Question 1

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

Accepted Answer

The SEC may require payment into the fund before wrongdoing is uncovered.

Question 2

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

Accepted Answer

Tangible collateral is not required regarding security instruments.

Question 3

Gina 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 orders 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 frauds for years and needs to destroy all the evidence.

Accepted Answer

Since Gina is aware of the frauds, she may be imprisoned if she shreds evidence even when the investigation is ongoing.

Question 4

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:

Accepted Answer

When the promoter of a security and the single investor share a common expectation of profit, the transaction is classified as having a vertical commonality.

Question 5

Fred 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:

Accepted Answer

The prohibition against short-swing profits is intended to deter insiders from profiting by manipulating the stock's short-term performance.

Question 6

The Restoring American Financial Stability Act of 2010 established the Consumer Financial Protection Bureau. What is the authority of this agency?

Accepted Answer

The answer of The Restoring American Financial Stability Act of...

Question 7

Under TARP provisions:

Accepted Answer

The board may consider the shareholders vote but is not bound by it.

Question 8

Joan 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?

Accepted Answer

The answer of Joan is the CFO of Para Corp....

Question 9

One form of private placement exemption involves sales of securities:

Accepted Answer

Private placements involve sales to accredited investors only or purely local offerings with residency requirements for purchase and resale.

Question 10

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

Accepted Answer

The answer of With regard to financial reporting and corporate...

Question 11

The Securities Act of 1933 focuses on the:

Accepted Answer

The Securities Act of 1933 regulates the original issuance and reissuance of securities to investors by issuers.

Question 12

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?

Accepted Answer

The answer of Brent has opened a fruit and vegetable...

Question 13

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

Accepted Answer

The answer of In what two ways do federal securities...

Question 14

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

Accepted Answer

Much of the day-to-day work of the SEC is conducted by its 11 regional offices located throughout the United States.

Question 15

Donald 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, Donald 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. Donald 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.

Accepted Answer

The answer of Donald is the president and CEO of...

Question 16

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?

Accepted Answer

The answer of Once a corporation has submitted a registration...

Question 17

The "safe-harbor" exemption from SEC regulations involves:

Accepted Answer

The safe-harbor exemption from SEC regulations involves offerings with specified dollar limitations and/or limitations on the number of nonaccredited investors.

Question 18

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

Accepted Answer

The answer of In SEC v. W. J. Howey Co.,...

Question 19

Frank 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. Betty Sue reads this article and calls a broker, directing him to buy shares in Frank's company. After two years the stock is below the price she paid for it, and she brings suit, claiming that Frank committed a 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?

Accepted Answer

The answer of Frank is the president and CEO of...

Question 20

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?

Accepted Answer

The answer of Imagine that the SEC had investigated ENRON...

Quiz 17: Regulation of Securities, Corporate Governance, and Financial Markets