Deck 16: Regulation of Securities, Corporate Governance, and Financial Markets

Question 1

Payments made to common stockholders based on the profitability of the company are called
.

Answer 1

dividends

Question 2

Holders of equity securities have no specific right or guarantee of a return on their investment.

Answer 2

True

Question 3

The SEC has the power to suspend or revoke the licenses of brokers that violate securities laws.

Answer 3

True

Question 4

Under Sarbanes-Oxley,requiring the payback of corporate bonuses that were awarded and later found to be based on false disclosures is called a provision.

Question 5

Public corporation disclosures and filings are made available to the general public.

Question 6

An is a professional in the securities market that agrees to facilitate the sale of stock to the public for a fee.

Question 7

On a bond,the face amount is also called the .

Question 8

Evidence of specific intent to deceive,manipulate,or defraud is called .

Question 9

State security laws are generally referred to as laws.

Question 10

Crowdfunding is a method of fundraising and is not subject to securities laws.

Question 11

Preferred stock is the most frequently used form of equity instrument.

Question 12

The primary market consists of securities sales in public markets,while the secondary market consists of security sales in private placements.

Question 13

The SEC has the power to initiate criminal actions against individuals or companies that violate security laws.

Question 14

Only Congress may enact securities regulations,and only the courts may interpret securities statutes.

Question 15

Any officer,director,or shareholder who owns 10 percent or more of a company's stock is considered an .

Question 16

A person who receives nonpublic confidential information regarding a company and uses that information to realize a profit is called a .

Question 17

Bonds are debt instruments secured by company assets.

Question 18

Preferred stock always has voting rights.

Question 19

A(n) investor is one who has experience,business savvy,and knowledge of the market to the extent that the law imputes a certain cognizance of investment risk and the ability to protect his or her own interests.

Question 20

The SEC's computer database,which maintains the national clearinghouse for public corporation disclosures,is known as .

Question 21

The foundation and underlying principle of all securities regulation is disclosure.

Question 22

The original Howey test required that the investor have no involvement with generating profits; however,the modern trend is for courts to permit a limited passive involvement on the part of the investor.

Question 23

Rule 10(b) (5)of the 34 Act is aggressively used by the SEC in terms of insider-trading enforcement.

Question 24

If a company files bankruptcy,preferred stockholders have priority over common stockholders and will be paid from the bankruptcy estate first if payments are to be made.

Question 25

Investors holding debt instruments are primarily interested in a fixed rate of return on their investment regardless of the profitability of the company.

Question 26

Blue-sky laws are federal security laws that preempt state security laws.

Question 27

Prior to the passage of the Sarbanes-Oxley Act,auditing in the accounting profession was self-regulating.

Question 28

MFK Corp.wants to raise capital and is considering an offer of bonds and debentures.It is not sure of a particular disclosure requirement,so MFK poses its question to the SEC and requests an interpretation letter.If the SEC issues an interpretive letter addressing MFK's question and MFK follows the statements contained in the letter,MFK cannot be penalized should the advice be incorrect.

Question 29

Issuing securities to the public markets for the first time is called an initial public offering.

Question 30

Annuities issued by insurance companies are exempt from full SEC registration requirements.

Question 31

When a corporation issues securities under a nonpublic offering or safe-harbor exemption from SEC regulations,it is free of the burden of supplying any disclosures to the investor due to the investor's experience and knowledge of the process.

Question 32

Violation of Section 16,a finding of short-swing liability,does not require evidence of the use of insider information and is deemed a strict liability provision.

Question 33

Debentures are unsecured equity instruments that are issued by a corporation.

Question 34

Most common stock enjoys voting rights; however,common stock may be sold without voting rights.

Question 35

The sales of securities in the secondary market does not raise capital for the business whose stock is sold.

Question 36

Securities may not be sold or marketed to the public until the SEC has completed its review phase and the registration becomes effective.

Question 37

Security sales to venture capitalists often do not require full registration.

Question 38

A security can exist in the absence of a formal certificate evidencing the investment and in the absence of an interest taken in the tangible assets of the company being invested in.

Question 39

A promissory note securing a home mortgage is a security instrument.

Question 40

Federal securities laws can,depending on the language and circumstances,classify a business plan as a form of securities offering.

Question 41

The SEC is an independent agency that

A) is not under the direct control of the president.
B) is under the direct control of the president.
C) is under the direct control of the Department of Justice.
D) is under the direct control of the U.S. Treasury Department.

Question 42

The SEC is composed of commissioners.

A) three
B) five
C) seven
D) nine

Question 43

Whether a dividend is paid depends on

A) the officers agreeing to pay the dividend.
B) the board of directors agreeing to pay the dividend.
C) the shareholders voting to award themselves the dividend.
D) the applicable state law, which mandates whether dividends must be paid.

Question 44

Which of the following is not a required preregistration document?
A) an underwriting agreement

A) the prospectus
B) letters of intent
D) comfort letters

Question 45

The purchase and sale of issued securities between investors is called the
A) preferred market.

A) primary market.
B) secondary market.
D) common market.

Question 46

Micro bonds appeal to small business ventures that wish to take advantage of bond financing in the range.

A) $50,000 to $100,000
B) $100,000 to $500,000
C) $500,000 to $1,000,000
D) $1,000,000 to $5,000,000

Question 47

Kante is an underwriter who acted as a third party conducting a sale of securities between Fox Co.and an investor.After the sale,it is discovered that the disclosures made by Fox Co.were fraudulent.The investor has sued both Fox Co.and Kante.What is Kante's best defense to avoid liability?

A) Proving that she actually did not profit from the transaction.
B) Proving that the fraud was so sophisticated that even if she had investigated the preregistration and registration documentation, she probably wouldn't have discovered the fraud anyway.
C) Proving that the issuing company had a long history of truthful disclosures and had never been suspected or investigated for fraud, so she was able to rely on their representations.
D) Proving that she exercised due diligence in examining the preregistration and registration documentation and did not discover the fraud.

Question 48

In 2002,Martha Stewart,the media mogul and CEO of Martha Stewart Living,was prosecuted for insider trading regarding her sale of ImClone stock.Her stockbroker had informed her that Samuel Waksal,the CEO and chairman of ImClone,was selling substantial amounts of his stock in the company,so she then sold her ImClone holdings.What was Martha's fate?

A) Since she "saved" only $45,000 by selling her stock, her dealings were deemed too insignificant and the matter was not pursued.
B) She was found guilty of insider trading as a tippee and went to jail.
C) She claimed that she was merely acting on her broker's advice and didn't know the information provided was material and nonpublic, so she didn't qualify as a tippee.
D) She was found guilty of obstructing justice in a securities investigation and went to jail.

Question 49

Penalties for violations of the Securities Act of 1933 may include each of the following except

A) civil penalties and fines.
B) revocation of the corporate charter for egregious cases.
C) criminal prosecution and incarceration.
D) rescission of the investment by the investor.

Question 50

The Securities Act of 1934 focuses on the
A) preferred market.

A) primary market.
B) secondary market.
D) common market.

Question 51

Wayne is the president and CEO of a corporation.He owns 25 percent of the company's total stock and has been selling large chunks of his holdings over the past three months.If the SEC investigates him for short-swing profits,it would do so under

A) Regulation D of the 1933 Act.
B) Rule 10(b)(5) of the 1934 Act.
C) Section 16 of the 1934 Act.
D) the Private Securities Litigation Reform Act of 1995.

Question 52

Section 16 of the 1934 Act defines an insider as an officer,director,or shareholder who owns or more of the company's total stock.

A) 5 percent
B) 10 percent
C) 15 percent
D) 20 percent

Question 53

Security transactions involving the original issuance and reissuance of securities by a business to raise capital are called the
A) preferred market.

A) primary market.
B) secondary market.
D) common market.

Question 54

Which of the following is an equity instrument?

A) debenture
B) bond
C) common stock
D) promissory note

Question 55

Sunshine Corporation has just filed bankruptcy.Among the investors,who will be paid first?

A) All investors are treated equally, so they all get paid their fair shares simultaneously.
B) Bondholders are paid first.
C) Common stockholders are paid first.
D) Preferred stockholders are paid first.

Question 56

The corporate counsel's opinion verifying the business venture's adherence to corporate formalities and a letter of compliance and opinion from the corporation's accounting firm are contained in the
A) prospectus.

A) supplemental information.
B) letters of intent.
D) comfort letters.

Question 57

In U.S.v.McGee,McGee purchased a substantial amount of a PHLY stock after a confidential conversation with a PHLY insider who was a fellow member of Alcoholics Anonymous.The PHLY stock subsequently showed a substantial profit.When the SEC brought charges of insider trading against McGee,the court found

A) McGee was convicted of insider trading for violating a fiduciary duty of confidentiality.
B) McGee was convicted of insider trading despite the absence of a fiduciary duty, because any duty of confidentiality, trust, loyalty, or confidence would suffice to establish misappropriation liability.
C) McGee was not guilty of insider trading because he had no fiduciary relationship with PHLY.
D) McGee was not guilty of insider trading because a promise of confidentiality for purposes of alcoholism treatment is not the same as a fiduciary duty to establish misappropriation liability.

Question 58

The most commonly used debt instrument is
A) a debenture.

A) common stock.
B) a bond.
D) a promissory note.

Question 59

The Sarbanes-Oxley Act imposed stricter regulations on how corporations do business through regulations in each of the following areas except
A) corporate governance.

A) tax compliance.
B) financial reporting.
D) auditing.

Question 60

The Financial Stability Oversight Council (FSOC)created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 has the power to

A) break up companies deemed to pose a threat to the nation's financial markets even if the company is not insolvent.
B) compel the SEC to assume an oversight position over institutions that pose a global risk to financial markets.
C) approve or disapprove executive compensation packages, including bonuses, regarding companies deemed too big to fail.
D) criminally prosecute officers and board members of companies that are found to have committed fraud and that have harmed the public or the national economy.

Question 61

The safe-harbor exemption from SEC regulations involves

A) nonpublic offers to a limited number of sophisticated investors who already have business relationships with the issuer.
B) nonpublic offers to a limited number of sophisticated investors who privately negotiate their securities purchases.
C) offerings with specified dollar limitations and/or limitations on the number of accredited investors.
D) offerings with specified dollar limitations and/or limitations on the number of nonaccredited investors.

Question 62

With regard to financial reporting and corporate governance,what is now required of public companies under the Sarbanes-Oxley Act?

Question 63

Drew is the president and CEO of Formerly Fat,Inc.,a health and diet company that promotes weight loss through its "revolutionary" feast and famine diet.The diet calls for eating anything you want on Tuesdays and Thursdays,with fasting on Mondays,Wednesdays,and Fridays.On weekends,food is limited to one big lunch each day.Formerly Fat has a celebrity spokesperson who claims she and all her Hollywood friends swear by this diet,and the company has infomercials running on television constantly.On a Friday afternoon,Drew is called by a reporter,who asks if he's concerned that the New England Journal of Medicine,one of the most respected and prestigious medical journals in the country,is about to publish an article on Tuesday documenting that numerous practitioners of this diet suffer from serious medical problems and that three deaths have occurred relating to the diet.The article's authors will be calling for an investigation and eventual ban on advertising and promotion of the diet.Drew laughs and claims the article will be challenged and shown to be inaccurate.As soon as he hangs up,he calls his wife,who has the company stock in her name for liability reasons,and then his brother and says to each,"I just got word that the company is in trouble,and we will have problems soon.Sell your stock immediately." On Monday morning,his wife and brother sell all of their holdings.On Tuesday the article is published,and by Wednesday the stock value is down 40 percent.Discuss this situation.

Question 64

In what two ways do federal securities statutes define a security?

Question 65

Imagine that the SEC had investigated ENRON prior to its collapse and had found extremely serious violations of various securities statutes and regulations.What two things might the SEC have done in the exercise of its delegated executive powers and administrative enforcement powers?

Question 66

Eve is a promoter and has approached Adam with an investment opportunity.Eve anticipates a generous profit and informs Adam that he too can realize a generous profit.This opportunity is not being offered to others.Assuming all other requirements to classify this as a security are in evidence,the commonality of this transaction would be described as a
A) horizontal commonality.

A) vertical commonality.
B) parallel commonality.
D) common commonality.

Question 67

Which of the following is not a component in the definition of a security?

A) An investment.
B) An expectation of profit.
C) Tangible collateral to secure the instrument.
D) Efforts of a third party to create expected profit.

Question 68

Under the emergency escrow provisions created by the Sarbanes-Oxley Act

A) the SEC may require corporate payouts into a government-controlled emergency escrow fund after the SEC investigation has uncovered wrongdoing by the corporation.
B) the SEC may require corporate payouts into a government-controlled emergency escrow fund during its investigation and before the SEC has uncovered wrongdoing by the corporation.
C) the PCAOB may require corporate payouts into a government-controlled emergency escrow fund after the PCAOB investigation has uncovered wrongdoing by the corporation.
D) the PCAOB may require corporate payouts into a government-controlled emergency escrow fund during its investigation and before the PCAOB has uncovered wrongdoing by the corporation.

Question 69

Giana is the executive secretary to the CEO of a large public corporation.One day her boss takes her into a back room containing numerous cardboard file boxes and three shredding machines,and he tells her to shred every document and file in the room.He then says,"We're under investigation by the SEC,and if they get their hands on anything in this room,we're ruined." She asks what is going on and is told that the company has been perpetrating fraud for years and needs to destroy all the evidence.If Giana then agrees to shred the documents and files,what,if anything,could happen to Giana?

A) Since Sarbanes-Oxley does not have a whistle-blower provision, Giana has no recourse if she wants to keep her job.
B) Since Giana didn't actually participate in the fraud and since she is only following orders, she will have no liability.
C) Since the investigation is ongoing and no charges have been brought, shredding the documents is not a punishable offense yet.
D) Giana could be imprisoned for up to 20 years if she shreds the documents.

Question 70

Once a corporation has submitted a registration statement to the SEC,what responses may the SEC make and what is the required timing of these responses?

Question 71

Under TARP provisions,

A) restrictions are imposed on compensation of officers, but not on their bonuses.
B) restrictions are imposed on bonuses of officers, but not on their compensation.
C) shareholders have no right to vote on compensation.
D) shareholders have more say on compensation of directors and officers

Question 72

The Securities Act of 1933 focuses on the
A) preferred market.

A) primary market.
B) secondary market.
D) common market.

Question 73

Fremont is a corporate insider and has made some very large profits through the buying and selling of his corporation's stock during the previous six months.These profits would be called
A) short-spell profits.

A) short-term profits.
B) short-range profits.
D) short-swing profits.

Question 74

One form of private placement exemption involves sales of securities

A) in limited dollar amounts to nonaccredited investors.
B) only to employees, officers, and board members of the issuing corporation.
C) to accredited investors.
D) to other corporations, with no sales to individuals permitted.

Question 75

The SEC maintains regional offices,throughout the United States,where much of its day-to-day work is done.

A) 8
B) 11
C) 13
D) 21

Question 76

Johanna is the CFO of Para Corp.and is a year from retirement.In order to guarantee herself a very substantial bonus and to boost her retirement package,she knowingly certifies false financial reports that make the company appear to be much more profitable than it really is.She further takes steps to ensure that the financial report does not get reviewed through internal controls maintained by Para Corp.Under provisions of the Sarbanes-Oxley Act,what are the possible penalties that may be imposed when her actions are discovered?

Question 77

Fernando is the president and CEO of a publicly held corporation and is quoted in the paper as saying that the company is solid and has a bright future.He mentions a number of projects and plans that he anticipates will be successful in both the short term and long term,thus benefiting the company.Braenna reads this article and calls a broker,directing him to buy shares in Fernando's company.After two years the stock is below the price she paid for it,and she brings suit,claiming that Fernando committed fraud when he stated that the company was solid and would be very successful in the future.What must be proved by each side,and what is the likely outcome of this suit?

Question 78

Brent has opened a fruit and vegetable business named Brent's Country Stand near an affluent suburban neighborhood.After six months Brent wishes to raise capital for expansion,so he offers a number of his customers the following deal: If the individual gives Brent $10,000,Brent will provide a promissory note,payable in five years with full repayment of the principal and a 10 percent interest rate of return.Brent's Country Stand is the maker of the notes,and about 10 customers have purchased these notes.Do these promissory notes qualify as securities? Why or why not?

Question 79

What authority does the Bureau of Consumer Financial Protection have?

Question 80

The Supreme Court decision in SEC v.W.J.Howey Co.led to what is commonly called the Howey test to determine whether something qualifies as a security.Identify and explain the four components of this test.