Chapter 18 Securities Regulation Finance

If you own a security in a company, such as common stock in IBM, you have:

An undivided interest in the company

The Supreme Court held that binding arbitration agreements between investors and investment firms:

Are legal (not: defraud investors under the securities law)

What financial disclosure report is not required of traded securities regulated by the SEC?

A bi-annual 8-Q report (not: all of the other choices are required)

A share of stock represents the right to:

A share of future profits of a firm

If a person is convicted under the Insider Trading Sanctions Act he or she may face:

All of the other choices (not: none of the other choices; the Act provides injunctive relief only)

The securities registration process requires all the following information to be provided to prospective investors except:

All of the other choices are required

Suppose there has been securities fraud in the preparation of materials sent to investors, who then lose money. Potentially, which of the following may be liable?

Directors of the company and high-level officers of the company

A securities registration statement consists of:

Information about risks involved in a business venture and a prospectus

The first regulation of securities in the U.S. was the:

Kansas blue sky law

Securities differ from other assets in that they:

None of the other choices

Which class of securities is (are) exempt from the federal securities laws?

None of the other choices

A debt is a financial obligation a firm. It is:

Often incurred by selling bonds

A proxy is best described as:

Permission by a stockholder to someone else to vote their shares a certain way

Merrill Lynch and other brokerage firms, in an effort to reduce conflicts of interest inside the company, have established policies:

Restricting trading in securities by analysts who comment on those securities

Under SEC rules, a "publicly held company" is a company:

That has issued securities that are publicly traded

Insider trading is:

The buying or selling of stock by persons who have access to information, not yet revealed to the public, that affects the value of the stock

In a public security offering, the party hired to market the securities to the public is called:

The underwriter

The SEC's Rule 10b-5:

Was adopted under Section 10(b) of the 1934 Act concerns securities fraud and prohibits "manipulative" deceptive device and applies to registered and unregistered securities (not: was adopted under Section 10(b) of the 1934 Act concerns securities fraud and prohibits "manipulative" deceptive device)

Most securities are issued by firms that can use a quicker registration process. These are:

Well-known seasoned issuers that have issued at least $1 billion in securities previously

A security is sold to the public under a private placement exemption. Later a suit is filed under federal securities law claiming securities fraud. This suit will:

Be allowed since all securities are subject to the law

To reduce possible conflicts of interest, the Investment Company Act requires that boards of directors:

Be composed of at least 74% outsiders (not: hire corporate attorneys to advise them on possible issues of conflicts of interest)

SEC Rule 10b-5 holds it illegal for anyone involved in securities dealings to:

Employ any device, scheme, or artifice to defraud or make any untrue statement of a material fact or to omit to state a material fact (not: employ any device, scheme, or artifice to defraud or make any untrue statement of a material fact or to omit to state a material fact or engage in any sale of property that would impose deceit upon any person)

A securities professional who are in the business of charging fees for recommendations on investments is a(an):

Investment adviser

The idea behind the disclosure provisions contained in federal securities law is that:

Investors need sufficient and accurate information on material facts concerning securities they might buy

A red herring:

Is a preliminary version of a prospectus

A share of stock:

Is a share in the future profits (if any) of a company (not: all of the other choices)

The Securities and Exchange Commission has the power to:

Issue a deficiency letter ordering the security issuer to amend the filing before sales (not: issue a deficiency letter ordering the security issuer to amend the filing before sales and rule on the merits or financial soundness of a security offering)

The rationale behind prohibiting insider trading is that:

It gives people in high positions in a company an unfair advantage

The president of a company says that new products to be introduced are sure to double company profits. Based on this, investors buy stock in the company, pushing up its price. The products flop, the company loses money, so the stock price falls. Investors are most likely to sue the president of the company under what theory provided by the securities law?

Liability for misstatements (not: liability for insider trading)

You work for a securities firm matching orders to buy and sell stocks in small companies. A customer places an order to buy 100 shares of X Corp. when they sell for $40 a share. You find a seller at $39 per share. May you buy the shares yourself at $39 and then sell them for $40 to you client?

No, specialists cannot deal for their own benefit (not: the SEC places no constraints on this, but in equity the law would require you to sell to your client at $39)

A securities professional who engages in the business of buying and selling securities for their own account is a:

None of the other choices

The CEO of Big Ships knows his company has won a $2 billion contract to build ships for the Navy. He is told by the Navy to keep this quiet until the official announcement. Knowing that Big Ships stock will rise when the announcement is made, he tells his children to buy as much Big Ships stock as they can right away. He does not buy any stock. The CEO may:

None of the other choices

The SEC rule that requires public companies to release material information to the public rather than release the information on a selective basis, such as in meetings with security analysts, is called:

None of the other choices

The registration requirement of the Securities Act of 1933 applies to:

None of the other choices

Under the securities law, liability for misstatements:

None of the other choices

When a company wants to take over another, it may issue:

None of the other choices

When a securities professional buys and sells excessive amounts of stock for a client's account to make extra large commissions from the trades, she is:

None of the other choices

You are on the subway in New York when you overhear two people you do not know talking about an upcoming merger, news not yet public. They seem to know their stuff. If you buy stock based on this information, and profit when the information turns out true, you have:

None of the other choices

Corporations must have annual stockholder meetings at which major business decisions of the firm are determined. Since many stockholders are not at meetings, the way they vote their shares is called:

None of the other choices (not: absente ballot)

The definition of securities subject to federal regulation is:

None of the other choices (not: any financial instrument reviewed by the SEC)

A security is sold to the public under a private placement exemption. Later a suit is filed under the federal securities law claiming securities fraud. This suit will:

None of the other choices (not: fail since the security is not subject to the federal law since it was sold under an exemption--unless there were subsequent financial disclosures to the SEC)

Regulation Fair Disclosure (FD) requires:

None of the other choices (not: public companies to provide explanations about all significant changes in the price of securities)

Under SEC rules, a "private company" is a company:

None of there other choices (not: with no more than 1,000 shareholders and shares not traded openly)

Jones works at an investment firm that helps corporations merge with other companies. Because of her work, she knows that two clients of her firm are going to merge. She also knows that when the announcement is made, the price of stock in these companies will jump. She buys stock in the companies before the announcement. She is:

Probably guilty of insider trading

The Sarbanes-Oxley Act:

Requires large companies with publicly traded stock to have the CEO personally certify the company's financial reports to the SEC and provides whistle-blower protection fro those reporting securities violations (not: requires large companies with publicly traded stock to have the CEO personally certify the company's financial reports to the SEC and requires all securities litigation to be filed in federal court, not state court and provides whistle-blower protection fro those reporting securities violations)

Fraud in securities dealings may be litigated on the basis of:

SEC Rule 10b-5

The federal agency that has the most to do with regulation of the securities markets is the:

Securities and Exchange Commission

Which of the following are exempt from the Securities Exchange Act of 1933

Securities issued by banks and securities issued by religious and other charitable organizations and insurance policies

Which of the following are exempt from the Securities Exchange Act of 1933:

Securities issued by banks and securities issued by religious and other charitable organizations and insurance policies (not: securities issued by religious and other charitable organizations and insurance policies)

The Securities Litigation Uniform Standards Act of 1998 requires:

Securities litigation involving nationally-traded securities to be in federal court

Most securities are issued by well-known seasoned issuers who do not have the right to:

Sell without SEC notification

Which of the following laws regulates the buying and selling of traded securities?

The 1934 Securities and Exchange Act

A corporate debt instrument usually specifies:

The length of the debt period and the debt repayment method and rate of interest and the amount of the debt (not: the length of the debt period and the debt repayment method and rate of interest)