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ch17

Student: ___________________________________________________________________________

1.

Securities laws are designed to protect the buying public by requiring accurate information so that they can make intelligent investment decisions based on factual information. True False The Securities and Exchange Commission has both quasi-legislative and quasi-judicial powers. True False The Securities Act of 1933 is a disclosure law with respect to the initial sale of securities to the public. True False Contracts to buy and sell securities are finalized during the posteffective period. True False The prospectus provides expert analysis of a particular security's expectations of future worth. True False The law prohibits the sale of worthless securities. True False It is legal to sell a covered security during the prefiling period. True False Fraud occurs when any material fact is omitted from a prospectus causing a statement to be misleading. True False Liability traditionally has been imposed against violators even though they lacked any wrongful intent. True False

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10. Plaintiffs can recover for harm done by false or misleading information in a prospectus even if the prospectus was not read or reviewed. True False 11. Sarbanes-Oxley has increased the statute of limitations for various infringements of both the 1933 Act and the 1934 Act. True False 12. The burden of proof when alleging a due diligence defense is on the expert. True False 13. Under the 1933 Act, the statute of limitations begins to run the moment the untrue statement or communication containing an omission is made public. True False 14. The Securities Exchange Act makes it illegal to sell a security on a national exchange unless a registration is effective for the security. True False 15. A plaintiff in a Rule 10b-5 suit is not required to prove damages in order to prevail. True False

16. A defrauding seller usually benefits from an increase in the value of the securities. True False 17. Proof of negligence leading to corporate mismanagement is not enough to prove a case of seller's fraud under Rule 10b-5. True False 18. A person cannot be considered an insider unless he/she owns at least 51 percent of a security. True False 19. The SEC applies the misappropriation theory of insider trading to force executives who file or certify incorrect financial statements to return bonuses and additional compensation received. True False 20. A tipster is a person who learns of nonpublic information from an insider. True False 21. Congress, through the PCAOB, limits the amount of damages private plaintiffs can recover and restricts attorney fees. True False 22. The blue sky laws can apply to securities subject to federal laws as well as to those securities exempt from the federal statutes. True False 23. The Uniform Securities Act has been the model for blue sky laws. True False 24. The Public Company Accounting Oversight Board (PCAOB) permits auditing firms to conduct a variety of nonauditing services. True False 25. Sarbanes-Oxley limits personal loans from a company to its executives to one loan of no more than $10,000, amortized over five years, at a time. True False 26. Sarbanes-Oxley provides protections for whistleblowers so that individuals are more willing to report the corruption that can lead to major scandals. True False 27. Restatements of financial reports have risen in number as a result of Sarbanes-Oxley because companies have made efforts to maintain appropriate compliance with the law. True False 28. Under the Sarbanes-Oxley Act, whistleblowers that suffer retaliation are able to recover civil damages and can be reinstated if terminated improperly. True False 29. The Consumer Financial Protection Board was established under the Dodd-Frank Act. True False 30. Whistleblowers who first use a company's internal processes before reporting to the SEC are entitled to potentially higher financial rewards. True False 31. The regulation of securities began as a program to: A. prohibit an individual's service as an officer or director. B. recover triple damages in civil actions against a user of nonpublic information. C. help the United States overcome the Great Depression of the 1930s. D. eliminate liabilities for short-swing profits made by insiders. E. help potential investors to make investment decisions based on less certain criteria.

32. A certificate of interest or participation in any profit-sharing agreement is an example of a(n): A. stock. B. bond. C. treasury stock. D. security. E. debenture. 33. The SEC's right to conduct investigations is based on: A. their quasi-executive power. B. their quasi-legislative power. C. their quasi-judicial power. D. an executive order. E. an injunction. 34. The SEC's adoption of rules and regulations relating to financial and other information furnished to the Commission comes under its _____ power. A. quasi-judicial B. executive C. quasi-executive D. quasi-legislative E. bargaining 35. The _____ is a disclosure law which makes it illegal to use mails or any other means of interstate communication or transportation to sell securities without disclosing certain financial information to potential investors. A. Securities Exchange Act of 1934 B. Sherman Antitrust Act of 1890 C. Sarbanes-Oxley Act of 2002 D. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 E. Securities Act of 1933 36. The registration statement to be filed with the SEC includes: A. statements which gives the holder the right to purchase securities at a stipulated price within a specified time limit. B. a written promise to repay a specified sum of money plus interest at a specified rate and length of time to fulfill the promise. C. statements that show ownership of a bond, stock or other security. D. financial statements and a report on operations, issued by a company to its shareholders at the company's fiscal year-end. E a detailed disclosure of financial information about the issuer and the controlling individuals involved . in the offering of securities for sale to the public. 37. Under the 1933 Act, proof of intentional violation is usually required to impose: A. criminal sanctions only. B. criminal or civil sanctions. C. criminal and pragmatic sanctions. D. criminal, civil, and equitable (injunctive) sanctions. E. pragmatic sanctions. 38. The Security Act of 1933 requires the preparation and distribution to potential investors of the: A. registration statement only. B. registration statement and prospectus. C. prospectus and licensing agreement. D. registration statement, prospectus, and licensing agreement. E. licensing agreement.

39. A(n) _____ is the individual or business organization offering a security for sale to the public. A. seller B. controlling person C. issuer D. underwriter E. financial sponsor 40. An individual who participates in the original distribution of securities by selling such securities for the issuer or by guaranteeing their sale is referred to as the: A. seller. B. controlling person. C. issuer. D. underwriter. E. bailee. 41. Which of the following statements is true of a seller? A.It refers to anyone who contracts with a purchaser or who is a motivating influence that causes the purchase transaction to occur. B. It refers to the individual or business organization offering a security for sale to the public. C It refers to anyone who participates in the original distribution of securities by selling such securities . for the issuer or by guaranteeing their sale. DIt refers to a person with whom some article is left, usually pursuant to a contract who is responsible for . the safe return of the article to the owner when the contract is fulfilled. E. It refers to anyone who controls or is controlled by the issuer, such as a major stockholder of a corporation. 42. A(n) _____ is one who controls or is controlled by the issuer, such as a major stockholder of a corporation. A. seller B. bailee C. underwriter D. guarantor E. controlling person 43. A prospectus is filed during the: A. prefiling period. B. waiting period. C. preeffective period. D. posteffective period. E. elimination period. 44. Tombstone ads refer to: A. solicitations made during the waiting period. B. notices filed during the posteffective period announcing that the sale of securities has ended. C. announcements issued by the SEC warning potential investors that a company is being investigated for fraud. D feedback from the SEC requiring additional information or a clarification of supplied information . needed to complete a filed registration statement. E. the statement that is required to be filled with the SEC. 45. The registration process waiting period typically lasts: A. 10 days. B. 20 days. C. 30 days. D. 45 days. E. 60 days.

46. According to the Securities Act of 1933, which of the following is illegal during the waiting period? A. Soliciting buyers for a company's securities. B. Receiving offers to buy a company's securities. C. Selling security subject to the act. D. Soliciting through the use of a summary prospectus. E. Soliciting offers for later acceptance. 47. According to the Securities Act of 1933, which of the following is considered legal during the prefiling period? A. Selling a covered security. B. Negotiations and agreements with underwriters. C. Offering to sell a covered security. D. Offering to buy a covered security. E. Sellers may solicit offers for later acceptance. 48. _____ ads are brief announcements identifying the security and stating its price, by whom orders will be executed, and from whom a prospectus may be obtained. A. Tombstone B. Institutional C. Coupon D. Adjunct E. Overlay 49. _____ refers to the intent of a defendant-seller to deceive or mislead. A. Handhabend B. Double jeopardy C. Per minas D. Mens rea E. Scienter 50. Due diligence defense requires that an expert prove that a reasonable investigation of the financial statements of the issuer and _____ was conducted. A. sellers B. bailees C. underwriters D. controlling persons E. guarantors 51. Which of the following is NOT true of the statute of limitations? A. The statute of limitations is a defense for both civil and criminal liability. B. The basic limitations period is one year. C. In no event may a suit be brought more than one year after the sale. D. The one year limitations period does not start to run until the discovery of the untrue statement or omission. E.The one year limitations period does not start to run until the time such discovery would have been made with reasonable diligence. 52. The _____ regulates transfers of securities after the initial sale. A. Securities Exchange Act of 1934 B. Sherman Antitrust Act of 1890 C. Sarbanes-Oxley Act of 2002 D. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 E. Securities Act of 1933

53. The damages of a defrauded purchaser of securities: A. are measured at the time of purchase. B. include a punitive amount to discourage further fraud. C. are measured at the time the fraud is discovered. D. are considered a "sunk cost" and are not recoverable. E. include speculative damages. 54. "Benefit of the bargain" refers to the damages awarded to the buyer which is: A. designed to restore the injured party to the economic position he/she occupied at the time the contract was entered. B. equal to the out-of-pocket expenses such as the legal fees incurred by the plaintiff. C. equal to what the security was represented to be worth in the market. D. equal to the combination of the out-of-pocket expenses and what the security was represented to be worth in the market. E. equal to the difference between what he/she paid and what the security was represented to be worth. 55. Under Rule 10b-5, plaintiffs are entitled to: A. contemptuous damages. B. consequential damages. C. aggravated damages. D. restitutionary damages. E. punitive damages. 56. Section 10(b) and Rule 10b-5 are usually referred to as the _____ provisions of the 1934 Act. A. civil B. discretionary C. general duties D. antifraud E. rulemaking 57. Sarbanes-Oxley requires that information pertaining to an insider's transaction be filed: A. by mail, postmarked within two business days of the transaction. B. electronically within two business days of the transaction. C. by any effective means within 10 business days of the transaction. D. by any effective means within 10 business days after the close of the calendar month in which the transaction occurred. E. electronically on the day of the transaction. 58. Prohibitions against insiders from engaging in short-swing profits are enforced by the: A. SEC. B. FTC. C. SEC and FTC. D. issuer of the security or by a person who owns a security of the issuer. E. issuer of the security or the SEC. 59. An insider is any person who owns more than _____ percent of any security. A. 5 B. 10 C. 15 D. 20 E. 50 60. Short-swing profits: A. refer to any profits made by insiders who buy and sell company stock within a three-month time period. B. rule of Section 16 depends on any misuse of information. C. by insiders, regardless of the insiders' states of mind, are absolutely prohibited. D. requires proof of intent to deceive under Section 10(b). E. liability is created by the Securities Act of 1933.

61. According to the SEC, a person should be considered to be a temporary insider if that person conveys nonpublic information that was to have been kept confidential. This philosophy has become known as the: A. quasi-insider theory. B. implied-insider theory. C. temporary insider theory. D. misappropriation theory. E. mosaic theory. 62. The civil penalty provided by the Insider Trading and Securities Fraud Enforcement Act of 1988 for profits gained with nonpublic information is: A. imprisonment up to two years. B. return of illegal profits gained. C. recovery of double damages. D. recovery of triple damages. E. imprisonment up to a period of 10 years. 63. The Insider Trading and Securities Fraud Enforcement Act of 1988 provides that suits alleging illegal use of nonpublic information may be filed up to a maximum period of _____ years after the wrongful transaction. A. six B. ten C. eight D. five E. seven 64. The Securities Enforcement Remedies Act: A. allows for the prohibition of an individual's service as an officer or director of a business organization. B. created the SEC. C. changes membership requirements of corporate audit committees. D. requires proof of criminal violation for individual and organizational fines to be imposed. E refrains from imposing liability on a theory of fraud on any person who shall make or cause to be made . any false or misleading statements. 65. Under the 1934 Act, a business organization found guilty of filing false or misleading documents with the SEC may be fined up to: A. $81,000,000. B. $55,000,000. C. $25,000,000. D. $50,000,000. E. $75,000,000. 66. Under the 1934 Act, an individual found guilty of filing false or misleading documents with the SEC may be imprisoned up to: A. 5 years. B. 10 years. C. 15 years. D. 20 years. E. 25 years.

67. The Private Securities Litigation Reform Act mandated that: A. plaintiffs could proceed with minimal evidence of fraud. B. only the SEC could pursue claims against third parties not directly responsible for a securities law violation. Cthe PCAOB was given the authority to decide whether third parties not directly responsible for a . securities law violation were nevertheless involved so closely with the violation that they could have claims pursued against. D private plaintiffs who suffered injury could maintain private causes of action against third parties not . directly responsible for a securities law violation. E. the FTC could pursue claims against third parties not directly responsible for a securities law violation. 68. The process of registration created by the Uniform Securities Act is known as registration by: A. coordination. B. notification. C. qualification. D. pronouncement. E. announcement. 69. Registration by notification: A. is required by those issuers who do not have a proven record and who are not subject to the Securities Act of 1933. B refers to documents filed with the Securities & Exchange Commission (SEC) by a privately held . company, declaring its intent to offer shares of its stock to the general public. C is required for those issuers of securities who must register with the SEC and the duplicate documents . are filed with the state's administrative agency. D refers to the quality certification process in which an independent and accredited quality auditor . conducts an on-site audit of a firm. E allows issuers to offer securities for sale automatically after a stated time period expire unless the . administrative agency takes action to prevent the offering. 70. The Public Company Accounting Oversight Board members are appointed by the: A. President. B. Senate. C. FTC. D. Congress. E. SEC. 71. The Public Company Accounting Oversight Board was created by the: A. Securities Act of 1933. B. Securities Exchange Act of 1934. C. Security Fraud Enforcement Act. D. Sarbanes-Oxley Act. E. Sherman Act. 72. According to the Sarbanes-Oxley Act, the accuracy of the company's financial records is certified by the: A. CEO and COO. B. COO and CFO. C. CEO and CFO. D. CEO and CIO. E. CFO and CIO. 73. According to the Sarbanes-Oxley Act, auditors are required to preserve audit records for a period of: A. three years. B. five years. C. two years. D. nine years. E. seven years.

74. Sarbanes-Oxley provides that whenever there is a restatement of the company's financial condition, then the executives: A. would be morally rather than legally culpable for the bonuses paid as a result of the incorrect financial statements. B. have to forfeit their salaries to cover for the amount of the bonuses paid to them on the basis of incorrect financial statements. C. would not be legally bound to return any bonuses paid as a result of the incorrect financial statements. D. must return any bonuses paid as a result of the incorrect financial statements along with the interest. E. must return any bonuses paid as a result of the incorrect financial statements. 75. The Financial Stability Oversight Council was established by the: A. Securities Exchange Act of 1934. B. Sherman Antitrust Act of 1890. C. Sarbanes-Oxley Act of 2002. D. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. E. Securities Act of 1933. 76. What are the three questions that a court will seek to answer when determining whether a person has purchased a security?

77. What are the sanctions recognized by the 1933 Securities Act in case of untrue or misleading information being provided to a potential investor?

78. Parties who are involved with or who promote the initial sale of securities fall into one or more of four roles. Mention these roles.

79. When is a prospectus issued, what is its purpose, and what has the SEC specified as requirements to be contained in the prospectus?

80. What are tombstone ads and when do they occur?

81. Explain the term "waiting period" with regard to the registration of securities.

82. What is the civil liability under the Securities Act of 1933? Which sections of the Act directly apply to civil liability?

83. Who is liable under the Section 11 civil liability provision dealing with registration statements?

84. What does Section 12 of the Securities Act of 1933 deal with?

85. What must an expert prove to successfully present the defense of due diligence?

86. Materiality is one of the several defenses that is recognized by the Securities Act of 1933 and may be used to avoid civil liability. Explain "materiality".

87. What are the common issues regarding litigation under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934?

88. Explain the concept of fraud under Section 10(b) of the Securities Exchange Act of 1934.

89. How does the Securities Exchange Act of 1934 seek to deal with insider transactions?

90. When is the use of nonpublic information not considered a violation of the Security Exchange Act of 1934 provisions?

91. What is the difference between Section 18 of the 1934 Act and Sections 11 and 12 of the 1933 Act with regard to liability in case of fraud?

92. What are the criminal penalties incorporated by the Congress for violating the Securities Exchange Act of 1934?

93. What was the purpose of the Private Securities Litigation Reform Act of 1995? What are some of the provisions of the Act?

94. What are the four common exemptions from blue sky laws that have been identified?

95. What are the three different forms of registration that apply to a state's application of blue sky laws?

96. What are the primary provisions of the Sarbanes-Oxley Act?

97. State the new or proposed rules issued by the SEC post the revitalization process initiated by the Sarbanes-Oxley Act of 2002.

98. Under Sarbanes-Oxley, what types of services are auditing firms prohibited from providing to companies?

99. What contributions did Sarbanes-Oxley Act make in the area of corporate governance?

100.What provisions have been made by the Sarbanes-Oxley Act to provide protection for whistleblowers?

ch17 Key
1. Securities laws are designed to protect the buying public by requiring accurate information so that they can make intelligent investment decisions based on factual information. TRUE Securities laws are designed to give potential investors sufficient information so that they can make intelligent investment decisions based on factual information rather than on other less certain criteria.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-01 To understand the meaning of the term securities and to apply the broad scope of the securities laws and regulations. Reed - Chapter 17 #1 Topic: What is a Security? Introduction

2.

The Securities and Exchange Commission has both quasi-legislative and quasi-judicial powers. TRUE The SEC has both quasi-legislative and quasi-judicial powers.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-01 To understand the meaning of the term securities and to apply the broad scope of the securities laws and regulations. Reed - Chapter 17 #2 Topic: Securities and Exchange Commission

3.

The Securities Act of 1933 is a disclosure law with respect to the initial sale of securities to the public. TRUE The Securities Act of 1933 is a disclosure law with respect to the initial sale of securities to the public.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #3 Topic: The Securities Act of 1933: Going Public

4.

Contracts to buy and sell securities are finalized during the posteffective period. TRUE The end of the waiting period is the beginning of the posteffective period. During this period, contracts to buy and sell securities are finalized.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #4 Topic: The Securities Act of 1933: Going Public

5.

The prospectus provides expert analysis of a particular security's expectations of future worth. FALSE Like the registration statement, the prospectus contains financial information related to the issuer and controlling persons.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #5 Topic: The Securities Act of 1933: Going Public

6.

The law prohibits the sale of worthless securities. FALSE The law does not prohibit the sale of worthless securities. An investor may "foolishly" invest his/her money, and a person may legally sell the blue sky if the statutory requirements are met.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #6 Topic: The Securities Act of 1933: Going Public

7.

It is legal to sell a covered security during the prefiling period. FALSE During the prefiling period, it is legal for the issuer of a security to engage in preliminary negotiations and agreements with underwriters. It is illegal to sell a covered security during this period.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #7 Topic: The Securities Act of 1933: Going Public

8.

Fraud occurs when any material fact is omitted from a prospectus causing a statement to be misleading. TRUE Fraud occurs when any material fact is omitted, causing a statement to be misleading.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #8 Topic: The Securities Act of 1933: Going Public

9.

Liability traditionally has been imposed against violators even though they lacked any wrongful intent. TRUE The first subsection of Section 12 imposes liability regardless of the intent or conduct of those who fail to comply with the registration requirements. Thus, liability traditionally has been imposed against violators even though they lacked any wrongful intent.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #9 Topic: The Securities Act of 1933: Going Public

10.

Plaintiffs can recover for harm done by false or misleading information in a prospectus even if the prospectus was not read or reviewed. TRUE Plaintiffs can recover for harm done by false or misleading information in a prospectus even if the prospectus is not read or reviewed.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #10 Topic: The Securities Act of 1933: Going Public

11.

Sarbanes-Oxley has increased the statute of limitations for various infringements of both the 1933 Act and the 1934 Act. FALSE Sarbanes-Oxley does not increase the statute of limitations under the 1933 Act.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #11 Topic: The Securities Act of 1933: Going Public

12.

The burden of proof when alleging a due diligence defense is on the expert. TRUE A very important defense for experts such as accountants is the due diligence defense. The burden of proof of this defense is on the expert, and the test is as of the time the registration statement became effective.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #12 Topic: The Securities Act of 1933: Going Public

13.

Under the 1933 Act, the statute of limitations begins to run the moment the untrue statement or communication containing an omission is made public. FALSE The statute of limitations is a defense for both civil and criminal liability. The basic period is one year. The one year does not start to run until the discovery of the untrue statement or omission. Or it does not start to run until the time such discovery would have been made with reasonable diligence.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #13 Topic: The Securities Act of 1933: Going Public

14.

The Securities Exchange Act makes it illegal to sell a security on a national exchange unless a registration is effective for the security. TRUE The Securities Exchange Act makes it illegal to sell a security on a national exchange unless a registration is effective for the security.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-03 To apply ways in which the laws cover these differences. Reed - Chapter 17 #14 Topic: Securities Exchange Act of 1934: Being Public

15.

A plaintiff in a Rule 10b-5 suit is not required to prove damages in order to prevail. FALSE A plaintiff in a suit under Rule 10b-5 must prove damages.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #15 Topic: Securities Exchange Act of 1934: Being Public

16.

A defrauding seller usually benefits from an increase in the value of the securities. FALSE A defrauding purchaser usually benefits from an increase in the value of the securities, while the plaintiff seller loses this increase.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #16 Topic: Securities Exchange Act of 1934: Being Public

17.

Proof of negligence leading to corporate mismanagement is not enough to prove a case of seller's fraud under Rule 10b-5. TRUE Liability under Rule 10b-5 requires proof of the defendant's intent to deceive. Proof of the defendant's simple negligence is not enough to establish liability.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #17 Topic: Securities Exchange Act of 1934: Being Public

18.

A person cannot be considered an insider unless he/she owns at least 51 percent of a security. FALSE An insider is any person who owns more than 10 percent of any security and is a director or an officer of the issuer of the security.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #18 Topic: Securities Exchange Act of 1934: Being Public

19.

The SEC applies the misappropriation theory of insider trading to force executives who file or certify incorrect financial statements to return bonuses and additional compensation received. FALSE The SEC has successfully argued that a person should be considered to be a temporary insider if that person conveys nonpublic information that was to have been kept confidential. This philosophy is known as the misappropriation theory of insider trading.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #19 Topic: Securities Exchange Act of 1934: Being Public

20.

A tipster is a person who learns of nonpublic information from an insider. FALSE A tippee is a person who learns of nonpublic information from an insider.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #20 Topic: Securities Exchange Act of 1934: Being Public

21.

Congress, through the PCAOB, limits the amount of damages private plaintiffs can recover and restricts attorney fees. FALSE Congress, through the Private Securities Litigation Reform Act (PSLRA), limits the amount of damages private plaintiffs can recover and restricts attorney fees.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #21 Topic: Other Considerations

22.

The blue sky laws can apply to securities subject to federal laws as well as to those securities exempt from the federal statutes. TRUE The blue sky laws can apply to securities subject to federal laws as well as to those securities exempt from the federal statutes.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-05 To evaluate how state regulations add to the requirements of proper securities transactions. Reed - Chapter 17 #22 Topic: Other Considerations

23.

The Uniform Securities Act has been the model for blue sky laws. TRUE To bring some similarity to the various blue sky laws, the Uniform Securities Act was proposed for adoption by all states beginning in 1956. Since that time, the Uniform Securities Act has been the model for blue sky laws.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-05 To evaluate how state regulations add to the requirements of proper securities transactions. Reed - Chapter 17 #23 Topic: Other Considerations

24.

The Public Company Accounting Oversight Board (PCAOB) permits auditing firms to conduct a variety of nonauditing services. FALSE The Public Company Accounting Oversight Board (PCAOB) requires that auditing firms refrain from conducting a variety of nonauditing services.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-06 To understand why the Sarbanes-Oxley Act was passed and evaluate its effectiveness. Reed - Chapter 17 #24 Topic: Sarbanes-Oxley Act of 2002

25.

Sarbanes-Oxley limits personal loans from a company to its executives to one loan of no more than $10,000, amortized over five years, at a time. FALSE The Sarbanes-Oxley Act prohibits personal loans from the company to its executives.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-06 To understand why the Sarbanes-Oxley Act was passed and evaluate its effectiveness. Reed - Chapter 17 #25 Topic: Sarbanes-Oxley Act of 2002

26.

Sarbanes-Oxley provides protections for whistleblowers so that individuals are more willing to report the corruption that can lead to major scandals. TRUE Sarbanes-Oxley provides protections for whistleblowers so that individuals are more willing to report the corruption that can lead to major scandals.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-06 To understand why the Sarbanes-Oxley Act was passed and evaluate its effectiveness. Reed - Chapter 17 #26 Topic: Sarbanes-Oxley Act of 2002

27.

Restatements of financial reports have risen in number as a result of Sarbanes-Oxley because companies have made efforts to maintain appropriate compliance with the law. FALSE Evidence that Sarbanes-Oxley is having a positive impact is found in the number of restatements of financial reports. During 2007, there were fewer restatements than in 2006. This was the first year to show a decline since Sarbanes-Oxley was enacted.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-06 To understand why the Sarbanes-Oxley Act was passed and evaluate its effectiveness. Reed - Chapter 17 #27 Topic: Sarbanes-Oxley Act of 2002

28.

Under the Sarbanes-Oxley Act, whistleblowers that suffer retaliation are able to recover civil damages and can be reinstated if terminated improperly. TRUE Sarbanes-Oxley provides protections for whistleblowers so that individuals are more willing to report the corruption that can lead to major scandals. Audit committees are required to adopt procedures ensuring that whistleblowers' reports are taken seriously. Whistleblowers that suffer retaliation are able to recover civil damages and can be reinstated if terminated improperly.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-06 To understand why the Sarbanes-Oxley Act was passed and evaluate its effectiveness. Reed - Chapter 17 #28 Topic: Sarbanes-Oxley Act of 2002

29.

The Consumer Financial Protection Board was established under the Dodd-Frank Act. TRUE The Dodd-Frank Act addresses many issues of reform. To accomplish its broad goals, Congress authorizes the creation of many new administrative organizations. Many of these new entities are housed within existing organizations. One of the new agencies is the Consumer Financial Protection Board (independent within Federal Reserve).
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-07 To remember the complexity of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Reed - Chapter 17 #29 Topic: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

30.

Whistleblowers who first use a company's internal processes before reporting to the SEC are entitled to potentially higher financial rewards. TRUE Employees who first use a company's internal processes are entitled to potentially higher financial rewards. Employees reporting directly to the SEC will receive less of a reward.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-07 To remember the complexity of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Reed - Chapter 17 #30 Topic: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

31.

The regulation of securities began as a program to: A. prohibit an individual's service as an officer or director. B. recover triple damages in civil actions against a user of nonpublic information. C. help the United States overcome the Great Depression of the 1930s. D. eliminate liabilities for short-swing profits made by insiders. E. help potential investors to make investment decisions based on less certain criteria. The regulation of securities began as part of the program to help the United States overcome the Great Depression of the early 1930s.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-01 To understand the meaning of the term securities and to apply the broad scope of the securities laws and regulations. Reed - Chapter 17 #31 Topic: Introduction

32.

A certificate of interest or participation in any profit-sharing agreement is an example of a(n): A. stock. B. bond. C. treasury stock. D. security. E. debenture. "Security" means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, and investment contract.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-01 To understand the meaning of the term securities and to apply the broad scope of the securities laws and regulations. Reed - Chapter 17 #32 Topic: What Is A Security?

33.

The SEC's right to conduct investigations is based on: A. their quasi-executive power. B. their quasi-legislative power. C. their quasi-judicial power. D. an executive order. E. an injunction. Under its quasi-judicial power, the SEC is involved in a variety of investigations.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-01 To understand the meaning of the term securities and to apply the broad scope of the securities laws and regulations. Reed - Chapter 17 #33 Topic: Securities and Exchange Commission

34.

The SEC's adoption of rules and regulations relating to financial and other information furnished to the Commission comes under its _____ power. A. quasi-judicial B. executive C. quasi-executive D. quasi-legislative E. bargaining The SEC has both quasi-legislative and quasi-judicial powers. Under its quasi-legislative power, it has adopted rules and regulations relating to financial and other information that must be furnished to the Commission.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-01 To understand the meaning of the term securities and to apply the broad scope of the securities laws and regulations. Reed - Chapter 17 #34 Topic: Securities and Exchange Commission

35.

The _____ is a disclosure law which makes it illegal to use mails or any other means of interstate communication or transportation to sell securities without disclosing certain financial information to potential investors. A. Securities Exchange Act of 1934 B. Sherman Antitrust Act of 1890 C. Sarbanes-Oxley Act of 2002 D. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 E. Securities Act of 1933 The Securities Act of 1933 is a disclosure law with respect to the initial sale of securities to the public. This law makes it illegal to use mails or any other means of interstate communication or transportation to sell securities without disclosing certain financial information to potential investors.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #35 Topic: The Securities Act of 1933: Going Public

36.

The registration statement to be filed with the SEC includes: A. statements which gives the holder the right to purchase securities at a stipulated price within a specified time limit. B. a written promise to repay a specified sum of money plus interest at a specified rate and length of time to fulfill the promise. C. statements that show ownership of a bond, stock or other security. D. financial statements and a report on operations, issued by a company to its shareholders at the company's fiscal year-end. E a detailed disclosure of financial information about the issuer and the controlling individuals . involved in the offering of securities for sale to the public. The Securities Act of 1933 contains detailed provisions relating to the registration of securities, which requires that a registration statement be filed with the SEC. The statement includes a detailed disclosure of financial information about the issuer and the controlling individuals involved in the offering of securities for sale to the public.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #36 Topic: The Securities Act of 1933: Going Public

37.

Under the 1933 Act, proof of intentional violation is usually required to impose: A. criminal sanctions only. B. criminal or civil sanctions. C. criminal and pragmatic sanctions. D. criminal, civil, and equitable (injunctive) sanctions. E. pragmatic sanctions. Proof of an intentional violation usually is required before criminal or civil sanctions are imposed.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #37 Topic: The Securities Act of 1933: Going Public

38.

The Security Act of 1933 requires the preparation and distribution to potential investors of the: A. registration statement only. B. registration statement and prospectus. C. prospectus and licensing agreement. D. registration statement, prospectus, and licensing agreement. E. licensing agreement. In regulating the initial sales of securities, the Securities Act of 1933 is viewed as a disclosure law. In essence, this law requires that securities subject to its provisions be registered prior to any sale and that a prospectus be furnished to any potential investor prior to any sale being consummated.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #38 Topic: The Securities Act of 1933: Going Public

39.

A(n) _____ is the individual or business organization offering a security for sale to the public. A. seller B. controlling person C. issuer D. underwriter E. financial sponsor An issuer is the individual or business organization offering a security for sale to the public.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #39 Topic: The Securities Act of 1933: Going Public

40.

An individual who participates in the original distribution of securities by selling such securities for the issuer or by guaranteeing their sale is referred to as the: A. seller. B. controlling person. C. issuer. D. underwriter. E. bailee. An underwriter is anyone who participates in the original distribution of securities by selling such securities for the issuer or by guaranteeing their sale.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #40 Topic: The Securities Act of 1933: Going Public

41.

Which of the following statements is true of a seller? A. It refers to anyone who contracts with a purchaser or who is a motivating influence that causes the purchase transaction to occur. B. It refers to the individual or business organization offering a security for sale to the public. C It refers to anyone who participates in the original distribution of securities by selling such . securities for the issuer or by guaranteeing their sale. DIt refers to a person with whom some article is left, usually pursuant to a contract who is responsible . for the safe return of the article to the owner when the contract is fulfilled. E. It refers to anyone who controls or is controlled by the issuer, such as a major stockholder of a corporation. A seller is anyone who contracts with a purchaser or who is a motivating influence that causes the purchase transaction to occur.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #41 Topic: The Securities Act of 1933: Going Public

42.

A(n) _____ is one who controls or is controlled by the issuer, such as a major stockholder of a corporation. A. seller B. bailee C. underwriter D. guarantor E. controlling person A controlling person is one who controls or is controlled by the issuer, such as a major stockholder of a corporation.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #42 Topic: The Securities Act of 1933: Going Public

43.

A prospectus is filed during the: A. prefiling period. B. waiting period. C. preeffective period. D. posteffective period. E. elimination period. During the posteffective period, securities may be sold. A prospectus must be furnished to any interested investor, and it must conform to the statutory requirements. The prospectus contains financial information related to the issuer and controlling persons.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #43 Topic: The Securities Act of 1933: Going Public

44.

Tombstone ads refer to: A. solicitations made during the waiting period. B. notices filed during the posteffective period announcing that the sale of securities has ended. C. announcements issued by the SEC warning potential investors that a company is being investigated for fraud. D feedback from the SEC requiring additional information or a clarification of supplied information . needed to complete a filed registration statement. E. the statement that is required to be filled with the SEC. Many solicitations during the waiting period are made in advertisements called tombstone ads. These ads are brief announcements identifying the security and stating its price, by whom orders will be executed, and from whom a prospectus may be obtained.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #44 Topic: The Securities Act of 1933: Going Public

45.

The registration process waiting period typically lasts: A. 10 days. B. 20 days. C. 30 days. D. 45 days. E. 60 days. After the registration statement is filed, a waiting period commences. This period typically lasts 20 days.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #45 Topic: The Securities Act of 1933: Going Public

46.

According to the Securities Act of 1933, which of the following is illegal during the waiting period? A. B. C. D. E. Soliciting buyers for a company's securities. Receiving offers to buy a company's securities. Selling security subject to the act. Soliciting through the use of a summary prospectus. Soliciting offers for later acceptance.

After the registration statement is filed, a waiting period commences. This period typically lasts 20 days. During this time, the SEC staff investigates the accuracy of the registration statement to determine whether the sale of the securities should be permitted. During the waiting period, it is still illegal to sell a security subject to the act.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #46 Topic: The Securities Act of 1933: Going Public

47.

According to the Securities Act of 1933, which of the following is considered legal during the prefiling period? A. Selling a covered security. B. Negotiations and agreements with underwriters. C. Offering to sell a covered security. D. Offering to buy a covered security. E. Sellers may solicit offers for later acceptance. During the prefiling period, it is legal for the issuer of a security to engage in preliminary negotiations and agreements with underwriters. It is illegal to sell a covered security during this period. Offers to sell and offers to buy securities also are prohibited during this prefiling period.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #47 Topic: The Securities Act of 1933: Going Public

48.

_____ ads are brief announcements identifying the security and stating its price, by whom orders will be executed, and from whom a prospectus may be obtained. A. Tombstone B. Institutional C. Coupon D. Adjunct E. Overlay Many solicitations during the waiting period are made in advertisements called tombstone ads. These ads are brief announcements identifying the security and stating its price, by whom orders will be executed, and from whom a prospectus may be obtained.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #48 Topic: The Securities Act of 1933: Going Public

49.

_____ refers to the intent of a defendant-seller to deceive or mislead. A. Handhabend B. Double jeopardy C. Per minas D. Mens rea E. Scienter The intent of a defendant-seller to deceive or mislead is known as scienter.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #49 Topic: The Securities Act of 1933: Going Public

50.

Due diligence defense requires that an expert prove that a reasonable investigation of the financial statements of the issuer and _____ was conducted. A. sellers B. bailees C. underwriters D. controlling persons E. guarantors A very important defense for experts such as accountants is the due diligence defense. To establish this defense, the expert must prove that a reasonable investigation of the financial statements of the issuer and controlling persons was conducted.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #50 Topic: The Securities Act of 1933: Going Public

51.

Which of the following is NOT true of the statute of limitations? A. The statute of limitations is a defense for both civil and criminal liability. B. The basic limitations period is one year. C. In no event may a suit be brought more than one year after the sale. D. The one year limitations period does not start to run until the discovery of the untrue statement or omission. E. The one year limitations period does not start to run until the time such discovery would have been made with reasonable diligence. The statute of limitations is a defense for both civil and criminal liability. The basic period is one year. The one year does not start to run until the discovery of the untrue statement or omission. Or it does not start to run until the time such discovery would have been made with reasonable diligence. In no event may a suit be brought more than three years after the sale.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #51 Topic: The Securities Act of 1933: Going Public

52.

The _____ regulates transfers of securities after the initial sale. A. Securities Exchange Act of 1934 B. Sherman Antitrust Act of 1890 C. Sarbanes-Oxley Act of 2002 D. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 E. Securities Act of 1933 Whereas the Securities Act of 1933 deals with original offerings of securities, the Securities Exchange Act of 1934 regulates transfers of securities after the initial sale.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-03 To apply ways in which the laws cover these differences. Reed - Chapter 17 #52 Topic: Securities Exchange Act of 1934: Being Public

53.

The damages of a defrauded purchaser of securities: A. are measured at the time of purchase. B. include a punitive amount to discourage further fraud. C. are measured at the time the fraud is discovered. D. are considered a "sunk cost" and are not recoverable. E. include speculative damages. The damages of a defrauded purchaser are actual out-of-pocket losses or the excess of what was paid over the value of what was received. A buyer's damages are measured at the time of purchase.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #53 Topic: Securities Exchange Act of 1934: Being Public

54.

"Benefit of the bargain" refers to the damages awarded to the buyer which is: A. designed to restore the injured party to the economic position he/she occupied at the time the contract was entered. B. equal to the out-of-pocket expenses such as the legal fees incurred by the plaintiff. C. equal to what the security was represented to be worth in the market. D. equal to the combination of the out-of-pocket expenses and what the security was represented to be worth in the market. E. equal to the difference between what he/she paid and what the security was represented to be worth. Courts in a few cases have used the benefit of the bargain measure of damages and awarded the buyer the difference between what he/she paid and what the security was represented to be worth.
AACSB: Ethics Blooms: Understand Difficulty: 3 Hard Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #54 Topic: Securities Exchange Act of 1934: Being Public

55.

Under Rule 10b-5, plaintiffs are entitled to: A. contemptuous damages. B. consequential damages. C. aggravated damages. D. restitutionary damages. E. punitive damages. Plaintiffs under Rule 10b-5 are entitled to consequential damages. These include lost dividends, brokerage fees, and taxes.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #55 Topic: Securities Exchange Act of 1934: Being Public

56.

Section 10(b) and Rule 10b-5 are usually referred to as the _____ provisions of the 1934 Act. A. civil B. discretionary C. general duties D. antifraud E. rulemaking Section 10(b) and Rule 10b-5 are usually referred to as the antifraud provisions of the 1934 Act.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #56 Topic: Securities Exchange Act of 1934: Being Public

57.

Sarbanes-Oxley requires that information pertaining to an insider's transaction be filed: A. by mail, postmarked within two business days of the transaction. B. electronically within two business days of the transaction. C. by any effective means within 10 business days of the transaction. D. by any effective means within 10 business days after the close of the calendar month in which the transaction occurred. E. electronically on the day of the transaction. Sarbanes-Oxley shortens the time period for filing information about insider transactions. Now, these filings with the SEC must be made electronically within two business days of the insider's transaction.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #57 Topic: Securities Exchange Act of 1934: Being Public

58.

Prohibitions against insiders from engaging in short-swing profits are enforced by the: A. SEC. B. FTC. C. SEC and FTC. D. issuer of the security or by a person who owns a security of the issuer. E. issuer of the security or the SEC. While the SEC enforces the requirements of Section 16 that insiders file certain documents, the SEC does not enforce the provision that prohibits insiders from engaging in short-swing profits. This provision of Section 16 is enforced by civil actions filed by the issuer of the security or by a person who owns a security of the issuer.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #58 Topic: Securities Exchange Act of 1934: Being Public

59.

An insider is any person who owns more than _____ percent of any security. A. 5 B. 10 C. 15 D. 20 E. 50 An insider is any person who owns more than 10 percent of any security and is a director or an officer of the issuer of the security.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #59 Topic: Securities Exchange Act of 1934: Being Public

60.

Short-swing profits: A. refer to any profits made by insiders who buy and sell company stock within a three-month time period. B. rule of Section 16 depends on any misuse of information. C. by insiders, regardless of the insiders' states of mind, are absolutely prohibited. D. requires proof of intent to deceive under Section 10(b). E. liability is created by the Securities Act of 1933. Because the SEC cannot determine for certain when nonpublic information is improperly used, Section 16 creates a presumption that any profit made within a six-month time period is illegal. These profits are referred to as short-swing profits. Unlike the required proof of intent to deceive under Section 10(b), the short-swing profits rule of Section 16 does not depend on any misuse of information. In other words, short-swing profits by insiders, regardless of the insiders' states of mind, are absolutely prohibited.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #60 Topic: Securities Exchange Act of 1934: Being Public

61.

According to the SEC, a person should be considered to be a temporary insider if that person conveys nonpublic information that was to have been kept confidential. This philosophy has become known as the: A. quasi-insider theory. B. implied-insider theory. C. temporary insider theory. D. misappropriation theory. E. mosaic theory. The SEC has successfully argued that a person should be considered to be a temporary insider if that person conveys nonpublic information that was to have been kept confidential. This philosophy has become known as the misappropriation theory of insider trading.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #61 Topic: Securities Exchange Act of 1934: Being Public

62.

The civil penalty provided by the Insider Trading and Securities Fraud Enforcement Act of 1988 for profits gained with nonpublic information is: A. imprisonment up to two years. B. return of illegal profits gained. C. recovery of double damages. D. recovery of triple damages. E. imprisonment up to a period of 10 years. The SEC's enforcement efforts on the misuse of nonpublic information at all levels of transactions are aided by the fact that the civil penalty for gaining illegal profits with nonpublic information is three times the profits gained. The penalties were increased to their current levels by the Insider Trading and Securities Fraud Enforcement Act of 1988.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #62 Topic: Securities Exchange Act of 1934: Being Public

63.

The Insider Trading and Securities Fraud Enforcement Act of 1988 provides that suits alleging illegal use of nonpublic information may be filed up to a maximum period of _____ years after the wrongful transaction. A. six B. ten C. eight D. five E. seven The Insider Trading and Securities Fraud Enforcement Act of 1988 provides that suits alleging the illegal use of nonpublic information may be filed within a five-year period after the wrongful transaction.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #63 Topic: Securities Exchange Act of 1934: Being Public

64.

The Securities Enforcement Remedies Act: A. allows for the prohibition of an individual's service as an officer or director of a business organization. B. created the SEC. C. changes membership requirements of corporate audit committees. D. requires proof of criminal violation for individual and organizational fines to be imposed. E. refrains from imposing liability on a theory of fraud on any person who shall make or cause to be made any false or misleading statements. The Securities Enforcement Remedies Act provides that civil fines of up to $500,000 per organization and $100,000 per individual may be imposed and collected by the courts. An individual found to have violated the securities laws may be prohibited by the court from serving as an officer or director of a business organization.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #64 Topic: Securities Exchange Act of 1934: Being Public

65.

Under the 1934 Act, a business organization found guilty of filing false or misleading documents with the SEC may be fined up to: A. $81,000,000. B. $55,000,000. C. $25,000,000. D. $50,000,000. E. $75,000,000. A business organization found guilty of filing with the SEC false or misleading documents may be subject to a fine up to $25,000,000.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #65 Topic: Securities Exchange Act of 1934: Being Public

66.

Under the 1934 Act, an individual found guilty of filing false or misleading documents with the SEC may be imprisoned up to: A. 5 years. B. 10 years. C. 15 years. D. 20 years. E. 25 years. An individual found guilty of filing false or misleading documents with the SEC may be fined up to $5,000,000 and imprisoned for up to 20 years.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #66 Topic: Securities Exchange Act of 1934: Being Public

67.

The Private Securities Litigation Reform Act mandated that: A. plaintiffs could proceed with minimal evidence of fraud. B. only the SEC could pursue claims against third parties not directly responsible for a securities law violation. Cthe PCAOB was given the authority to decide whether third parties not directly responsible for a . securities law violation were nevertheless involved so closely with the violation that they could have claims pursued against. D private plaintiffs who suffered injury could maintain private causes of action against third parties . not directly responsible for a securities law violation. E. the FTC could pursue claims against third parties not directly responsible for a securities law violation. The Private Securities Litigation Reform Act (PSLRA) made it clear that only the SEC can pursue claims against third parties not directly responsible for the securities law violation.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #67 Topic: Other Considerations

68.

The process of registration created by the Uniform Securities Act is known as registration by: A. coordination. B. notification. C. qualification. D. pronouncement. E. announcement. In addition to adopting the registration by notification and registration by qualification, the Uniform Securities Act created a third procedureregistration by coordination. For those issuers of securities who must register with the SEC, duplicate documents are filed with the state's administrative agency.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-05 To evaluate how state regulations add to the requirements of proper securities transactions. Reed - Chapter 17 #68 Topic: Other Considerations

69.

Registration by notification: A. is required by those issuers who do not have a proven record and who are not subject to the Securities Act of 1933. B refers to documents filed with the Securities & Exchange Commission (SEC) by a privately held . company, declaring its intent to offer shares of its stock to the general public. C is required for those issuers of securities who must register with the SEC and the duplicate . documents are filed with the state's administrative agency. D.refers to the quality certification process in which an independent and accredited quality auditor conducts an on-site audit of a firm. E allows issuers to offer securities for sale automatically after a stated time period expire unless the . administrative agency takes action to prevent the offering. Registration by notification allows issuers to offer securities for sale automatically after a stated time period expires unless the administrative agency takes action to prevent the offering.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-05 To evaluate how state regulations add to the requirements of proper securities transactions. Reed - Chapter 17 #69 Topic: Other Considerations

70.

The Public Company Accounting Oversight Board members are appointed by the: A. President. B. Senate. C. FTC. D. Congress. E. SEC. Sarbanes-Oxley creates the Public Company Accounting Oversight Board (PCAOB). This Board consists of five members appointed by the SEC commissioners.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-06 To understand why the Sarbanes-Oxley Act was passed and evaluate its effectiveness. Reed - Chapter 17 #70 Topic: Sarbanes-Oxley Act of 2002

71.

The Public Company Accounting Oversight Board was created by the: A. Securities Act of 1933. B. Securities Exchange Act of 1934. C. Security Fraud Enforcement Act. D. Sarbanes-Oxley Act. E. Sherman Act. Sarbanes-Oxley creates the Public Company Accounting Oversight Board (PCAOB).
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-06 To understand why the Sarbanes-Oxley Act was passed and evaluate its effectiveness. Reed - Chapter 17 #71 Topic: Sarbanes-Oxley Act of 2002

72.

According to the Sarbanes-Oxley Act, the accuracy of the company's financial records is certified by the: A. CEO and COO. B. COO and CFO. C. CEO and CFO. D. CEO and CIO. E. CFO and CIO. Section 302 of the law requires CEOs and CFOs to certify the accuracy of the quarterly and annual financial statements filed with the SEC.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-06 To understand why the Sarbanes-Oxley Act was passed and evaluate its effectiveness. Reed - Chapter 17 #72 Topic: Sarbanes-Oxley Act of 2002

73.

According to the Sarbanes-Oxley Act, auditors are required to preserve audit records for a period of: A. three years. B. five years. C. two years. D. nine years. E. seven years. Sarbanes-Oxley requires that auditors preserve audit records for seven years.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-06 To understand why the Sarbanes-Oxley Act was passed and evaluate its effectiveness. Reed - Chapter 17 #73 Topic: Sarbanes-Oxley Act of 2002

74.

Sarbanes-Oxley provides that whenever there is a restatement of the company's financial condition, then the executives: A. would be morally rather than legally culpable for the bonuses paid as a result of the incorrect financial statements. B. have to forfeit their salaries to cover for the amount of the bonuses paid to them on the basis of incorrect financial statements. C. would not be legally bound to return any bonuses paid as a result of the incorrect financial statements. D. must return any bonuses paid as a result of the incorrect financial statements along with the interest. E. must return any bonuses paid as a result of the incorrect financial statements. Sarbanes-Oxley provides that whenever there is a restatement of the company's financial condition, executives must return any bonuses paid as a result of the incorrect financial statements.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-06 To understand why the Sarbanes-Oxley Act was passed and evaluate its effectiveness. Reed - Chapter 17 #74 Topic: Sarbanes-Oxley Act of 2002

75.

The Financial Stability Oversight Council was established by the: A. Securities Exchange Act of 1934. B. Sherman Antitrust Act of 1890. C. Sarbanes-Oxley Act of 2002. D. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. E. Securities Act of 1933. The Dodd-Frank Act addresses many issues of reform. To accomplish its broad goals, Congress authorizes the creation of many new administrative organizations. Many of these new entities are housed within existing organizations. One of the new agencies is the Financial Stability Oversight Council.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-07 To remember the complexity of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Reed - Chapter 17 #75 Topic: Sarbanes-Oxley Act of 2002

76.

What are the three questions that a court will seek to answer when determining whether a person has purchased a security? Courts seek positive answers to the following three questions when determining whether a person has purchased a security: Is the investment in a common business activity? Is the investment based on a reasonable expectation of profits? Will these profits be earned through the efforts of someone other than the investor? If the answers to the three questions are all yes, then a security is involved regardless of the form that it takes.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-01 To understand the meaning of the term securities and to apply the broad scope of the securities laws and regulations. Reed - Chapter 17 #76 Topic: What Is A Security?

77.

What are the sanctions recognized by the 1933 Securities Act in case of untrue or misleading information being provided to a potential investor? In essence, the 1933 Securities Act requires the disclosure of information to the potential investor or other interested party. The information given must not be untrue or even misleading. If this information is not accurate, liability is imposed upon those responsible. The Act recognizes three sanctions for violations: Criminal punishment. Civil liability, which may be imposed in favor of injured parties in certain cases. Equitable remedy of an injunction.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #77 Topic: The Securities Act of 1933: Going Public

78.

Parties who are involved with or who promote the initial sale of securities fall into one or more of four roles. Mention these roles. The Securities Act of 1933 regulates anyone who is involved with or who promotes the initial sale of securities. Typically, these parties who must comply with the disclosure requirements of the 1933 Act fall into one or more of four roles. An issuer is the individual or business organization offering a security for sale to the public. An underwriter is anyone who participates in the original distribution of securities by selling such securities for the issuer or by guaranteeing their sale. A controlling person is one who controls or is controlled by the issuer, such as a major stockholder of a corporation. Finally, a seller is anyone who contracts with a purchaser or who is a motivating influence that causes the purchase transaction to occur.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #78 Topic: The Securities Act of 1933: Going Public

79.

When is a prospectus issued, what is its purpose, and what has the SEC specified as requirements to be contained in the prospectus? The prospectus is issued during the posteffective period. It is intended to supply the investor with sufficient facts, including financial information, so that the investor can make an informed and intelligent decision regarding their investment opportunity. The SEC requires that detailed information be included about the issuer and financial statements, including balance sheets and statements of operations pertaining to the issuer.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #79 Topic: The Securities Act of 1933: Going Public

80.

What are tombstone ads and when do they occur? Tombstone ads are brief announcements identifying the security and stating its price, by whom the orders will be executed and from whom a prospectus may be obtained. Tombstone ads are published during the waiting period.
AACSB: Ethics Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #80 Topic: The Securities Act of 1933: Going Public

81.

Explain the term "waiting period" with regard to the registration of securities. After the registration statement is filed, a waiting period commences. This period typically lasts 20 days. During this time, the SEC staff investigates the accuracy of the registration statement to determine whether the sale of the securities should be permitted. During the waiting period, it is still illegal to sell a security subject to the Act. However, it is not illegal to solicit a buyer or receive offers to buy. However, during these waiting periods, sellers may solicit offers for later acceptance. Many solicitations during the waiting period are made in tombstone ads. Solicitations may also be made during the waiting period by use of a statistical summary, a summary prospectus, or a preliminary prospectus. These techniques allow dissemination of the facts that are to be ultimately disclosed in the formal prospectus. A registration becomes effective at the expiration of the waiting period, 20 days after it is filed, unless the SEC gives notice that it is not in proper form or unless the SEC accelerates the effective date.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #81 Topic: The Securities Act of 1933: Going Public

82.

What is the civil liability under the Securities Act of 1933? Which sections of the Act directly apply to civil liability? Civil liability under the 1933 Act usually involves a buyer of securities suing for a refund of the investment. This liability on the issuer, controlling person, underwriter, and seller is significant because the investors' money typically is lost at the time of these civil claims. Three sections of the Securities Act of 1933 directly apply to civil liability of parties involved in issuing securities: Section 11 deals with registration statements. Section 12 relates to prospectuses and oral and written communication. Section 17 concerns fraudulent interstate transactions.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #82 Topic: The Securities Act of 1933: Going Public

83.

Who is liable under the Section 11 civil liability provision dealing with registration statements? The civil liability provision dealing with registration statements imposes liability on the following persons in favor of purchasers of securities: Every person who signed the registration statement. Every director of the corporation or partner in the partnership issuing the security. Every person who, with his/her consent, is named in the registration statement as about to become a director or partner. Every accountant, engineer, or appraiser who assists in the preparation of the registration statement or its certification. Every underwriter.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #83 Topic: The Securities Act of 1933: Going Public

84.

What does Section 12 of the Securities Act of 1933 deal with? Section 12 of the 1933 Act is divided into two parts. The first subsection of Section 12 imposes liability on those who offer or sell securities that are not registered with the SEC. This liability exists regardless of the intent or conduct of those who fail to comply with the registration requirements. Thus, liability traditionally has been imposed against violators even though they lacked any wrongful intent. The Supreme Court has held that a defendant is free from liability if the plaintiff is equally responsible for the failure to file the registration statement. The second subsection of Section 12 imposes liability on sellers who use a prospectus or make communications that contain an untrue statement of material facts required to be stated or necessary to make statements not misleading. The plaintiff does not have to prove reliance on the false or misleading prospectus or communication. Nor does the plaintiff have to establish that the defendant intended the deception. Purchasers of such securities may sue for their actual damages.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #84 Topic: The Securities Act of 1933: Going Public

85.

What must an expert prove to successfully present the defense of due diligence? To establish the due diligence defense, the expert must prove that a reasonable investigation of the financial statements of the issuer and controlling persons was conducted. As the result of this investigation, an expert exercising due diligence must prove that there was no reason to believe any of the information in the registration statement or prospectus was false or misleading.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #85 Topic: The Securities Act of 1933: Going Public

86.

Materiality is one of the several defenses that is recognized by the Securities Act of 1933 and may be used to avoid civil liability. Explain "materiality". The SEC and the courts have attempted to define materiality. The term "material" describes the kinds of information that an average prudent investor would want to have so that he/she can make an intelligent, informed decision whether or not to buy the security. A material fact is one that if correctly stated or disclosed would have deterred or tended to deter the average prudent investor from purchasing the securities in question. The term does not cover minor inaccuracies or errors in matters of no interest to investors. Facts that tend to deter a person from purchasing a security are those that have an important bearing upon the nature or condition of the issuing corporation or its business.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. Reed - Chapter 17 #86 Topic: The Securities Act of 1933: Going Public

87.

What are the common issues regarding litigation under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934? The common issues regarding litigation under Section 10(b) and Rule 10b-5 include the following: Who is liable? What can be recovered by the plaintiff, and does the defendant have the right to seek contribution from third parties? When is information material to the transaction? Where does the law apply?
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-03 To apply ways in which the laws cover these differences. Reed - Chapter 17 #87 Topic: Securities Exchange Act of 1934: Being Public

88.

Explain the concept of fraud under Section 10(b) of the Securities Exchange Act of 1934. The concept of fraud under Section 10(b) encompasses not only untrue statements of material facts but also the failure to state material facts necessary to prevent statements actually made from being misleading. In other words, a half-truth that misleads is fraudulent. Finally, failure to correct a misleading impression left by statements already made, or silence where there is a duty to speak, gives rise to a violation of Rule 10b-5 because it is a form of aiding and abetting the deception.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #88 Topic: Securities Exchange Act of 1934: Being Public

89.

How does the Securities Exchange Act of 1934 seek to deal with insider transactions? Section 16 of the Securities Exchange Act of 1934 concerns insider transactions. The SEC defines an officer for insider trading purposes as the executive officers, accounting officers, chief financial officers, and controllers. The SEC also examines the individual investor's function within the company rather than the title of the position held. Section 16 and SEC regulations require that insiders file, at the time of the registration or within 10 days after becoming an insider, a statement of the amount of such issues of which they are the owners. The regulations also require filing within 10 days after the close of each calendar month thereafter if there has been any change in such ownership during such month (indicating the change). Sarbanes-Oxley shortens the time period for filing information about insider transactions. Now, these filings with the SEC must be made electronically within two business days of the insider's transaction.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #89 Topic: Securities Exchange Act of 1934: Being Public

90.

When is the use of nonpublic information not considered a violation of the Security Exchange Act of 1934 provisions? If nonpublic information is deduced independently, without facts, figures, data, or tips specifically provided by a company, and the party is not in a fiduciary position with the company, there will be no duty to disclose or report the information obtained.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #90 Topic: Securities Exchange Act of 1934: Being Public

91.

What is the difference between Section 18 of the 1934 Act and Sections 11 and 12 of the 1933 Act with regard to liability in case of fraud? Two distinctions between Section 18 of the 1934 Act and Sections 11 and 12 of the 1933 Act are noteworthy. First, the requirement that an intent to deceive be proven under Section 18 means that the defendant's good faith is a defense. Good faith exists when a person acts without knowledge that the statement is false and misleading. In other words, freedom from fraud is a defense under an action based on Section 18. There is no liability under this section for simple negligence. In a Section 11 or 12 case under the 1933 Act, the plaintiff is not required to prove defendant's intent to deceive. Second, the plaintiff in a Section 18 case must prove reliance on the false or misleading filing. The simple fact that the filing is inaccurate is not sufficient. In a Section 11 or 12 case under the 1933 Act, the plaintiff does not have to establish reliance.
AACSB: Ethics Blooms: Understand Difficulty: 3 Hard Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #91 Topic: Securities Exchange Act of 1934: Being Public

92.

What are the criminal penalties incorporated by the Congress for violating the Securities Exchange Act of 1934? In response to the corporate scandals occurring during the beginning of the 21st century, Congress in 2002 increased the criminal penalties for violating the Securities Exchange Act of 1934. An individual found guilty of filing false or misleading documents with the SEC may be fined up to $5,000,000 and imprisoned for up to 20 years. A business organization found guilty of filing with the SEC false or misleading documents may be subject to a fine up to $25,000,000. An individual guilty of securities fraud may face a prison sentence of up to 25 years.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #92 Topic: Securities Exchange Act of 1934: Being Public

93.

What was the purpose of the Private Securities Litigation Reform Act of 1995? What are some of the provisions of the Act? The Private Securities Litigation Reform Act (PSLRA) was passed by Congress specifically to support and clarify the Supreme Court's decision that only the SEC could pursue claims against third parties not directly responsible for a securities law violation. The PSLRA requires that private plaintiffs allege with specificity the scienter or intent of a company or its executives when filing claims under Section 10(b) or Rule 10b-5. It also limits the damages available to plaintiffs and restricts attorney fees. Furthermore, it provides requirements for the appointment of lead plaintiffs in class-action suits.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. Reed - Chapter 17 #93 Topic: Other Considerations

94.

What are the four common exemptions from blue sky laws that have been identified? Individual states have varied in their adoption of blue sky law exemption provisions. The common four exemptions adopted are: when the exemption is for an isolated transaction. when the offer or sale is to a limited number of offerees or purchasers within a stated period of time. when it is a private offering. when the sale is to a number of holders that after the sale does not exceed a specified number.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-05 To evaluate how state regulations add to the requirements of proper securities transactions. Reed - Chapter 17 #94 Topic: Other Considerations

95.

What are the three different forms of registration that apply to a state's application of blue sky laws?

Registration by notification allows issuers to offer securities for sale automatically after a stated time period expires unless the administrative agency takes action to prevent the offering. Registration by qualification usually requires a more detailed disclosure by the issuer. Under registration by qualification, a security cannot be offered for sale until the administrative agency grants the issuer a license or certificate to sell securities. The Uniform Securities Act created registration by coordination, which mandates that for those issuers of securities that must register with the SEC, duplicate documents be filed with the state's administrative agency. Unless the state objects, the state registration becomes effective automatically when the federal registration is deemed effective.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-05 To evaluate how state regulations add to the requirements of proper securities transactions. Reed - Chapter 17 #95 Topic: Other Considerations

96.

What are the primary provisions of the Sarbanes-Oxley Act? The Sarbanes-Oxley Act served to accomplish five major functions. It increased the SEC budget significantly. created the Public Company Accounting Oversight Board. required that corporate audit committee members be independent. mandated that CEOs and CFOs certify financial statements. increased criminal penalties.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-06 To understand why the Sarbanes-Oxley Act was passed and evaluate its effectiveness. Reed - Chapter 17 #96 Topic: Sarbanes-Oxley Act of 2002

97.

State the new or proposed rules issued by the SEC post the revitalization process initiated by the Sarbanes-Oxley Act of 2002. Sarbanes-Oxley (SOX) increases the SEC's power over many governance issues. The following are among the new or proposed rules issued by the SEC in the past several years: The need for public companies to have a majority of independent directors on their boards. The focus on the agency's effort to collect civil damages against executives and their company so long as the shareholder's value will not be harmed. The increase in emphasis on how the Internet can assist shareholders in expressing their views through voting and other communications. The disclosure of executive compensation, including severance packages and other perks such as stock options, travel benefits, club memberships, and retirement plans. These disclosures cover the CEO, CFO, and the three other highest paid executives.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-06 To understand why the Sarbanes-Oxley Act was passed and evaluate its effectiveness. Reed - Chapter 17 #97 Topic: Sarbanes-Oxley Act of 2002

98.

Under Sarbanes-Oxley, what types of services are auditing firms prohibited from providing to companies? One of the purposes of Sarbanes-Oxley is to create and maintain a separation of auditing and consulting functions to facilitate independence. As a result, the Public Company Accounting Oversight Board requires that auditing firms refrain from conducting a variety of nonauditing services. These services include bookkeeping, systems designs and implementation, appraisals and valuations, actuarial services, human resource functions, and investment banking.
AACSB: Ethics Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-06 To understand why the Sarbanes-Oxley Act was passed and evaluate its effectiveness. Reed - Chapter 17 #98 Topic: Sarbanes-Oxley Act of 2002

99.

What contributions did Sarbanes-Oxley Act make in the area of corporate governance? Sarbanes-Oxley focused on increasing the independence of the auditors. Sarbanes-Oxley stipulated that each member of the audit committee must be independent from the control of the company. No longer may a public company place its finance officer or other employee on the audit committee. Further, at least one member of the audit committee had to be a financial expert. To qualify as a financial expert, it must be shown that through experience or education this person has an understanding of generally accepted accounting practices (GAAP), financial statements, audits of public companies, internal audit controls, and the functions of an audit committee. Sarbanes-Oxley requires that the auditor reported to this independent audit committee. The auditor should not have a close working relationship with the company's CFO, accounting staff, and other company officials. In addition, the audit partner of the auditing firm must rotate off the engagement every five years. Auditors also must preserve audit records for seven years.
AACSB: Ethics Blooms: Understand Difficulty: 3 Hard Learning Objective: 17-06 To understand why the Sarbanes-Oxley Act was passed and evaluate its effectiveness. Reed - Chapter 17 #99 Topic: Sarbanes-Oxley Act of 2002

100.

What provisions have been made by the Sarbanes-Oxley Act to provide protection for whistleblowers?

Sarbanes-Oxley provides protections for whistleblowers so that individuals are more willing to report the corruption that can lead to major scandals. Audit committees are required to adopt procedures ensuring that whistleblowers' reports are taken seriously. Whistleblowers that suffer retaliation are able to recover civil damages and can be reinstated if terminated improperly. Under Sarbanes-Oxley, employees and employers must realize there are limitations to these protections.
AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-06 To understand why the Sarbanes-Oxley Act was passed and evaluate its effectiveness. Reed - Chapter 17 #100 Topic: Sarbanes-Oxley Act of 2002

ch17 Summary
Category # of Questions AACSB: Ethics 100 Blooms: Remember 67 Blooms: Understand 33 Difficulty: 1 Easy 46 Difficulty: 2 Medium 51 Difficulty: 3 Hard 3 Learning Objective: 177 01 To understand the meaning of the term securities and to apply the broad scope of the securities laws and regulations. Learning Objective: 17-02 To analyze the differences between a public offering and subsequent securities transactions. 38 Learning Objective: 17-03 To apply ways in which the laws cover these differences. 3 Learning Objective: 17-04 To evaluate when and why private individuals and organizations make claims to enforce securities laws. 28 Learning Objective: 17-05 To evaluate how state regulations add to the requirements of proper securities transactions. 6 Learning Objective: 17-06 To understand why the Sarbanes-Oxley Act was passed and evaluate its effectiveness. 15 Learning Objective: 17-07 To remember the complexity of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 3 Reed - Chapter 17 100 Topic: Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 2 Topic: Introduction 1 Topic: Other Considerations 9 Topic: Sarbanes-Oxley Act of 2002 16 Topic: Securities and Exchange Commission 3 Topic: Securities Exchange Act of 1934: Being Public 28 Topic: The Securities Act of 1933: Going Public 38 Topic: What Is A Security? 2 Topic: What is a Security? Introduction 1