Deck 17: Financial and Securities Regulations

Question 1

A prospectus must conform to the statutory requirements.

Answer 1

True
Explanation: A prospectus must be furnished to any interested investor, and it must conform to the statutory requirements. Like a registration statement, a prospectus contains financial information related to the issuer and controlling persons.

Question 2

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

Answer 2

True
Explanation: The Securities and Exchange Commission (SEC) has both quasi-legislative and quasi-judicial powers. Under its quasi-legislative power, it has adopted rules and regulations relating to financial and other information that must be furnished to the Commission. Under its quasi-judicial power, the SEC also is involved in a variety of investigations.

Question 3

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

Answer 3

False
Explanation: During the prefiling period, it is legal for the issuer of a security to engage in preliminary negotiations and agreements with underwriters. It is illegal to sell a covered security during this period.

Question 4

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

Question 5

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

Question 6

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

Question 7

A plaintiff in a Rule 10b-5 suit is required to prove damages in order to prevail.

Question 8

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

Question 9

Under Section 11,the plaintiff has to prove reliance on the false or misleading prospectus or communication.

Question 10

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

Question 11

The information contained in a prospectus is completely different from that contained in a registration statement.

Question 12

Under the 1933 Act,the basic period of the statute of limitations starts to run even before the discovery of the untrue statement or omission.

Question 13

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

Question 14

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

Question 15

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

Question 16

In the context of providing untrue or misleading information to potential investors,proof of negligence will support an injunction.

Question 17

Proof of negligence leading to corporate mismanagement is enough to prove a case of seller's fraud under Rule 10b-5.

Question 18

The law prohibits the sale of worthless securities.

Question 19

An insider is a person who owns at least 75 percent of a security.

Question 20

Securities laws are designed to give potential investors sufficient information so that they can make intelligent investment decisions based on factual information.

Question 21

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 22

The Securities and Exchange Commission (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 23

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

Question 24

The Securities and Exchange Commission's (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) federal
C) quasi-executive
D) quasi-legislative
E) bargaining

Question 25

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

Question 26

A tippee is liable for trading or passing on information that is public.

Question 27

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

Question 28

Which of the following Acts created the Securities and Exchange Commission?

A) the Securities Act of 1933
B) the Securities Exchange Act of 1934
C) the Securities Enforcement Remedies Act of 1990
D) the Sarbanes-Oxley Act of 2002
E) the Insider Trading and Securities Fraud Enforcement Act of 1988

Question 29

Title II of the Jumpstart Our Business Startups (JOBS)Act of 2012 prohibits companies to advertise or share publicly that they are seeking investments.

Question 30

Which of the following is a major provision of the State blue sky laws?

A) They impose another level of securities regulations and govern interstate securities transactions that are beyond federal laws.
B) They relax some of the regulatory burden for investments in smaller businesses or start-ups.
C) They provide protection of whistleblowers who reveal fraud.
D) They reformed the Federal Reserve.
E) They created the Public Company Accounting Oversight Board.

Question 31

Congress,through the Public Company Accounting Oversight Board (PCAOB),limits the amount of damages private plaintiffs can recover and restricts attorney fees.

Question 32

The Securities and Exchange Commission's (SEC)right to conduct investigations is based on its

A) quasi-executive power.
B) federal power.
C) quasi-judicial power.
D) constitutional right.
E) quasi-legislative power.

Question 33

The Uniform Securities Act has been the model for blue sky laws since 1956.

Question 34

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

Question 35

The registration statement to be filed with the Securities and Exchange Commission (SEC)includes

A) statements which allow the holder to buy securities at a specified price within a designated 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) an annual report on the activities of an organization distributed among its stakeholders.
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 36

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

Question 37

The Sarbanes-Oxley Act focuses on decreasing the independence of the auditors.

Question 38

Under the Sarbanes-Oxley Act of 2002,whistleblowers exclude contractors.

Question 39

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

Question 40

The Sarbanes-Oxley Act 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 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) engaging in negotiations and agreements with underwriters
C) offering to sell a covered security
D) offering to buy a covered security
E) sellers soliciting offers for later acceptance

Question 42

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 Securities and Exchange Commission (SEC) warning potential investors that a company is being investigated for fraud.
D) feedback from the Securities and Exchange Commission (SEC) requiring additional information or a clarification of supplied information needed to complete a filed registration statement.
E) statements that are required to be filled with the Securities and Exchange Commission (SEC).

Question 43

______ 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 ads
B) Institutional ads
C) Coupon ads
D) Adjunct ads
E) Overlay ads

Question 44

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 securities subject to the act
D) Soliciting through the use of a summary prospectus
E) Soliciting offers for later acceptance

Question 45

Which of the following sections of the Securities Act of 1933 deals with imposing liability on fraudulent interstate transactions?

A) Section 12
B) Section 11
C) Section 17
D) Section 4
E) Section 16

Question 46

Which of the following statements is true of the statute of limitations?

A) The defense mechanism is inapplicable in cases of civil liability.
B) The basic period for the statute of limitation is one year.
C) The statute of limitation begins even before the discovery of untrue statement or omission.
D) A suit may be brought in any event even after five years of sale.
E) The statute of limitation excludes reasonable diligence in discovering untrue statement or omission.

Question 47

After the registration statement is filed,a ______ commences.

A) deferring period
B) prefiling period
C) posteffective period
D) waiting period
E) regulation period

Question 48

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 49

The buyer's 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 when the fraud is discovered.
D) are considered sunk costs and irrecoverable.
E) include speculative damages.

Question 50

According to the Securities Act of 1933,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 51

In the registration process,the waiting period typically lasts

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

Question 52

A major stockholder of a corporation is most likely to be a(n)______ in the initial sale of securities who also has power over the issuer in such sales.

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

Question 53

Which of the following statements is true of the various activities occurring during the registration process of securities in a sale?

A) A registration becomes ineffective and invalid immediately at the expiry of the waiting period.
B) Contracts to buy and sell securities are finalized during the posteffective period.
C) It becomes legal to sell a security subject to the act during the waiting period.
D) During the prefiling period, offers to sell and buy securities are permitted as per the Securities Act of 1933.
E) Tombstone ads are made after the end of the posteffective period.

Question 54

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

A) The Act makes it legal to sell a security on a national exchange.
B) The registration under the 1934 Act is the same as under the 1933 Act.
C) The registration process excludes filing of prescribed forms with the Securities Exchange Commission.
D) The Act deals with original offerings of securities instead of regulating transfers of securities after the initial sale.
E) The Act requires brokers and dealers to keep detailed records of their activities and filing of annual reports with the Securities Exchange Commission.

Question 55

According to the Securities Act of 1933,an issuer of securities who complies with the federal law must prepare a(n)

A) issuer's statement.
B) registration statement.
C) licensing agreement.
D) statute of limitations.
E) secured promissory note.

Question 56

______ 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 57

A prospectus is filed during the

A) prefiling period.
B) waiting period.
C) pre-effective period.
D) posteffective period.
E) elimination period.

Question 58

According to the Securities Act of 1933,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 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

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 prepares the registration statement and prospectus for securities involved in a sale.
D) It refers to a person who is in possession of an article and is responsible for returning the article safely to the owner once 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 61

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 62

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 63

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

A) two years imprisonment.
B) return of illegal profits gained.
C) a recovery of double damages.
D) three times the profits gained.
E) a release of an equity court summons.

Question 64

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

A) Securities and Exchange Commission (SEC).
B) Federal Trade Commission (FTC).
C) Federal Reserve.
D) issuer of the security or by a person who owns a security of the issuer.
E) executive officers, accounting officers, and chief financial officers.

Question 65

Which of the following statements is true of the Private Securities Litigation Reform Act (PSLRA)?

A) It was enacted by the Congress to eliminate the fraud-on-the-market presumption.
B) It is used by the Congress to limit the amount of damages private plaintiffs can recover and restrict attorney fees.
C) It usually fails to give provisions for requirements for the appointment of lead plaintiffs in securities class-action cases.
D) It requires that private plaintiffs who suffered injury could maintain private causes of action against third parties not directly responsible for a securities law violation.
E) It mandated that the Federal Trade Commission could pursue claims against third parties that are indirectly responsible for a securities law violation.

Question 66

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

A) 65
B) 10
C) 15
D) 20
E) 50

Question 67

Which of the following statements is true of creating liabilities under Section 18?

A) There is a liability under section 18 for simple negligence.
B) The plaintiff in a Section 18 case must prove reliance on the false or misleading filing of documents.
C) Inaccuracy of filing is sufficient to impose liability under Section 18.
D) The defendant's good faith is considered a defense under Section 18.
E) Freedom from fraud is an invalid defense under an action based on Section 18.

Question 68

Under the 1934 Act,an individual found guilty of filing false or misleading documents with the Securities and Exchange Commission (SEC)may be imprisoned up to

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

Question 69

Benefit of the bargain refers to the measure of damages awarded to the buyer which is

A) the amount that allows the injured party to revive the economic position held by him or her when the contract was made.
B) the out-of-pocket expense such as the legal fees incurred by the plaintiff.
C) the value of the security that was represented to be worth in the market.
D) the combination of the out-of-pocket expenses and what the security was represented to be worth in the market.
E) the difference between what he or she paid and what the security was represented to be worth.

Question 70

Under the 1934 Act,a business organization found guilty of filing false or misleading documents with the Securities and Exchange Commission (SEC)may be fined up to

A) $80,000,000.
B) $55,000,000.
C) $25,000,000.
D) $50,000,000.
E) $70,000,000.

Question 71

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

A) by mail, postmarked within five 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 72

Which of the following statements is true of short-swing profits?

A) Short-swing profits refer to any profits made by insiders who buy and sell company stock within a three-month time period.
B) The short-swing profits rule of Section 16 depends on misuse of information.
C) Short-swing profits refer to those profits that have been made within a six-month time period.
D) The short-swing profits policy takes into consideration order of purchase and sale in determining its legality.
E) Short-swing profits are calculated on the highest price in and the lowest price out during any fiscal period.

Question 73

According to the Securities and Exchange Commission (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 74

Which of the following statements is true of the criminal liability imposed as per the Securities Act of 1934?

A) Criminal liability is inapplicable in cases of false material statements in applications or reports.
B) Individuals found guilty of filing misleading documents are subject to maximum two years of imprisonment.
C) Individuals guilty of securities fraud may face a prison sentence of up to 25 years.
D) Business organizations found guilty of filing misleading documents have relaxed laws in comparison to individuals.
E) Regulating and imposing liabilities on trading on nonpublic information is beyond the scope of the act.

Question 75

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

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

Question 76

Under Rule 10b-5,plaintiffs are entitled to

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

Question 77

Which of the following statements is true of blue sky laws?

A) The federal laws preempt the existence of state blue sky laws.
B) The method of regulation is uniform and same across all the states.
C) The laws can apply to securities subject to federal laws as well as to those securities exempt from the federal statutes.
D) The laws are commonly known as the antifraud laws as per the Securities Act of 1934.
E) The laws were established as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Question 78

Which of the following statements is true of the Securities Enforcement Remedies Act?

A) An individual found to have violated the securities laws may be prohibited by the court from serving as an officer or director of a business organization.
B) Civil fines of up to $700,000 per organization and $500,000 per individual may be imposed and collected by the courts.
C) It changes membership requirements of corporate audit committees.
D) It requires proof of criminal violation for individual and organizational fines to be imposed.
E) It 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 79

Registration by notification

A) is required by those issuers who lack a proven record and who are beyond the scope of 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 Securities and Exchange Commission (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 80

A(n)______ is a person who learns of nonpublic information from an insider,and is generally viewed as a temporary insider.

A) underwriter
B) controlling person
C) issuer
D) tippee
E) dealer