Question 1

Which policy measure increased the SEC budget to supervise securities markets?

Accepted Answer

The Sarbanes-Oxley Act of 2002 increased the SEC's budget and expanded its authority to supervise securities markets, specifically to improve corporate governance and prevent accounting fraud. The other policy measures listed did not involve increasing the SEC's budget for supervising securities markets.

Question 2

Which policy measure increases the punishment for white-collar crime and obstruction of official investigations?

Accepted Answer

The Sarbanes-Oxley Act of 2002 increases the punishment for white-collar crime and obstruction of official investigations. It was passed in response to the Enron scandal and other corporate scandals of the early 2000s, and it established stricter accounting and reporting requirements for public companies and increased penalties for those who violate securities laws.

Question 3

Explain how the market can reduce the incentive for credit-rating firms to take advantage of conflicts of interest.

Accepted Answer

The answer of Explain how the market can reduce the...

Question 4

If the incentive to take advantage of a conflict of interest is high

Accepted Answer

Removing the economies of scope that created the conflict may decrease the flow of reliable information, and this may increase costs. However, if the incentive to take advantage of the conflict is high, it is still necessary to remove the conflict to prevent unethical behavior and potential legal repercussions. The cost of non-action in removing the conflict may be even higher than the cost of removing the conflict.

Question 5

Which of the following is not a part of the Sarbanes-Oxley Act of 2002?

Accepted Answer

The requirement for investment banks to make public their analysts' recommendations is not a part of the Sarbanes-Oxley Act of 2002.

Question 6

Which of the following policy measures prohibited compliance officers from being involved in producing or selling credit ratings?

Accepted Answer

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 prohibited compliance officers from being involved in producing or selling credit ratings. Sarbanes-Oxley Act of 2002, Global Legal Settlement of 2002, Gramm-Leach-Bliley Act of 1999, and Riegle-Neal Act of 1994 do not have such provisions.

Question 7

Which of the following policy measures required the SEC to prevent issuers of asset-backed securities from choosing the credit-rating agencies that will give them the highest rating and supported earlier initiatives by the SEC?

Accepted Answer

The policy measure that required the SEC to prevent issuers of asset-backed securities from choosing the credit-rating agencies that will give them the highest rating and supported earlier initiatives by the SEC is the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Question 8

If a conflict of interest exists

Accepted Answer

While conflicts of interest can potentially lead to serious adverse consequences, the severity of the consequences depends on various factors such as the nature of the decision being made, the importance of the conflicting interests, and the incentive to take advantage of the conflict. Therefore, it is possible for a conflict of interest to exist without causing serious harm, especially if measures are taken to mitigate or eliminate the conflict. It is not necessarily the case that government intervention is required to address conflicts of interest, as organizations and individuals can take proactive steps to prevent and manage conflicts.

Question 9

Which of the following is a part of the Global Legal Settlement of 2002?

Accepted Answer

The answer of Which of the following is a part...

Question 10

If there isn't sufficient information available, then which of the following approaches to reduce conflicts of interest will have the lowest probability of working?

Accepted Answer

Leaving it to the market assumes that parties will act in their self-interest and that competition will keep everyone in check. However, without sufficient information, it is difficult for the market to accurately assess the value of goods or services and the potential conflicts of interest involved. Therefore, this approach is less likely to work when information is lacking.

Question 11

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 included which of the following provisions to deal with conflicts of interest in the credit-rating Industry? 1. Created an Office of Credit Ratings at the SEC with its own staff and the authority to fine credit-rating agencies and to deregister an agency if it produces bad ratings.
2) Forced credit-rating agencies to provide reports to the SEC when their employees go to work for a company that has been rated by them in the last twelve months.
3) Prohibited compliance officers from being involved in producing or selling credit ratings.
4) Required the SEC to prevent issuers of asset-backed securities from choosing the credit-rating agencies that will give them the highest rating and supported earlier initiatives by the SEC.
5) Authorized investors to bring lawsuits against credit-rating agencies for a reckless failure to get the facts when providing a credit rating.

Accepted Answer

All five provisions were included in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to deal with conflicts of interest in the credit-rating industry. The Act created an Office of Credit Ratings at the SEC with its own staff and the authority to fine credit-rating agencies and to deregister an agency if it produces bad ratings. It forced credit-rating agencies to provide reports to the SEC when their employees go to work for a company that has been rated by them in the last twelve months. It prohibited compliance officers from being involved in producing or selling credit ratings. It required the SEC to prevent issuers of asset-backed securities from choosing the credit-rating agencies that will give them the highest rating and supported earlier initiatives by the SEC. Lastly, it authorized investors to bring lawsuits against credit-rating agencies for a reckless failure to get the facts when providing a credit rating.

Question 12

Which policy measure bans spinning?

Accepted Answer

The answer of Which policy measure bans spinning?
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Question 13

Which of the following policy measures forced credit-rating agencies to provide reports to the SEC when their employees go to work for a company that has been rated by them in the last twelve months.?

Accepted Answer

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 included provisions that required credit-rating agencies to provide reports to the SEC when their employees go to work for a company that has been rated by them in the last twelve months. This was aimed at reducing conflicts of interest and improving the integrity of credit ratings.

Question 14

Which policy measure requires investment banks to make public their analysts' recommendations?

Accepted Answer

The Global Legal Settlement of 2002 required investment banks to make public their analysts' recommendations. The Sarbanes-Oxley Act of 2002 addresses corporate governance and financial disclosure requirements, the Gramm-Leach-Bliley Act of 1999 deals with financial services and banking regulations, and the Riegle-Neal Act of 1994 focuses on interstate banking regulations.

Question 15

Which policy measure makes it unlawful for a registered public accounting firm to provide any nonaudit service to a client contemporaneously with an impermissable audit?

Accepted Answer

The policy measure that makes it unlawful for a registered public accounting firm to provide any nonaudit service to a client contemporaneously with an impermissible audit is the Sarbanes-Oxley Act of 2002 (SOX). Section 201 of SOX prohibits registered public accounting firms from providing non-audit services, such as consulting and advisory services, to their audit clients during the same period in which they perform an audit. This measure is intended to maintain auditor independence and prevent conflicts of interest.

Question 16

Reputational rents refer to

Accepted Answer

Reputational rents refer to the profits earned solely based on the credibility of a firm. These profits come from customers' willingness to pay a premium price for the products or services of a reputable firm due to its established brand name, quality, or reliability.

Question 17

Which of the following policy measures authorized investors to bring lawsuits against credit-rating agencies for a reckless failure to get the facts when providing a credit rating?

Accepted Answer

The policy measure that authorized investors to bring lawsuits against credit-rating agencies for a reckless failure to get the facts when providing a credit rating is the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Sarbanes-Oxley Act of 2002 was passed to protect investors from fraudulent accounting activities by corporations. Global Legal Settlement of 2002 was an agreement between state attorneys general and major Wall Street firms regarding conflicts of interest in stock research. The Gramm-Leach-Bliley Act of 1999 repealed certain provisions of the Glass-Steagall Act and allowed banks, securities firms, and insurance companies to consolidate. The Riegle-Neal Act of 1994 removed barriers between banks and other financial services companies, allowing them to enter the same business.

Question 18

Which of the following policy measures created an Office of Credit Ratings at the SEC with its own staff and the authority to fine credit-rating agencies and to deregister an agency if it produces bad ratings?

Accepted Answer

The policy measure that created an Office of Credit Ratings at the SEC with its own staff and the authority to fine credit-rating agencies and to deregister an agency if it produces bad ratings is the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Question 19

Which policy measure requires investment banks to sever the links between research and securities underwriting?

Accepted Answer

The Global Legal Settlement of 2002 required investment banks to sever the links between research and securities underwriting, as a response to conflicts of interest and biased research during the dot-com bubble. Sarbanes-Oxley Act of 2002, Gramm-Leach-Bliley Act of 1999, and Riegle-Neal Act of 1994 did not have this specific policy measure.

Question 20

When the SEC requires companies to publicly release financial statements, which of the following remedies of conflicts of interest does this fall under?

Accepted Answer

Requiring companies to publicly release financial statements is an example of regulating for transparency, which helps to mitigate conflicts of interest by providing relevant information to investors and the public.

Quiz 15: Conflicts of Interest in the Financial Industry