Deck 45: Securities Regulation

Question 1

Rule 10b-5 applies to all transactions in all securities listed on an American stock exchange,and the purchase or sale of any other security in the United States,whether or not registered under the 1933 Act or the 1934 Act.

Answer 1

True
Explanation: Rule 10b-5 applies to all transactions in all securities listed on an American stock exchange,and the purchase or sale of any other security in the United States,whether or not registered under the 1933 Act or the 1934 Act.

Question 2

The ultimate purpose of the 1934 Act is to keep investors fully informed to allow them to make investment decisions when an issuer sells securities to investors.

Answer 2

False
Explanation: The ultimate purpose of the 1934 Act is to keep investors fully informed to allow them to make intelligent investment decisions at any time.

Question 3

Securities Exchange Act Rule 10b-5 liability attaches to anyone who trades in securities for personal profit using confidential information misappropriated in a breach of fiduciary duty owed to the source of the information.

Answer 3

True
Explanation: In June 1997,the Supreme Court held that Rule 10b-5 liability attaches to anyone who trades in securities for personal profit using confidential information misappropriated in a breach of fiduciary duty owed to the source of the information.

Question 4

Section 11 of the 1933 Act provides civil liabilities for damages when a 1933 Act registration statement on its effective date misstates or omits a material fact.

Question 5

The most important elements for violation of Rule 10b-5 of the 1933 Securities Act are misstatement or omission of material fact and negligence.

Question 6

Section 5 of the 1933 Act provides an exemption from registration for transactions of securities by any person other than an issuer,underwriter,or dealer.

Question 7

The State of Delaware has adopted business combination moratorium statutes to deter tender offers from being made.

Question 8

Section 16(a)of the 1934 Act prohibits statutory insiders from disclosing their ownership of their company's securities for the first 10 days of ownership.

Question 9

Securities Act Rule 506 requires an issuer to sell to no more than 35 accredited investors.

Question 10

The maximum penalty for any person who willfully violates the Securities Act of 1933 or its rules and regulations is a $20,000 fine and 10 years' imprisonment.

Question 11

The purpose of securities regulation is to make issuers and sellers of securities have a duty to disclose important information.

Question 12

The period of time between the filing date and the effective date of a share offering is called the waiting period.

Question 13

Under the Securities Act of 1933,the definition of a security excludes a promissory note that matures not more than nine months from the date of issuance.

Question 14

The Securities and Exchange Commission (SEC)has the power to impose civil fines up to $500,000 and issue cease and desist orders.

Question 15

As per the test laid down by the Supreme Court (in United States v.Chiarella),the definition of "insiders" includes not only officers and directors of the company but also anyone who has been entrusted with corporate information for a corporate purpose.

Question 16

Prior to the filing of a 1933 Act registration statement,the issuer may use a Rule 134 tombstone advertisement to make investors aware of the upcoming offering of securities.

Question 17

An insurance policy is exempt from registration under the 1933 Act.

Question 18

The Securities Act of 1933 regulates the sale of securities when they are sold from the issuer to a public purchaser.

Question 19

The Sarbanes-Oxley Act of 2002 extends the statute of limitations to three years after discovery of facts constituting a violation of Section 11 of the 1933 Act and seven years after the violation.

Question 20

State securities laws are known as "blue-sky laws".

Question 21

Which federal law has established three important time periods in the filing of shares to public shareholders?

A)Securities Act of 1933
B)Dodd-Frank Act of 2010
C)Sarbanes Oxley Act of 2002
D)Homeland Security Act of 2002

Question 22

The SEC does NOT have the power to:

A)direct a defendant to stop violating the securities laws.
B)impose fines for violation of securities laws.
C)desist a defendant from future violations of securities laws.
D)issue injunctions against alleged violators of securities laws.

Question 23

Section 5 of the 1933 Act permits the securities to be offered but not sold during the ________ period.

A)pre-filing
B)quiet
C)waiting
D)post-effective

Question 24

Which of the following is an example of a transaction that is exempt from the registration requirements of the 1933 Act?

A)Securities issued by municipal governments in the United States and offered solely to banks.
B)Securities issued by nonprofit charitable organizations and offered solely to institutional investors.
C)Securities issued by banks and offered solely to investors sophisticated in investment matters.
D)Securities issued by for-profit corporations and offered solely to intrastate investors.

Question 25

The Securities and Exchange Commission (SEC)was created by the:

A)Securities Exchange Act of 1934.
B)Securities Investor Protection Act of 1970.
C)Investment Company Act of 1940.
D)Securities Act of 1933.

Question 26

The judicial branch of the SEC:

A)promulgates rules and regulations.
B)decides whether a person has violated the securities laws.
C)makes new laws regulating securities.
D)brings enforcement actions against alleged violators.

Question 27

One of the two principal regulatory components of the 1933 Act is:

A)distribution provisions.
B)restricted provisions.
C)registration provisions.
D)disclosure provisions.

Question 28

Jargons Company is a well-known and seasoned public issuer of securities.It is going to file a registration statement with the SEC on February 1,2012,for a new security offering.Rule 163 of the 1933 Act will allow it to use a ________ in January 2012.

A)final prospectus
B)Communications Not Deemed a Prospectus
C)free-writing prospectus
D)preliminary prospectus

Question 29

Under the Securities Act of 1933,the registration of securities which are offered to the public in interstate commerce is:

A)directed toward minimizing investor exposure to financially risky securities.
B)not required unless the issuer is a corporation.
C)mandatory unless the cost to the issuer is "prohibitive" as defined in the SEC regulations.
D)required unless the offering of the securities are exempt from registration.

Question 30

The ________ underwriting is used when an issuer is not well established and the underwriter is unwilling to risk being unable to sell the securities.

A)standby
B)sponsorship
C)best efforts
D)firm commitment

Question 31

Under the 1933 Act,which of the following is allowed to state the price at which the securities will be offered?

A)A notice about a prospective offering published during the pre-filing period
B)A tombstone ad
C)A free-writing prospectus
D)A preliminary prospectus

Question 32

Which of the following instruments is NOT considered to be a security?

A)Mortgage notes
B)Treasury stock
C)Certificate of interest
D)Investment contract

Question 33

Baronial Company plans to make a registered offering of its preferred shares pursuant to the Securities Act of 1933.After filing a registration statement with the Securities and Exchange Commission but prior to its effective date,which of the following will violate Section 5 of the Securities Act of 1933?

A)Sending letters to 50 prospective investors noting that projected earnings are up 15 percent.
B)An oral offer at a sales meeting attended by 50 prospective investors.
C)An oral offer to sell the shares made by telephone to 50 prospective investors.
D)In-person oral offers to sell the shares to 50 prospective investors.

Question 34

What is the term for the period of time when a security may be offered and sold to the public under section 5 of the 1933 Securities Act?

A)The waiting period
B)The post-effective period
C)The pre-filing period
D)The mediation phase

Question 35

A(n)________ is the basic selling document of a security offering registered under the 1933 Act.

A)prospectus
B)investment letter
C)registration statement
D)suitability letter

Question 36

The classic underwriting arrangement is a ________ underwriting.

A)standby
B)sponsorship
C)best efforts
D)firm commitment

Question 37

The ________ underwriting is typically used only to sell common shares to existing shareholders pursuant to a preemptive rights offering.

A)standby
B)sponsorship
C)best efforts
D)firm commitment

Question 38

The Securities Act of 1933 and the Securities Exchange Act of 1934 are examples of:

A)federal statutes.
B)state statutes.
C)administrative rules.
D)common Law decisions.

Question 39

Under Section 4(a)(2)of the 1993 Act,registration is not required for:

A)transactions that are done by non-charitable organizations.
B)transactions by agricultural corporations.
C)interstate securities transactions.
D)transactions by an issuer that does not involve a public offering.

Question 40

________ creates three important periods of time in the life of a securities offering: (1)the pre-filing period,(2)the waiting period,and (3)the post-effective period.

A)Section 3 of the 1934 Act
B)Section 17 of the 1933 Act
C)Section 12 of the 1934 Act
D)Section 5 of the 1933 Act

Question 41

Which section of the 1933 Securities Act provides for criminal liability for willful securities violations under the act?

A)Section 24
B)Section 5
C)Section 7
D)Section 31

Question 42

Baronet Company is a publicly owned company whose shares are traded on the NYSE.Baronet acquired a small manufacturing plant in Nevada as part of its strategic growth plan.Under the 1934 Act,which of the following reports must Baronet file with the SEC within four business days of this event?

A)The 10-K
B)The 8-Q
C)The 10-Q
D)The 8-K

Question 43

Barchrome Company issued debentures in November 1996 to raise capital to finance a new manufacturing plant.John was one of the small investors who bought those debentures.In December 2000,John discovered that Barchrome's registration statement contained material misstatements (it had overstated current assets by 11 percent and sales by 8 percent).John sued Barchrome in January 2001.Is Barchrome liable?

A)Yes,Barchrome is liable under Section 12(A)(2)of the 1933 Act.
B)No,Barchrome is not liable because the statute of limitations under Section 12(a)(2)has run out.
C)No,Barchrome is not liable because the statute of limitations under Section 11 has run out.
D)Yes,Barchrome is liable under Section 11 of the 1933 Act.

Question 44

Section 4(a)(2)of the 1933 Act covers the ________ offering exemption from the registration provisions.

A)intrastate
B)interstate
C)private
D)small

Question 45

Which of the following is true about shareholder proposals and eligibility of shareholders to get their proposals included by a corporation in its proxy statement?

A)A shareholder must own at least 0.5 percent of the securities to be voted at the shareholders' meeting.
B)An eligible shareholder may submit only one proposal per shareholder meeting.
C)The shareholder proposal and its supporting statement may not exceed 1500 words.
D)A shareholder must own at least $1,000 of the securities to be voted at the shareholders' meeting.

Question 46

Northern Company is a small issuer who wishes to solicit investors to buy its securities during the pre-filing period.As the advertising budget of the company is not large,Northern has decided to advertise during the pre-filing period by using a website.This solicitation of shares is:

A)in violation of the Prohibition of Solicitation Act.
B)permitted as the Internet has strong potential for attracting investors.
C)in violation of Rule 505 and Rule 506 of Regulation D.
D)allowed provided SEC gives written permission.

Question 47

Under Rule 10b-5 of the Securities Act of 1934,a plaintiff has the burden of proof to establish that the defendant acted:

A)with negligence.
B)with scienter.
C)with malice.
D)in concert with others.

Question 48

In a due diligence meeting,officers and experts confer with each other for the purpose of:

A)increasing corporate transparency and responsibility.
B)ascertaining that the registration statement contains no misstatements or omissions of material fact.
C)creating strategies for maximizing capital raised from public issue of securities.
D)issuing a proxy solicitation document for issuance of securities.

Question 49

An offering circular is a disclosure document required under Regulation A of the SEC for a(n)________ offering exemption from the registration provisions of the 1933 Act.

A)intrastate
B)interstate
C)private
D)small

Question 50

Mel is a securities broker who holds shares in Beanbag Inc.Mel does not disclose this to his customer Kim,whom he advises to buy Beanbag shares.Mel hopes that by not disclosing his conflict of interest,he will influence Kim to buy the shares.Kim,believing the information on Beanbag shares is given from Mel's disinterested point of view,declares that buying Beanbag shares "sounds like an excellent idea" and purchases the shares.Which of the following statements is most accurate?

A)Kim cannot hold Mel liable because Mel did not make a misstatement of material fact.
B)Kim will have to prove that Mel acted negligently in order to prove a Rule 10b-5 violation.
C)Kim will most likely be able to make a successful claim against Mel under Rule 10b-5.
D)Mel did not have a duty to disclose his conflict of interest to Kim.

Question 51

Eastern Company wants to make an offering of securities exempt from registration under Rule 504 of the Securities Act of 1933.Which of the following is a requirement of Rule 504?

A)Eastern may sell to no more than 35 unaccredited purchasers.
B)Eastern must sell only to investors who are able to protect themselves by making informed investment decisions.
C)Eastern must be a nonpublic issuer under the Securities Exchange Act.
D)Eastern may not make any general solicitations of investors.

Question 52

A plaintiff wishes to recover damages from the issuer for losses resulting from material misstatements in a securities registration statement.To be successful under Section 11 of the 1933 Act,one of the elements the plaintiff must prove is that the:

A)plaintiff was in privity of contract with the issuer.
B)plaintiff relied on the misstatement or omission in the registration statement.
C)issuer acted negligently.
D)issuer is in one of the classes of persons liable under Section 11.

Question 53

Carmen Company wants to make an offering of securities exempt from registration under Rule 505 of the Securities Act of 1933.To do this,Carmen:

A)may sell to 50 unaccredited purchasers.
B)may sell to any number of accredited purchasers.
C)may only sell to purchasers sophisticated in investment matters.
D)cannot restrict resale of securities for one year.

Question 54

To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement,the plaintiff must prove which of the following?

A)The defendant's intent to deceive and the plaintiff's reliance on the registration statement
B)The defendant's intent to deceive but not the plaintiff's reliance on the registration statement
C)The plaintiff's reliance on the registration statement but not the defendant's intent to deceive
D)Neither the defendant's intent to deceive nor the plaintiff's reliance on the registration statement

Question 55

The SEC has defined the intrastate offering exemption more precisely in Rule 147.According to this rule:

A)intrastate resale of such securities is permitted for nine months.
B)interstate resale of such securities is permitted for nine months.
C)intrastate resale of such securities is permitted for twelve months.
D)interstate resale of such securities is permitted for twelve months.

Question 56

Section 404 of the Sarbanes-Oxley Act of 2002 is considered controversial because:

A)sensitive corporate information has to be published,which may be detrimental to a company.
B)a company has to significantly increase its budget to comply with Section 404.
C)the procedure for complying with Section 404 is lengthy,complicated,and time consuming.
D)Section 404 results in diminished corporate responsibility of the officers of a company.

Question 57

Which of the following issuers must register securities with the SEC under the 1934 Act?

A)An issuer with total assets of $12 million,whose debentures are traded in interstate commerce and are held by 600 holders.
B)An issuer with total assets of $9 million,whose stocks are traded in intrastate commerce and are held by 700 holders.
C)An issuer with total assets of $14 million,whose debentures are traded in interstate commerce and are held by 300 holders.
D)An issuer with total assets of $8 million,whose stocks are traded in intrastate commerce and are held by 400 holders.

Question 58

Under Section 11 of the Securities Act of 1933,a defendant (other than the issuer)may establish a defense to liability if the defendant can prove that he/she acted:

A)with due diligence.
B)with scienter.
C)without scienter.
D)without due diligence.

Question 59

Which of the following could be considered as an "insider" under the 1934 Securities and Exchange Act?

A)Directors of the corporation
B)Any employee entrusted with information that is being held secret to the public
C)The Secretary of State
D)Both directors of the corporation and any employee entrusted with information that is being held secret to the public.

Question 60

To prove his/her due diligence defense under Securities Act Section 11 with regard to audited financial statements,an officer of the issuer must prove which of the following?

A)The officer made a reasonable investigation into the accuracy of the audited financial statements.
B)The officer believed the financial statements did not omit or misstate a material fact.
C)The officer had no intent to misstate or omit a material fact in the audited financial statements.
D)The officer had no reason to believe the financial statements omitted or misstated a material fact.

Question 61

Hearings held by the SEC are held before a(n)________,who is an employee of the SEC.

A)administrative law judge
B)consultant
C)federal district court judge
D)director

Question 62

Section 12(a)(1)of the 1933 Act imposes liability on any person who violates the provisions of Section 5.Liability extends to any purchaser to whom an illegal offer or sale was made.Which of the following describes the purchaser's remedy?

A)The purchaser's remedy is rescission of the purchase or damages if the purchaser has already resold the securities.
B)The purchaser's remedy is to issue an injunction against the seller and sue for punitive damages.
C)The purchaser's remedy is rescission of the purchase and any consequential damages.
D)The purchaser's remedy is the right to sue for treble damages.

Question 63

Which of the following is not a basic purpose of either the Securities Act of 1933 or the Securities Exchange Act of 1934 as discussed in the text?

A)To create transparency for the general public to deter white-collar crime
B)To require the disclosure of meaningful information about a security and its issuer to allow investors to make intelligent investment decisions
C)To impose liability on those persons who make inadequate and erroneous disclosures of information
D)To regulate insiders,professional sellers of securities,securities exchanges,and other self-regulatory securities organizations

Question 64

The Uniform Securities Act permits an issuer to register by coordination,which means the issuer:

A)can file the 1933 Act registration statement with the state securities administrator.
B)becomes exempt from registration under state securities registration law.
C)needs to file under the state securities registration law only and not the 1933 Act.
D)need not register the securities statement once he/she has registered under the 1933 Act.

Question 65

The legislative branch of the SEC:

A)decides whether a person has violated the securities laws.
B)promulgates rules and regulations.
C)makes new laws regulating securities.
D)brings enforcement actions against alleged violators.

Question 66

Which of the following was created in response to widespread misstatements and omissions in corporate financial statements?

A)Securities Exchange Act of 1934
B)Sarbanes-Oxley Act of 2002
C)Dodd-Frank Act of 2010
D)Securities Act of 1933

Question 67

The Supreme Court uses the family resemblance test developed in Reves v.Ernst & Young to determine whether:

A)promissory notes are securities.
B)common shares are securities.
C)debentures are securities.
D)liens are securities.

Question 68

The Supreme Court's Howey test defines ________ as an investment of money in a common enterprise with an expectation of profits solely from the efforts of others.

A)investment contracts
B)treasury stock
C)certificates of interest
D)security interests

Question 69

Which of the following is correct concerning the Foreign Corrupt Practices Act (FCPA)?

A)Under the FCPA,a company may be fined up to $5 million.
B)Under the FCPA,directors participating in violations may be subject to prison terms up to 10 years.
C)The FCPA bribery provisions apply only to American firms with equity securities registered under the 1934 Act.
D)Facilitating or grease payments are not prohibited by the FCPA.

Question 70

Which of the following can the SEC issue that directs a defendant to stop violating the securities laws and abstain from future violations?

A)Injunction orders
B)Consent orders
C)Special orders
D)Cease and desist orders

Question 71

Which of the following demonstrates the timeline of decision makers from the initial SEC hearing to the final appeal?

A)Administrative law judge,U.S.District Court,U.S.Court of Appeals
B)Commissioners of the SEC,U.S.Court of Appeals,U.S.Supreme Court
C)Commissioners of the SEC,U.S.District Court,U.S.Court of Appeals
D)Administrative law judge,commissioners of the SEC,U.S.Court of Appeals

Question 72

Which of the following statements about an SEC no-action letter is false?

A)No-action letters state the SEC will not take legal action against the issuer if the issuer acts as indicated in the no-action letter.
B)No-action letters are binding on the SEC commissioners.
C)Issuers that comply with the no-action letters rarely face SEC action.
D)Issuers often seek no-action letters before making exempted offerings of securities and excluding shareholder proposals from their proxy statements.

Question 73

Rule ________ of the SEC prohibits insider trading on nonpublic corporate information.

A)10b-5
B)14e-3
C)14a-8
D)10c-7

Question 74

Criminal actions under the 1933 Act are brought by the ________.

A)Securities and Exchange Commission
B)attorney general of the state where the defendant is located
C)Federal Trade Commission
D)attorney general of the United States

Question 75

Provisions contained in the ________ impose new powers and responsibilities on the Securities and Exchange Commission,increase regulation of brokers and investment advisers,regulate asset-backed securities,require shareholder approval of executive compensation,and strengthen shareholder rights in director elections.

A)Securities Exchange Act of 1934
B)Dodd-Frank Act of 2010
C)Sarbanes-Oxley Act of 2002
D)Securities Act of 1933

Question 76

In addition to an injunction,the SEC may also ask the courts to grant ________ relief,which may include the disgorgement of profits that a defendant has made in a fraudulent sale or in an illegal insider trading transaction.

A)compensatory
B)punitive
C)ancillary
D)nominal

Question 77

The executive branch of the SEC:

A)decides whether a person has violated the securities laws.
B)brings enforcement actions against alleged violators.
C)makes new laws regulating securities.
D)promulgates rules and regulation.

Question 78

The "fraud-on-the-market-theory" used in some cases to establish liability under Rule 10b-5 of the Securities Act of 1934 is an indirect way of establishing which of the following elements of proof?

A)The defendant acted with negligence.
B)The defendant acted with scienter.
C)The plaintiff's reliance.
D)The plaintiff's due diligence.

Question 79

Which of the following is true about the Williams Act?

A)It regulates tender offers only when the bidder intends to hold at least 2 percent of the subject company's shares.
B)It requires bidders to solicit shares from at least 100 shareholders.
C)It does not permit tendering shareholders to withdraw their tendered shares.
D)The aim of the Williams Act is to protect investors and to give the bidder and the subject company equal opportunities to present their cases to the shareholder.

Question 80

Instead of litigating an SEC action,the SEC often issues ________,by which the defendant promises not to violate the securities laws in the future but does not admit to having violated them in the past.

A)arbitration orders
B)injunction orders
C)consent orders
D)cease and desist orders