Deck 34: Regulation of Trading: The Securities Exchange Act of 1934

Question 1

The Securities Exchange Act of 1934 establishes a system of oversight over the self-regulation of the securities exchanges and trading industry practices.

Answer 1

True

Question 2

The Securities Exchange Act of 1934 does not currently require registration with the SEC for issuers who wish to have their securities offered on a national exchange.

Answer 2

False

Question 3

Companies whose securities (equity or debt) are listed on a national stock exchange are subject to minimal regulatory requirements.

Answer 3

False

Question 4

The Securities Exchange Act of 1934 requires that anyone who solicits a proxy from a shareholder must file a proxy statement with the SEC and distribute that proxy statement to shareholders.

Question 5

Rule 10(b)(5) of the Securities Exchange Act of 1934 is the primary anti-fraud provision covering the trading of securities.

Question 6

Material facts can be related to financial disclosures, risks, threatened litigation, or any other event that may increase the investor's risk.

Question 7

Under the misappropriation theory, deceptive trading is performed by an outsider who owes no duty to shareholders but does owe some type of duty to the source of the information.

Question 8

The U.S. Supreme Court has recognized one complementary theory of insider trading.

Question 9

Section 16 of the Exchange Act provides transparency of all stock trades by insiders and prohibits insiders from earning short-swing profits.

Question 10

The element of scienter in the context of a securities fraud case means that the seller of securities either knew or believed the represented facts to be untrue.

Question 11

The Securities Exchange Act of 1934 established a system of oversight over the self-regulation of the securities exchanges and trading industry practices. This\ Act mandates __________ disclosures for publicly traded companies.

A) private
B) extensive
C) common
D) minimal

Question 12

The Securities Exchange Act of 1934 requires registration with the SEC for __________ who wish to have their securities offered on a national exchange.

A) issuers
B) majority shareholders
C) material borrowers
D) maximum lenders

Question 13

The Securities Exchange Act of 1934 regulates the relationship between existing stockholders and the corporation by requiring disclosure of information concerning:

A) the financial performance of the company
B) corporate governance procedures
C) any changes that increase or decrease risk that have occurred since the last report
D) All of the choices are correct.

Question 14

Companies whose securities (equity or debt) are listed on a national stock exchange are subject to __________ regulatory requirements.

A) opinion-based
B) extensive
C) theoretical
D) minimal

Question 15

A company becomes a reporting company subject to the Exchange Act if: (1) a class of its equity securities (other than exempted securities) is held by either __________ investors or __________ investors who are not accredited investors, and (2) on the last day of the issuer's fiscal year, its total assets exceed $10 million.

A) 2000, 500
B) 1000, 500
C) 1000, 250
D) 2500, 250

Question 16

A company becomes a reporting company subject to the Exchange Act if it is a __________ offering that occurs without a securities exchange listing.

A) open
B) private
C) public
D) closed

Question 17

A company that files a __________ statement under the Securities Act of 1933 becomes a reporting company subject to the Exchange Act once the registration company becomes effective.

A) county
B) business
C) notice
D) registration

Question 18

Section __________ of the Exchange Act requires public companies to file regular reports with the SEC in order to maintain their registration and to provide the public with ongoing disclosures via annual, quarterly, and special reports.

A) 10
B) 11
C) 13
D) 15

Question 19

A __________ is a device used by a shareholder to grant another shareholder the right to vote on his or her behalf.

A) proxy
B) charge
C) conduit
D) None of the choices are correct.

Question 20

The Exchange Act requires that anyone who solicits a proxy from a __________ must file a proxy statement with the SEC and distribute that proxy statement to shareholders.

A) borrower
B) lender
C) shareholder
D) offeror

Question 21

The Exchange Act expressly prohibits __________ and requires that a proxy relate to only one specific meeting.

A) ongoing proxies
B) perpetual proxies
C) dealer proxies
D) All of the choices are correct.

Question 22

Section __________ of the Exchange Act is the primary anti-fraud provision covering the trading of securities.

A) 10(b)
B) 10(c)
C) 10(d)
D) 10(e)

Question 23

In the context of securities law, a/an__________ fact is one that, if known to an investor, would impact her decision as to whether or not to invest in the security.

A) trade
B) material
C) industry standard
D) None of the choices are correct.

Question 24

In addition to the SEC's enforcement rights, private citizens also have the right to file __________ against companies and individuals for violations of Rule 10b-5.

A) preemptory charges
B) notice
C) demands
D) lawsuits

Question 25

A person who receives nonpublic confidential information regarding a company and uses that information to realize a profit is called a __________.

A) offeree
B) offeror
C) tippor
D) tippee

Question 26

In 1988, Congress passed the __________, which raised the criminal and civil penalties for insider trading, increased the liability of brokerage firms for wrongful acts of their employees, and gave the SEC more power to pursue violations of Rule 10b-5.

A) Outsider Trading and Securities Fraud Enforcement Act
B) Insider Trading and Securities Fraud Enforcement Act
C) Insider Tipping and Securities Fraud Enforcement Act
D) None of the choices are correct.

Question 27

In order to trigger liability under 10b-5 for insider trading, the investor must have bought or sold stock in a__________ traded company.

A) privately
B) county-based
C) publicly
D) All of the choices are correct.

Question 28

In order to trigger liability under 10b-5 for insider trading, the investor must have possessed nonpublic information that was __________ and was significant to the decision of the investor.

A) material
B) major
C) important
D) immaterial

Question 29

In order to trigger liability under 10b-5 for insider trading, the investor must have had a __________ relationship with the source of information as an insider or as a "tippee" if he received information from an insider.

A) primary
B) secondary
C) special
D) important

Question 30

What did the SEC begin to utilize after they lost a string of enforcement actions?

A) mediations
B) arbitrations
C) county courts
D) administrative law courts

Question 31

Administrative Law Judges are __________ attorneys who are selected, maintained, and funded by the SEC.

A) public
B) private
C) government
D) former

Question 32

After a two-week trial in October 2013, the jury acquitted billionaire Mark Cuban of all counts where the SEC alleged that Cuban violated __________ laws.

A) outsider trading
B) insider trading
C) misrepresentation
D) None of the choices are correct.

Question 33

The U.S. Supreme Court has recognized __________ complementary theories of insider trading.

A) two
B) three
C) four
D) six

Question 34

Under the abstain/disclose rule, those who have a __________ duty of trust and confidence and encounter information that is nonpublic and material have a duty to abstain from trading or to disclose the information publicly.

A) legal
B) investor
C) offeror
D) fiduciary

Question 35

In United States v. Bhagat, the court held that Bhagat was properly convicted by a jury of insider trading, securities tipping, and lying to__________ investigators.

A) FTC
B) DOL
C) SEC
D) None of the choices are correct.

Question 36

Under the __________ theory, deceptive trading is performed by an outsider who owes no duty to shareholders but does owe some type of duty to the source of the information.

A) misappropriation
B) misuse
C) misapprehension
D) mistake

Question 37

The SEC regularly investigates unusual stock activity as it may be indicative of stock __________.

A) malware
B) remediation
C) manipulation
D) None of the choices are correct.

Question 38

Section 16(b) includes a __________ provision that allows a corporation to recapture any profits earned by an insider on the purchase and sale of the company's stock that occurred within a six-month period.

A) white claw
B) lookback
C) clawback
D) contemplation

Question 39

Section 16(b) is a __________ statute because it applies even if the insider did not use any insider information or intend any stock manipulation in realizing a short-swing profit.

A) negligence
B) strict liability
C) intentional
D) None of the choices are correct.

Question 40

Based on the scienter requirement, courts require investor plaintiffs to __________ particular facts that give rise to a strong inference that the defendant acted with the required deceptive state of mind.

A) itemize
B) deliver
C) investigate
D) quantify

Question 41

Aubrey, the CEO of Rainbow Loom Corp., announces her retirement in February and the board of directors undertakes a search for a new president immediately thereafter. In November, the board announces it has selected Lily as the new president. How do the Section 13 reporting requirements impact these events?

Question 42

Explain what Section 13 of the Exchange Act requires public companies to do and how often in terms of reporting.

Question 43

JourneyCo is a publicly held corporation subject to the provisions of the Exchange Act. Brian is the company's chief financial officer, and Nancy is on the board of directors. The company has invested several million dollars on a 10-year research project to produce an alternate fuel product that will result in substantially lower pollution. As of the end of the last year, Brian and Nancy each owned 10,000 shares of JourneyCo's stock. This year, they traded as follows:1. January 1-Brian purchases 1,000 shares at $10/share. Nancy purchases 5,000 shares at $10/share.
2. March 1-Nancy purchases 5,000 additional shares at $10/share.
3. May 1-Nancy purchases 1,000 additional shares at $20/share. Brian sells 1,000 shares at $20/share.
4. November 1-Nancy sells all of his shares of JourneyCo at $25/share.
5. December 1-JourneyCo stock drops to $2/share.Assume further that on October 30, both Brian and Nancy learned in advance of public knowledge that the Environmental Protection Agency (EPA) failed to give regulatory approval to JourneyCo's new alternative fuel and that improvements to the formula would likely take many more years of research and testing. After the public disclosure by the EPA of the adverse decision on November 30, JourneyCo's stock price dropped precipitously. How will these events be analyzed in terms of Section 16 and Rule 10b-5 liability?

Question 44

Jamie is a lawyer who overhears his client discussing a confidential corporate acquisition with a business associate on his cellphone while in the waiting room. Jamie knows that the client is the CEO of publicly held Bartles, Inc., so he acquires 50,000 shares of Bartles the next day. One week later, Bartles announces the acquisition and Jamie nets a $100,000 profit. Did Jamie breach any duties or have any liability for his actions?