Deck 31: Securities Regulation

Question 1

The Securities Act of 1933 is concerned primarily with public distributions of securities.

Answer 1

True

Question 2

One of the principal regulatory components of the 1933 Act is _____.

A) the prospectus
B) antifraud provisions
C) securities provisions
D) the registration statement

Answer 2

B
Explanation: The 1933 Act has two principal regulatory components: (1) registration provisions and (2) antifraud provisions. The various antifraud provisions in the 1933 Act impose liability on sellers of securities for mistaking or omitting facts of material significance to investors.

Question 3

The executive branch of the Securities and Exchange Commission:

A) decides whether a person has violated the securities statutes or not.
B) controls securities transactions by creating and passing regulations.
C) promulgates rules and regulations.
D) brings enforcement actions against alleged violators of the statutes.

Answer 3

D
Explanation: Like other federal administrative agencies, the SEC has legislative, executive, and judicial functions. Its legislative branch promulgates rules and regulations, its executive branch brings enforcement actions against alleged violators of the statutes and their rules and regulations, and its judicial branch decides whether a person has violated the securities statutes.

Question 4

The classical theory of insider trading liability holds that a person violates Section 10(b) and Rule 10b-5 when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the individual from whom he learned of the information.

Question 5

The mandamus is the basic selling document of a 1933 Act registered offering.

Question 6

Securities of nonprofit issuers are exempted from the registration provisions of the 1933 Act.

Question 7

An investment contract:

A) is used to bring enforcement actions against investors who violate provisions of the 1934 Act.
B) regulates the sale of securities while they are passing from the hands of the issuer into the hands of the public investors.
C) is defined as an investment of money in a common enterprise with an expectation of profits from the efforts of others.
D) is the basic investment document of a 1933 Act registered offering.

Question 8

Under the 1934 Act, any profit made by an insider is recoverable by the issuer if the profit resulted from the purchase and sale (or the sale and purchase) within less than a three-year period of any class of the issuer's equity securities.

Question 9

Under the classical theory of insider trading liability, Section 10(b) and Rule 10b-5 are violated when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information.

Question 10

If a manager of an unprofitable business induces shareholders to sell their stock to him by representing that the business will fail, although he knows that the business has become potentially profitable, he violates Rule 10b-5.

Question 11

Section 11 of the 1933 Act provides civil liabilities for damages resulting in an investor who finds, after purchasing the security, that the registration statement for the security contained an untrue statement or omitted a material fact.

Question 12

Securities must be registered under the 1933 Act or the 1934 Act for Rule 10b-5 to apply.

Question 13

Which of the following statements is true of securities regulation?

A) The Securities Exchange Act of 1934 requires periodic disclosures from issuers of securities.
B) The 1933 Act regulates the sale of securities while they are passing from the hands of the issuer into the hands of the private investors.
C) The Securities and Exchange Commission was created by the 1933 Act.
D) Unlike other federal administrative agencies, the Securities and Exchange Commission has only legislative functions.

Question 14

The 1933 Act does not require the issuer of securities to register the securities with the Securities and Exchange Commission (SEC) prior to their offer or sale to the public.

Question 15

Section 16(b) of the 1934 Act requires that insiders individually file a statement disclosing their holdings of any class of equity securities of the issuer.

Question 16

The Securities Act of 1933 is a one-time disclosure statute, although some of its liability provisions purport to cover all fraudulent sales of securities.

Question 17

The Securities Act of 1933:

A) is concerned primarily with private distributions of securities and does not provide provisions to cover fraudulent sale of securities.
B) regulates the sale of securities while they are passing from the hands of the issuer into the hands of the private investors.
C) requires that issuers selling securities publicly make necessary disclosures at the time the issuer sells the securities to the public.
D) requires that all material information about the issuer be disclosed.

Question 18

The mandatory disclosure provision of the Securities Exchange Act of 1934 requires periodic disclosures from issuers of securities.

Question 19

Under Section 11 of the 1933 Act, the purchaser need not prove that the defendant negligently or intentionally misstated or omitted a material fact.

Question 20

"These are the best securities you can buy" is an example of a per se fraudulent statement.

Question 21

Securities sold in exempt transactions are exempt from:

A) registrations in all transactions.
B) registration on subsequent sales of the securities.
C) the registration requirements for those particular transactions only.
D) the antifraud provisions of the 1933 Act.

Question 22

Which of the following statements is true of the registration requirements of the 1933 Act?

A) It requires the issuer of securities to register the securities with the Securities and Exchange Commission prior to their offer or sale to the public.
B) The buyer of the securities must file a registration statement with the Securities and Exchange Commission.
C) Exempt securities need to be registered regardless of who sells the securities or how they are sold.
D) The registration statement should exclude the timing, manner, and content of offers and sales.

Question 23

Which of the following is designed to stop speculative insider trading on the basis of insider information?

A) Regulation of short-swing profits
B) Wash sale
C) Blue sky laws
D) Certificate of interest of participation

Question 24

Which section of the 1933 Act imposes liability on any person who has violated the timing, manner, and content restrictions on offers and sales of new issues?

A) 12(2)
B) 17(a)
C) 12(1)
D) 11

Question 25

Under the Securities Exchange Act of 1934, a 10-K annual report:

A) must include audited financial statements for the fiscal year and current information about the conduct of business.
B) must include only a summarized and unaudited operating statement.
C) requires only summarized and unaudited figures on capitalization and shareholders' equity.
D) is required within 15 days of the end of any month in which any specified event occurs.

Question 26

Which of the following is a feature of the Securities Exchange Act of 1934 but not the Act of 1933?

A) It has several sections prohibiting fraud in securities transactions.
B) The 1934 Act requires additional information in the registration statement.
C) It has registration provisions for issuance of securities.
D) The 1934 Act requires periodic disclosure by issuers with publicly held equity securities.

Question 27

Under the Securities Act of 1933, liability is imposed for improper offers and sales when:

A) a person sells his securities to another private party without notifying the Securities and Exchange Commission.
B) a person offers or sells unregistered and nonexempt securities in violation of the Act.
C) the investor finds that the registration statement for the security contained an untrue statement.
D) the issuer inadvertently omits a few material facts in the registration statement.

Question 28

Which of the following is true of Rule 10b-5 of the 1934 Act?

A) Securities need not be registered under the 1933 Act or the 1934 Act for Rule 10b-5 to apply.
B) The rule applies only to transactions executed on a securities exchange.
C) The rule applies only to face-to-face transactions.
D) Misstatements or omissions of material fact, scienter, and reliance are not elements of Rule 10b-5.

Question 29

Jack Monroe had bought 200 GE common shares on the New York Stock Exchange that he could easily sell without any SEC registration. Jack was able to do so because:

A) it was not a large number of shares.
B) he wasn't selling an insurance policy.
C) it was a nonprofit private offering.
D) he was not an issuer, underwriter, or dealer.

Question 30

Which of the following is true about Section 11 of the 1933 Act?

A) To prove liability, a purchaser only has to prove that the defendant is in one of the three classes of persons liable under Section 11.
B) Directors who are not signers are not liable for false information after purchase of the security.
C) Under Section 11, the purchaser has the burden of proving that he or she exercised due diligence.
D) The defendant can escape liability if the purchaser did not read the registration statement.

Question 31

Under the _____, a person's undisclosed, self-serving use of another's information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the individual who provided the information.

A) blue-sky law
B) misappropriation theory
C) fraud-on the-market theory
D) price disparity law

Question 32

_____ are important securities exemptions from the registration provisions of the 1933 Act.

A) Securities of profit issuers
B) Short-term notes and drafts
C) Private offerings
D) Initial market securities

Question 33

Average investors who offer and sell the securities they own, yet avoid the need to have the issuer register the securities, are called _____.

A) nonissuers
B) issuers
C) dealers
D) brokers

Question 34

According to the Securities and Exchange Commission (SEC), per se fraudulent statements include those that:

A) tout securities and make unreasonable forecasts.
B) specify the use of the proceeds of the issuance.
C) outline the annual return on an investment.
D) give full details about the securities to be offered.

Question 35

In a Rule 10b-5 case, _____.

A) selective disclosure by a defendant doesn't make him liable for omission of material facts
B) the plaintiff must prove that the defendant acted with the intent to deceive, manipulate, or defraud
C) negligence on the part of the defendant is enough to make the defendant liable
D) the plaintiff is generally not required to prove that she relied on the defendant's false statement

Question 36

Jodie's brother is a director at Trip Corporation. He calls her and says that Trip's earnings, not yet announced, will be up by 75 percent and that Jodie should buy Trip's common stock. Under these circumstances, Jodie:

A) can trade because she obtained public information from an insider.
B) cannot trade because she is not an insider.
C) can trade because the information will eventually be made public.
D) cannot trade because she is the relative of an insider.

Question 37

The U.S. Supreme Court has ruled that fraud claims under Section 10(b) and Rule 10b-5 must be brought within:

A) one year after discovery of the facts constituting the violation and no more than three years after the violation has occurred.
B) three years after discovery of the facts constituting the violation and no more than five years after the violation has occurred.
C) five years after discovery of the facts constituting the violation and no more than ten years after the violation has occurred.
D) two years after discovery of the facts constituting the violation and no more than ten years after the violation has occurred.

Question 38

According to the registration requirements of the 1933 Act, a prospectus:

A) should make forecasts of the annual return on a company's common stocks.
B) should include most of the information present in the registration statement.
C) should include statements that tout securities.
D) is a public offer by a bidder to purchase a target company's equity securities.

Question 39

Under the _____, the investor's reliance on the integrity of the market was found to justify a presumption of reliance on the misrepresentation.

A) misappropriation theory
B) classical theory
C) fraud-on-the-market theory
D) efficient markets theory

Question 40

A wash sale:

A) refers to a legal activity that manipulates the price of a security.
B) occurs each time new securities are issued.
C) comes under the liability provisions of the 1934 Act.
D) is a violation under Section 10(b) of the 1934 Act.

Question 41

Why are some securities exempted from the registration provisions of the 1933 Act? Give two examples of such securities. Are they exempted from the antifraud provisions of the act as well?

Question 42

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

A) They are state laws that provide penalties for fraudulent sales and permit the issuance of injunctions to protect investors from anticipated fraudulent acts.
B) They are state laws that give investors the information they need to make intelligent decisions about whether to purchase securities.
C) They provide civil penalties for selling fraudulent securities and conducting fraudulent transactions.
D) They give the bidder and the target company equal opportunities to present their cases to the shareholders.

Question 43

While auditing the financial statements of Forble Corp. (which are to be included in a Securities Act registration statement), Ernie, a certified public accountant, fails to review any of Forble's journal entries, does not read the details of meetings of the board of directors, and does not even speak with the comptroller of Forble. Consequently, Ernie does not discover that substantial loans, which went unmentioned in the financial statements, had been made to Forble officers. As a result, the registration statement omits any mention of the loans. Assuming the omitted fact is a material one and that Ernie is not an officer or director of Forble, does Ernie face potential liability under Section 11 of the Securities Act of 1933? Discuss the reasons for your answer.

Question 44

What are the two types of securities that must be registered under the Securities Exchange Act of 1934?

Question 45

Discuss whether "grease" payments are prohibited by the Foreign Corrupt Practices Act (FCPA).

Question 46

Registration by coordination:

A) allows the issuer to file the 1933 Act registration statement with the state securities administrator.
B) is prohibited by both the 1933 and 1934 Acts.
C) increases the issuer's expense of complying with state laws when making an interstate offering.
D) is concerned primarily with public distributions of securities.

Question 47

Describe the liability provisions of the Securities Exchange Act of 1934 against insider trading, under Rule 10b-5 of the Securities Exchange Act of 1934.

Question 48

A public offer by a bidder to purchase a target company's equity securities directly from its shareholders at a specified price for a fixed period of time is called a(n) _____.

A) bond exchange offer
B) prospectus
C) investment contract
D) tender offer

Question 49

The safe harbor legislation:

A) is implemented with the goal of giving the bidder and the target company equal opportunities to present their cases to the shareholders.
B) applies only when the target company's equity securities are registered under the 1934 Act.
C) holds companies immune from liability as long as they warn the public about factors that might undermine their forecasts.
D) applies to transactions executed on a securities exchange as well as face-to-face transactions.

Question 50

The Williams Act amendments to the 1934 Act were designed to:

A) provide penalties for fraudulent sales and permit the issuance of injunctions to protect investors from anticipated fraudulent acts.
B) protect investors from promoters and security salespersons who offered stock in companies organized to pursue visionary schemes.
C) force corporations to comply with stockholders' social goals of meeting the EPA's new source emission standards.
D) give the bidder and the target company equal opportunities to present their cases to the shareholders.