Deck 18: Securities Regulation

Question 1

Gunnar and his brother Henrik were directors, officers and each 26% shareholders in Evergold Resources, a mining exploration company with claims in Indonesia. Evergold was undertaking exploration on its claims when Henrik's laboratory results on site yielded the existence of a major gold find. The result was a dramatic departure from other samples and seemed to indicate an isolated high-quality vein of gold. Gunnar, in Vancouver, released a press report as to the find. The shares of Evergold began a dramatic run-up in price as a result. Henrik double-checked his work, and the results (though very exceptional) were correct. A further week later, Henrik discovered an anonymous note in his tent at the camp that one of his locally hired laboratory geologists had been involved in a tampering scandal some years before. He telephoned this information to Gunnar, who advised Henrik to thoroughly check the results again. Gunnar immediately sold a third of his own shares in Evergold and reported his trade. The insider trade alarmed the market, which also promptly sold Evergold, depressing its price. The anonymous note proved baseless, and on subsequent announcement of the repeated test confirming the gold strike, Evergold shares rebounded to their previous level. Gunnar was obligated to file a Material Change Report after receipt of the first test results.

Answer 1

True

Question 2

A financial intermediary who, through deceit or fraudulent means, affects the public market price of securities can face a maximum of

A) a monetary fine of three times the loss avoided or gain received.
B) two years less a day in custody of a provincial institution.
C) five years imprisonment in a federal penitentiary.
D) ten years imprisonment in a federal penitentiary.
E) None of the responses are correct.

Answer 2

D

Question 3

What is the Canadian electronic filing and disclosure system called?

A) SEDAR
B) EDGAR
C) SEC
D) TSE
E) ASE

Answer 3

A

Question 4

Which of the following are not exempt from the requirement of registration as investment advisors?

A) Brokers.
B) Lawyers.
C) Bankers.
D) Accountants.
E) Financial market commentators.

Question 5

Which of the following is not an insider of a reporting issuer?

A) The reporting issuer itself.
B) A senior officer of a subsidiary firm of the reporting issuer.
C) A shareholder owning 10% of voting rights in the reporting issuer.
D) A senior officer of the parent firm of the reporting issuer.
E) Any director of the parent firm of the reporting issuer.

Question 6

NewTech Ltd. requires $2 million in capital to finish developing its new solar-powered lighting system. What is the simplest and most likely way to raise the money?

A) Initial public offering
B) Short-form prospectus
C) Accredited investor exemption
D) Private issuers exemptions
E) Unanimous shareholders' agreement

Question 7

When a takeover bid is initiated, the board of directors of the target firm has the legal obligation to its shareholders to

A) recommend acceptance or rejection, or remain neutral, with written reasons.
B) defend against the bid.
C) remain neutral on the merits of the bid.
D) remain silent on the merits of the bid.
E) resign.

Question 8

The most important exemption from the prospectus requirement are the "Accredited Investors" provisions in the Securities Act. Who are defined as Accredited Investors?

A) Banks and investment dealers.
B) Governments.
C) Individuals and their spouses owning net financial assets exceeding $1 million; and individuals who, either alone or with a spouse, have net assets of at least $5 million.
D) Banks, investment dealers and governments.
E) All of these are accredited investors.

Question 9

Which is not a security, as defined by the Securities Act?

A) Shares
B) Bonds
C) Debentures
D) Mutual fund units
E) Insurance contract

Question 10

A transferred right to vote shares in a reporting issuer is a

A) plebiscite.
B) bid.
C) corporate ballot.
D) proxy.
E) absentee ballot.

Question 11

True, full and plain disclosure is a standard of disclosure set in 1978 by

A) the Supreme Court of Canada.
B) the Self-Regulatory Organizations.
C) the Provincial Securities Commissions.
D) Canada's Securities Administrators.
E) Stock Exchanges

Question 12

CompuDream Ltd. has been led by its imaginative founder, Frank Foresee, for the past 15 years. Frank is thought to be one of the top corporate leaders of the day. Unfortunately, Frank has just discovered that he has terminal cancer. Does this information have to be disclosed?

A) The information does not have to be disclosed until Frank dies.
B) The information does not have to be disclosed until Frank is unable to make further contributions to the company.
C) The information has to be disclosed fairly soon.
D) The information has to be disclosed in the annual report.
E) None of the responses are correct.

Question 13

Gunnar and his brother Henrik were directors, officers and each 26% shareholders in Evergold Resources, a mining exploration company with claims in Indonesia. Evergold was undertaking exploration on its claims when Henrik's laboratory results on site yielded the existence of a major gold find. The result was a dramatic departure from other samples and seemed to indicate an isolated high-quality vein of gold. Gunnar, in Vancouver, released a press report as to the find. The shares of Evergold began a dramatic run-up in price as a result. Henrik double-checked his work, and the results (though very exceptional) were correct. A further week later, Henrik discovered an anonymous note in his tent at the camp that one of his locally hired laboratory geologists had been involved in a tampering scandal some years before. He telephoned this information to Gunnar, who advised Henrik to thoroughly check the results again. Gunnar immediately sold a third of his own shares in Evergold and reported his trade. The insider trade alarmed the market, which also promptly sold Evergold, depressing its price. The anonymous note proved baseless, and on subsequent announcement of the repeated test confirming the gold strike, Evergold shares rebounded to their previous level. Gunnar's trade was in violation of the relevant provincial Securities Act.

Question 14

A exemption from the prospectus requirement exists for an issuer where

A) the purchase is one of a regular series made by an issuer in a security of its own issue.
B) the purchaser is a bank, buying on its own account.
C) the purchaser is an individual buying at least $25,000 in market value of one security.
D) the recipient of the security receives it in satisfaction of a debt owed to it by the issuer.
E) None of the responses are correct.

Question 15

Where a single class of voting shares has been issued by a reporting issuer, the provisions of securities regulation relating to takeover bids are first triggered when a bidder holding 1% of those shares bids for a further

A) 9%.
B) 10%.
C) 19%.
D) 49%.
E) 49% + 1 further share.

Question 16

A firm that chooses to raise funds through a distribution of securities is known as

A) an underwriter.
B) an issuer.
C) a Self-Regulatory Organization.
D) an open-market trader.
E) a qualified offeror.

Question 17

Helen is the receptionist for First Well Ltd., a junior oil and gas company. On Thursday at lunch she told her friend Alice that a takeover bid had arrived by courier that morning. Alice purchased First Well Ltd. stock. How is the share purchase impacted by the Securities Act?

A) Alice's share purchase is allowed.
B) Alice is an insider and must report the purchase within 10 days.
C) Alice and Helen are both insiders and must report the purchase within 10 days.
D) Alice is a tippee and liable for prosecution.
E) Alice is a tippee and Helen is a tipper and both are liable for prosecution.

Question 18

A short-form prospectus is available

A) for firms already listed.
B) for listed firms with more than 50 million dollars in market value.
C) as part of the Prompt Offering Qualification System.
D) under the authority of SEDAR.
E) for exempted underwriting firms only.

Question 19

Gunnar and his brother Henrik were directors, officers and each 26% shareholders in Evergold Resources, a mining exploration company with claims in Indonesia. Evergold was undertaking exploration on its claims when Henrik's laboratory results on site yielded the existence of a major gold find. The result was a dramatic departure from other samples and seemed to indicate an isolated high-quality vein of gold. Gunnar, in Vancouver, released a press report as to the find. The shares of Evergold began a dramatic run-up in price as a result. Henrik double-checked his work, and the results (though very exceptional) were correct. A further week later, Henrik discovered an anonymous note in his tent at the camp that one of his locally hired laboratory geologists had been involved in a tampering scandal some years before. He telephoned this information to Gunnar, who advised Henrik to thoroughly check the results again. Gunnar immediately sold a third of his own shares in Evergold and reported his trade. The insider trade alarmed the market, which also promptly sold Evergold, depressing its price. The anonymous note proved baseless, and on subsequent announcement of the repeated test confirming the gold strike, Evergold shares rebounded to their previous level. Gunnar was obligated to file a Material Change Report on receipt of Henrik's telephone call.

Question 20

When considering insider trading, the "insiders" of a reporting issuer are

A) its directors and senior officers.
B) the directors and senior officers of its parent or subsidiary firms.
C) its shareholders with more than 10 percent of outstanding voting rights.
D) the reporting issuer itself (the company is its own insider).
E) All of these are reporting issuers.

Question 21

Self-Regulating Organizations make a major contribution to securities regulation in Canada.

Question 22

The process of purchasing newly created securities en bloc from an original issuer as inventory for later resale is known as "securitization."

Question 23

A person holding 25% of shares of a reporting issuer is considered to be in a "special relationship" with the reporting issuer.

Question 24

Takeover bids have required special rules to evolve within securities regulation to promote fairness. Describe the operation of a takeover bid, highlighting why and how the regulation achieves its desired fairness.

Question 25

Explain what rights a proxy confers, why and by whom are they actively sought, and the procedure that must be followed to conduct such a solicitation.

Question 26

The following is an agreed statement of facts in a court case, Roma v. Carthage and Troy Stock Brokerage Corporation:
Mrs. Roma: I'm glad to meet you Mr. Carthage. My daughter has told me all about you and the wonderful way you have managed her stock portfolio. It is a blessing for her not to have to worry about such decisions, she's just so busy; she's starting out as a network engineer, you know. I'm so proud of her. She's the first in the family to graduate from college. If only my dear Caesar had lived to see that!
Mr. Carthage: I'm very sorry to hear of your loss Mrs. Roma, I'm sure Mr. Roma would have been very proud. And thank you for your compliment to me, as well. I understand from your daughter you would like me to undertake some work on your finances.
Mrs. Roma: That is right. Since my dear husband died, I have not known what to do, as he took care of the family finances. I have $250,000 to invest from his life insurance proceeds, and I'm really not well enough myself anymore to get out often.
Mr. Carthage: That's fine Mrs. Roma, not to worry. I'll set up your account as discretionary and do the trades for you. You'll of course get confirmation slips in the mail, so you needn't come here to the office. If there is anything in particular you want me to buy or sell, of course I'll follow your instructions to the letter.
Mrs. Roma: Thank you very much. If you can do for me what you've been doing for my daughter, I'd be very pleased. She told me her $10,000 had become $11,000 in the space of three months, thanks to you.
Mr. Carthage: Well, we try pretty hard to follow the right trends here at Troy. So that you don't think that you are out there on your own, I'll set up a portfolio that is a carbon copy of your daughter's.
Mrs. Roma paid over her funds, but never told her daughter that their portfolios were identical. Confirmation slips were duly delivered after trades, as were monthly statements, and Mrs. Roma filed them in a folder, not fully understanding them. She would ask about her daughter's portfolio finances now and again, and her daughter provided generally vague but upbeat comments. Unknown to Mrs. Roma, market downturns were forcing the two portfolios steadily down in value and her daughter, embarrassed at what she thought were solely her own losses, was covering up the truth of her own financial position.
When the truth came to light, Mrs. Roma held 10,000 shares in Mega.com at $1.50 per share, 1,000 shares of Antarctic Oilfield Exploration Ltd at $0.25 per share, and 1,000 shares of a major Canadian bank at $50 per share, for a portfolio value $65,250. The shares were essentially the same as those originally purchased at the time of account opening. Mrs. Roma sued both Mr. Carthage and the Troy stockbrokerage firm for her losses. Discuss, drawing conclusions and making assumptions as required.

Question 27

Gunnar and his brother Henrik were directors, officers and each 26% shareholders in Evergold Resources, a mining exploration company with claims in Indonesia. Evergold was undertaking exploration on its claims when Henrik's laboratory results on site yielded the existence of a major gold find. The result was a dramatic departure from other samples and seemed to indicate an isolated high-quality vein of gold. Gunnar, in Vancouver, released a press report as to the find. The shares of Evergold began a dramatic run-up in price as a result. Henrik double-checked his work, and the results (though very exceptional) were correct. A further week later, Henrik discovered an anonymous note in his tent at the camp that one of his locally hired laboratory geologists had been involved in a tampering scandal some years before. He telephoned this information to Gunnar, who advised Henrik to thoroughly check the results again. Gunnar immediately sold a third of his own shares in Evergold and reported his trade. The insider trade alarmed the market, which also promptly sold Evergold, depressing its price. The anonymous note proved baseless, and on subsequent announcement of the repeated test confirming the gold strike, Evergold shares rebounded to their previous level. If Gunnar repurchases his shares at a later date, he will be subject to the provisions respecting takeover bids.

Question 28

Gunnar and his brother Henrik were directors, officers and each 26% shareholders in Evergold Resources, a mining exploration company with claims in Indonesia. Evergold was undertaking exploration on its claims when Henrik's laboratory results on site yielded the existence of a major gold find. The result was a dramatic departure from other samples and seemed to indicate an isolated high-quality vein of gold. Gunnar, in Vancouver, released a press report as to the find. The shares of Evergold began a dramatic run-up in price as a result. Henrik double-checked his work, and the results (though very exceptional) were correct. A further week later, Henrik discovered an anonymous note in his tent at the camp that one of his locally hired laboratory geologists had been involved in a tampering scandal some years before. He telephoned this information to Gunnar, who advised Henrik to thoroughly check the results again. Gunnar immediately sold a third of his own shares in Evergold and reported his trade. The insider trade alarmed the market, which also promptly sold Evergold, depressing its price. The anonymous note proved baseless, and on subsequent announcement of the repeated test confirming the gold strike, Evergold shares rebounded to their previous level. Henrik would be considered a "tipper" under the relevant provincial Securities Act.

Question 29

The purpose of securities regulation is to seek a balance between market efficiency and market integrity.

Question 30

Federal and provincial jurisdictional responsibilities for securities regulation in Canada mirror those found in the United States at their federal and state levels.

Question 31

Attempts by a market participant to influence the market price of a security can result in sanctions under both provincial and federal law in Canada.

Question 32

A brokerage firm may not, under any circumstance, have a financial interest in a security that it offers for sale to the public.

Question 33

A prospectus may or may not be required for a new issue of shares, and it is a question that often depends on the nature and number of the proposed purchasers.

Question 34

Prospectus disclosure allows the investing public to sensibly decide whether a material event in the affairs of a company makes the continued ownership of shares of that company prejudicial or advantageous to the investor.

Question 35

Material Change Reports, financial statements and the Annual Information Form together are the backbone of the continuous reporting regime.