a psychiatrist. Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office. Although her income for the past couple of years has been in the range of $80,000, business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion. Which of the following is the term for the document referenced by Robbie to be provided to the SEC that will be used as an advertising tool by potential investors who can rely on it to decide whether they should buy securities?

A) An advertising statement
B) A prospectus
C) An inventory
D) A proposed income statement
E) A securities advertisement

Question 56

Which of the following limits shareholders' ability to bring class action suits against nationally traded companies?

A) The Class Prohibition Act of 1997.
B) The Sarbanes-Oxley Act of 2002.
C) The National Securities Markets Improvement Act of 1996.
D) The Market Reform Act of 1990.
E) The Securities Litigation Uniform Standards Act of 1998.

Question 57

Reference - Coffee shops. Bernice wants to open a chain of coffee shops and begins by asking her friends in various states around the country to invest through the purchase of securities in the coffee shops. Her friend Robbie says that he would like to invest but that she should be sure that she satisfies requirements of the SEC. He tells her that she has to provide information to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company, and other matters. He tells her that she also has to provide a document to the SEC that will be provided as an advertising tool to potential investors who can rely on it to decide whether they should buy securities. Bernice says that she does not want to do that. She explains to Robbie that insofar as the coffee shop venture is concerned, she does not want to advertise; and she wants to offer securities only to a limited number of wealthy friends. Particularly, she has in mind Scott who has a net worth of at least $3 million and Mary, a psychiatrist. Mary recently filed bankruptcy because of some bad decisions involving an elaborate decoration of her office. Although her income for the past couple of years has been in the range of $80,000, business is improving based on her recent involvement with a number of patients suffering anxiety based upon a fear of alien invasion. Which of the following is the term for the document referenced by Robbie involving information to be provided to the SEC involving a description of the securities, an explanation of how proceeds will be used, information regarding the management of the company and other matters?

A) Robbie was wrong, and there is no such document.
B) A confirmation statement.
C) A registration statement.
D) An acknowledgement statement.
E) A reference statement.

Question 58

Reference - In Trouble. Bruno, an issuer of stock, may be in trouble. He sold stock in a new health club venture before the effective date of registration. He did so because was in financial trouble involving other ventures of his and needed additional funds. Bruno thought that the health club venture would be such a success that he would never get caught in regard to the stock sale. Unfortunately, he was wrong. The health club venture was going very poorly and investors were looking for some way to hold Bruno responsible. Another problem Bruno has is that he inflated information regarding the prospects of the health club in the prospectus. Investors bitterly complained. Rick, a new lawyer, told Bruno that as far as he knew, the SEC could fine Bruno under the Securities Act of 1933 but could not send him to jail. Bruno told Rick that was good news and that no one should feel sorry for the investors because none of them made any effort to check on information contained in the prospectus or to investigate the future profitability of the health club venture. Bruno says that he plans to rely on the due diligence defense. Bruno also asks Rick if he is aware of any other defenses. Bruno says that he has never previously been in trouble with the SEC. Which of the following is true regarding Bruno's plan to rely on the due diligence defense in regard to all charges?

A) He will be able to do so if he can establish that the purchasers would have had reasonable grounds to question the registration statement had they reviewed it with due diligence.
B) He will be able to do so if he can establish that the purchasers would have had reasonable grounds to question the prospectus had they reviewed it with due diligence.
C) He will be able to do so if he can establish that the purchasers would have had reasonable grounds to question either the registration statement or the prospectus had they reviewed them with due diligence.
D) He will not be able to use that defense unless he can establish that he reviewed the registration statement and the prospectus, and had reasonable grounds to believe that the registration statement was accurate and had no omission of material facts.
E) He will not be able to rely on that defense because he is an issuer.

Question 59

Which of the following is an example of a material omission or misrepresentation during a securities transaction under Section 10(b) and Rule 10(b)(5)?

A) A change in the status of litigation against the company.
B) A change in dividends.
C) A new product, process, or discovery.
D) A change in the status of litigation against the company; a change in dividends; and a new product, process, or discovery.
E) A change in the status of litigation against the company and a change in dividends; but not a new product, process or discovery.

Question 60

Which of the following references a profit made by a statutory insider from the purchase and sale of their own company stock within a six-month period?

A) Short-swing profits
B) Short-term profits
C) Insider profits
D) Insider profiting profits
E) Contempt profits

Question 61

Reference - Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announce was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a nice profit. For which of the following is George liable?

A) His own profits and also the profits of Frank.
B) His own profits and also the profits of both Frank and Linda.
C) His own profits regardless of whether he knew he was trading in information that had not been made public.
D) Only his own profits and those of Linda.
E) Only his own profits and then only if it can be shown that he knew or should have known that the material information was not public.

Question 62

Set forth the Howey three-part test for determining if a security exists.

Question 63

What is a proxy solicitation and how is it regulated by the SEC?

Question 64

Reference - Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announce was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a nice profit. Which of the following would describe Frank in providing information about the asset sale to George?

A) Tipper
B) Provider
C) Providee
D) Tippee
E) There is no designation for his behavior because he did nothing illegal.

Question 65

Reference - Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announce was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a nice profit. For which of the following is Linda liable?

A) Her own profits only.
B) Her profits and those of Frank only.
C) Her profits, the profits of Frank, and also the profits of George.
D) Her profits only plus a 10% penalty.
E) Nothing because she did nothing illegal.

Question 66

Set forth the four major responsibilities of the SEC.

Question 67

Set forth what a registration statement filed with the SEC generally contains.

Question 68

Rebecca, a secretary at ABC Software Company, a publicly traded company, enjoyed snooping through the desk of her boss, Emma. One day while snooping, Rebecca came across information indicating that ABC Software was in the process of launching a new type of software that it was believed would be very profitable. Rebecca immediately purchased a large amount of stock in ABC Company and sold it for a nice profit after the product was made public. Her conscience was bothering her a bit, so she confessed her snooping to a friend, Jason. Jason told Rebecca not to worry because she could have no liability. Is Jason correct; and, if not, what theory of liability could be applied against Rebecca? Additionally, set forth the definition of insider under Section 10(b) and Rule 10b-5.

Question 69

Reference - Presidential Profits. Linda was president of a publicly traded tractor company, Tough Tractors. Linda became aware that stock in her company would likely increase significantly in value because her company had a contract to purchase the assets of Rough Tractors. The boards of both companies wanted the information kept confidential until the purchase was complete and a news release was made. Before the news was made public, Linda immediately purchased a significant number of shares in Tough Tractors. Linda also told her friend Frank about the contract to purchase assets. Frank, who knew that the information was not public, told his brother, George. Frank and George purchased a number of shares of stock in Tough Tractors prior to any public announcement of the sale. After the public announce was made and the purchase of assets went through, Linda, George and Frank, all sold their shares in Tough Tractors and made a nice profit. Which of the following would describe Frank in receiving the information from Linda and acting upon it?

A) Tipper
B) Provider
C) Providee
D) Tippee
E) Revealor