Gleim Chapter 33

Which of the following events must be reported to the SEC under the reporting provisions of the Securities Exchange Act of 1934? 1. Tender Offers 2. Insider Trading 3. Solicitation of Proxies A. 1.Yes 2.Yes 3.Yes B. 1.Yes 2.Yes 3.No C. 1.Yes 2.No 3.Yes D. 1.No 2.Yes 3.Yes

A. 1.Yes 2.Yes 3.Yes (The Securities Exchange Act of 1934 governs dealings in securities subsequent to their initial issuance. It requires all regulated publicly held companies to register with the SEC. The act requires disclosure of matters concerning tender offers, insider trading, and the solicitation of proxies)

Which of the following is least likely to be considered a security under the Securities Act of 1933? A.General partnership interests. B.Limited partnership interests. C.Stock options. D.Warrants.

A.General partnership interests. (A security is defined very broadly by the Securities Act of 1933, as interpreted by the Supreme Court. In general, a security is an investment in a common enterprise with an expectation of profits based solely on the efforts of others. A general partner is entitled to participate directly in the management of the business. Thus, return on the investment in the partnership might be attributed to his or her own efforts)

The Securities Act of 1933 provides an exemption from registration for Bonds issued by a municipality for governmental purposes Securities issued by a not-for-profit charitable organization A.YesYes B.YesNo C.NoYes D.NoNo

A.YesYes (Unless a specific exemption applies, the Securities Act of 1933 regulates the initial offering of securities by requiring the filing of a registration statement with the SEC prior to sale or an offer to sell. The act specifically exempts securities of domestic governments used for a governmental purpose and securities of not-for-profit organizations)

Which one of the following laws addresses the issue of insider trading? A. Federal Trade Commission Act. B. Securities Exchange Act. C. Clayton Act. D. North American Free Trade Agreement.

B. Securities Exchange Act. (The Securities Exchange Act of 1934 addresses the issue of insider trading. Specifically, insiders must turn over to the corporation any profits earned on purchases and sales of their company's stock that fall within six months of each other. They are also prohibited from buying or selling stock based on inside information not available to the public)

Under the Securities Exchange Act of 1934, which of the following conditions generally will allow an issuer of securities to terminate the registration of a class of securities and suspend the duty to file periodic reports? 1. The Corporation has fewer than 300 Shareholders 2. The Securities are listed on a National Securities Exchange A.YesYes B.YesNo C.NoYes D.NoNo

B.YesNo (The 1934 act requires all publicly held companies to register with the SEC. Registration is required of all companies that (1) list shares on a national securities exchange or (2) have at least 500 shareholders of its equity securities and total gross assets of at least $10 million. Following registration, an issuer must file specific up-to-date and accurate reports with the SEC to ensure fair trading practices for investors. An over-the-counter issuer may terminate its registration if the holders of its registered equity securities number fewer than 300 or if the issuer has had fewer than 500 shareholders and less than $10 million in assets on closing day in each of the last 3 years)

Corporations that are exempt from registration under the Securities Exchange Act of 1934 are subject to the act's A. Provisions dealing with the filing of annual reports. B. Provisions imposing periodic audits. C. Antifraud provisions. D. Proxy solicitation provisions.

C. Antifraud provisions. (A corporation required to register under the 1934 act must comply with its reporting requirements. The antifraud provisions of the act apply to any person who performs a prohibited act in connection with the purchase or sale of any security, whether or not the security is registered)

Blue-sky laws are A. Federal laws that make it unlawful to use deceptive practices in the sale of securities. B. Federal laws that limit the amount of air pollution in a specific geographic area. C. State laws that regulate the sale of securities. D. State laws that regulate the environment.

C. State laws that regulate the sale of securities. (Blue-sky laws are state laws designed to prevent fraudulent or misleading security issues. The name came from the fact that some of the earliest laws prohibited "everything under the blue-skies which is fraudulent.")

In which of the following types of action brought against a CPA who issues an audit report containing an unmodified opinion on materially misstated financial statements may a plaintiff prevail without proving reliance on the audit report? A.An action for common law fraud. B.An action for common law breach of contract. C.An action brought under Section 11 of the Securities Act of 1933. D.An action brought under Rule 10b-5 of the Securities Exchange Act of 1934.

C.An action brought under Section 11 of the Securities Act of 1933. (To recover under Section 11, a plaintiff must prove that (1) the plaintiff acquired a security subject to registration, (2) the registration statement contained a material misstatement or omission, and (3) the plaintiff incurred a loss. The defendant's liability extends to acquirers of a security described in the registration statement or prospectus, and the acquirer need not prove reliance.)

How many audits of public companies per year does a CPA firm that is registered with the Public Company Accounting Oversight Board (PCAOB) have to perform before it receives an annual inspection from the PCAOB? A.One audit. B.More than 10 audits. C.More than 50 audits. D.More than 100 audits.

D.More than 100 audits. (The PCAOB annually inspects registered CPA firms that regularly provide audit reports for more than 100 issuers. It inspects at least triennially firms that regularly provide audit reports for 100 or fewer issuers)

Under Regulation D, Rule 505, of the Securities Act of 1933, which of the following statements is correct regarding a $3,000,000 stock offering sold only to accredited investors? A.The issuer may sell the stock to only 35 accredited investors. B.The issuer may make the offering through a general advertising. C.The issuer must supply all accredited investors with financial information. D.The issuer must notify the SEC within 15 days after the first sale of the offering.

D.The issuer must notify the SEC within 15 days after the first sale of the offering. (Various procedural rules generally must be followed to qualify for an exemption under Regulation D, some of which do not apply to certain exemptions. However, a requirement to notify the SEC by filing Form D within 15 days of the first offering applies to all 3 exemptions (Rule 504, Rule 505, and Rule 506))

Which of the following transactions is subject to registration requirements of the Securities Act of 1933? A.The public sale of stock of a trucking company regulated by the Interstate Commerce Commission. B.A public sale of municipal bonds issued by a city government. C.The issuance of stock by a publicly traded corporation to its existing shareholders because of a stock split. D.The public sale by a corporation of its negotiable 10-year notes.

D.The public sale by a corporation of its negotiable 10-year notes. (The 1933 Act defines the term "security" to include almost any offering that constitutes an investment, including a corporation's negotiable 10-year notes. Any offer or sale of a security to the public requires registration unless a specific exemption applies. A corporation's negotiable 10-year notes are not exempt from registration under the 1933 Act)

Taso Limited Partnership intends to offer $400,000 of its limited partnership interests under Rule 504 of Regulation D of the Securities Act of 1933. These interests are registered under state law. Which of the following statements is true? A.The exemption under Rule 504 is not available to an issuer of limited partnership interests. B.The limited partnership interests may be sold only to accredited investors. C.The total number of nonaccredited investors who purchase the limited partnership interests may not exceed 35. D.The resale of the limited partnership interests by a purchaser generally will not be restricted.

D.The resale of the limited partnership interests by a purchaser generally will not be restricted. (A purchaser of securities under Rules 505 and 506 of Regulation D may not immediately resell without being considered an underwriter. Thus, the exemption from registration for transactions by a person not an issuer, underwriter, or dealer is inapplicable. Moreover, the issuer must take steps to prevent nonexempt, unregistered resale and must notify the SEC of the sale. After the securities have been held for 1 year, limited resales are allowed under SEC Rule 144 without registration. Unlimited resales by a nonaffiliate purchaser are allowed after 2 years. However, these limits on resale do not apply to the exemption under Rule 504. Securities issued under Rule 504 are unrestricted and may be resold without federal registration if they are registered under a state law that requires delivery of a substantive disclosure document)

An offering made under the provisions of Regulation A of the Securities Act of 1933 requires that the issuer A. File an offering circular with the SEC. B. Sell only to accredited investors. C. Provide investors with the prior 4 years' audited financial statements. D. Provide investors with a proxy registration statement.

A. File an offering circular with the SEC. (Under Regulation A, a small public issue of securities is exempt from full registration with the SEC if certain requirements are met. Regulation A applies to issuances not exceeding $5 million if the issuer (1) files an offering statement with the SEC, which includes a notification and an offering circular; (2) provides the circular to each offeree and purchaser; and (3) observes the 20-day waiting period. However, investment companies and issuers that must report under the 1934 act may not claim the exemption)

Pursuant to Regulation D of the Securities Act of 1933, Pate Corp. is offering $3 million of its securities solely to accredited investors. Under Regulation D, Pate is A. Not required to provide any specified information to the accredited investors. B. Required to provide the accredited investors with audited financial statements for the 2 most recent fiscal years. C. Permitted to make a general solicitation. D. Not eligible for an exemption if the securities are debentures.

A. Not required to provide any specified information to the accredited investors (Rule 504 of Regulation D does not apply to this offering because it exceeds $1 million. But Rules 505 ($5 million limit) and 506 (no dollar limit) may be relevant. Under Rules 505 and 506 of Regulation D, no financial disclosure is necessary if all investors are accredited. But, if some are nonaccredited, they must receive certain material information)

A basic purpose of the securities laws in the United States is to regulate the issuance of investment securities by A. Requiring disclosure of all relevant information so that investors can make informed decisions. B. Prohibiting the issuance of non-investment grade securities. C. Ensuring that all shareholders have an equal vote in the election of a board of directors. D. Providing a regulatory framework for those states that do not have their own securities laws.

A. Requiring disclosure of all relevant information so that investors can make informed decisions. (The basic purpose of the federal securities laws in the United States, primarily the Securities Act of 1933 and the Securities Exchange Act of 1934, is to provide complete and fair disclosure to potential investors. The emphasis is on disclosure that allows informed investors to make intelligent decisions.)

Which of the following statements concerning the prospectus required by the Securities Act of 1933 is true? A. The prospectus is a part of the registration statement. B. The prospectus should enable the SEC to pass on the merits of the securities. C. The prospectus must be filed after an offer to sell. D. The prospectus is prohibited from being distributed to the public until the SEC approves the accuracy of facts embodied therein.

A. The prospectus is a part of the registration statement. (A prospectus is prepared as part of the registration statement. A prospectus is a written document proposing a sale of securities to potential investors. The prospectus contains most of the information in the registration statement. It must be furnished to each potential investor prior to the time of delivery of the securities)

Which of the following securities is exempt from registration under the Securities Act of 1933? A.A class of stock given in exchange for another class by the issuer to its existing shareholders without the issuer's payment of a commission. B.Limited partnership interests sold for the purpose of acquiring funds to invest in bonds issued by the United States. C.Corporate debentures that were previously subject to an effective registration statement, provided they are convertible into shares of common stock. D.Shares of nonvoting common stock, provided their par value is less than $1.00.

A.A class of stock given in exchange for another class by the issuer to its existing shareholders without the issuer's payment of a commission. (If securities are transferred between the issuer and its existing shareholders without payment of commissions or other consideration, the transaction is exempt from registration. Hence, stock dividends and stock splits are exempt. Securities issued in mergers and reorganizations are also exempt if no cash is involved and the securities are given solely for other securities)

Pick, CPA, was engaged by Edge Corp. to audit Edge's financial statements. Pick, in performing the audit and rendering an unmodified opinion, intentionally ignored several material omissions in the financial statements. Edge included Pick's auditor's report in its annual filing with the SEC and in its annual stockholders' report. Drane purchased shares of Edge stock based on Drane's review of the past performance of the stock and current-year financial statements. When the omissions in the financial statements became known, the value of Edge stock declined and Drane suffered a loss. Under the provisions of Rule 10b-5 of the Securities Exchange Act of 1934, what will be the result of a suit by Drane against Pick? A.Drane will win because Pick acted with intent. B.Drane will win because Pick was negligent. C.Drane will lose because only Edge is liable. D.Drane will lose because the stock purchased was not part of a new issue.

A.Drane will win because Pick acted with intent. (Rule 10b-5 states that it is illegal for any person, directly or indirectly, to use interstate commerce or a national securities exchange to defraud anyone in connection with the purchase or sale of any security, whether or not required to be registered. It is most often applied to insider trading and corporate misstatements. A person may violate Rule 10b-5 without actively participating in the purchase or sale of the security. All that is required is that the party's activity be connected with the purchase or sale. Liability is only to actual purchasers or sellers. They need not be in privity with the defendant. The SEC or a private party may sue. A plaintiff must prove each of the following: (1) an oral or written misstatement or omission of a material fact or other fraud; (2) its connection with any purchase or sale of securities; (3) the defendant's intent to deceive, manipulate, or defraud (scienter); (4) reliance on the misstatement (but a private plaintiff ordinarily need not prove reliance in omission cases); and (5) loss caused by the reliance. Accordingly, the auditor is liable for fraud because (s)he intentionally ignored material omissions in the financial statements that constituted written misstatements of material facts related to a purchase of securities that resulted in loss)

A major impact of the Foreign Corrupt Practices Act of 1977 is that registrants subject to the Securities Exchange Act of 1934 are now required to A.Keep records that reflect the transactions and dispositions of assets and to maintain a system of internal accounting controls. B.Provide access to records by authorized agencies of the federal government. C.Prepare financial statements in accord with international accounting standards. D.Produce full, fair, and accurate periodic reports on foreign commerce and/or foreign political party affiliations.

A.Keep records that reflect the transactions and dispositions of assets and to maintain a system of internal accounting controls. (The main purpose of the FCPA is to prevent bribery by firms that do business in foreign countries. A major ramification is that it requires all companies that must register with the SEC under the Securities Exchange Act of 1934 to maintain adequate accounting records and a system of internal accounting control)

Bird Corp. made a $5 million exempt common stock offering under Rule 505 of Regulation D of the Securities Act of 1933. Thus, the shares were restricted securities. As the issuer of restricted securities, Bird must A.Make a reasonable effort to determine that purchasers are buying for themselves and not for others. B.Publicly advertise that the shares are not registered. C.Provide information to all purchasers as to how they can register their shares so that resale will be permitted. D.Apply to the SEC for contingent exemptions so that purchasers may resell their shares as exempt.

A.Make a reasonable effort to determine that purchasers are buying for themselves and not for others. (Exemption from the 1933 act requirements under Rules 505 and 506 of Regulation D applies to particular transactions, not the securities offered and sold. Securities sold under one of these exemptions are restricted. An issuer of restricted securities is therefore required to make a reasonable effort to determine that purchasers are not underwriters and that they are purchasing strictly for their own investment purposes)

Which of the following securities is exempt from registration under the Securities Act of 1933? A.Municipal bonds. B.Securities sold by a discount broker. C.Pre-incorporation stock subscriptions. D.One-year notes issued to raise working capital.

A.Municipal bonds. (The 1933 act exempts certain securities or transactions from registration. Thus, it specifically exempts securities of domestic governments used for a governmental purpose, for example, municipal bonds)

Frey, Inc., intends to make a $2 million common stock offering under Rule 505 of Regulation D of the Securities Act of 1933. Frey A.Must notify the SEC within 15 days after the first sale of the offering. B.May sell the stock to an unlimited number of nonaccredited investors. C.May make the offering through a general advertising. D.Must provide all investors with a prospectus.

A.Must notify the SEC within 15 days after the first sale of the offering. (Rule 505 provides exemption from the requirements of the 1933 act to all issuers other than investment companies for sales of securities up to $5 million in any 12-month period. Under Rule 505, securities may be sold to no more than 35 nonaccredited investors and to an unlimited number of accredited investors. Rule 505 also provides that the issuer must notify the SEC within 15 days after the first offering)

The registration provisions of the Securities Exchange Act of 1934 require disclosure of all of the following information except the A.Names of owners of at least 5% of any class of nonexempt equity security. B.Bonus and profit-sharing arrangements. C.Financial structure and nature of the business. D.Names of officers and directors.

A.Names of owners of at least 5% of any class of nonexempt equity security. (Registration under the 1934 act requires disclosure of (1) corporate organization; (2) financial structure; (3) description of all securities; (4) names of officers, directors, and underwriters; (5) names of all owners of more than 10% of any class of nonexempt equity security; (6) description of the nature of the business; (7) financial statements; and (8) bonus and profit-sharing arrangements)

Which of the following statements is true with respect to criminal prosecution under the securities acts? A.Reckless disregard for the truth may be a sufficient basis for a criminal conviction. B.Personal monetary gain from the alleged criminal conduct is required in order to be convicted. C.The antifraud provisions of the Securities Acts are the only basis upon which a person can be indicted and convicted. D.Corporations are not subject to criminal prosecution.

A.Reckless disregard for the truth may be a sufficient basis for a criminal conviction. (Criminal liability under the federal securities laws is based on willful violation. A reckless disregard for the truth or falsity of a statement is sometimes deemed a willful or intentional act)

A requirement of a private action to recover damages for violation of the registration requirements of the Securities Act of 1933 is that A.The plaintiff acquired the securities in question. B.The issuer or other defendants committed either negligence or fraud in the sale of the securities. C.A registration statement was filed. D.The securities were purchased from an underwriter.

A.The plaintiff acquired the securities in question. (The Securities Act of 1933 permits a civil action by an acquirer of securities if (1) the required registration was not made; (2) a registered security was sold, but a prospectus was not delivered; (3) a security was sold using a prospectus that was not current; or (4) an offer to sell was made before a required registration. Section 11 allows an acquirer to sue on the basis of misstatements or omissions of material facts in the registration statement)

Which of the following transactions is subject to registration requirements of the Securities Act of 1933? A.The public sale by a corporation of its negotiable 10-year notes. B.The public sale by a charitable organization of 10-year bearer bonds. C.The sale across state lines of municipal bonds issued by a city. D.Issuance of stock by a publicly traded corporation to its shareholders because of a stock split.

A.The public sale by a corporation of its negotiable 10-year notes. (Under the 1933 act, any offer or sale of a security to the public requires registration unless a specific exemption applies. Negotiable 10-year rates are securities because they provide evidence of indebtedness. Moreover, no exemption applies. For example, these notes are not commercial paper)

Which of the following facts will result in an offering of securities being exempt from registration under the Securities Act of 1933? A.The sale or offer to sell the securities is made by a person other than an issuer, underwriter, or dealer. B.The securities are nonvoting preferred stock. C.The issuing corporation was closely held prior to the offering. D.The securities are AAA-rated debentures that are collateralized by first mortgages on property that has a market value of 200% of the offering price.

A.The sale or offer to sell the securities is made by a person other than an issuer, underwriter, or dealer. (Under Section 4(1) of the 1933 act, an initial offering of securities is exempt from registration if the sale is made by an ordinary investor, that is, a person who is not an issuer, an underwriter, or a dealer)

Under the Securities and Exchange Act of 1934, which of the following penalties could be assessed against a CPA who intentionally violated the provisions of Section 10(b), Rule 10b-5 of the act? Civil Liability for Monetary Damages Criminal Liability for a Fine A.YesYes B.YesNo C.NoYes D.NoNo

A.YesYes (Section 10(b) of the 1934 act and SEC Rule 10b-5 are antifraud provisions. They make it unlawful for any person to employ, in connection with the purchase or sale of any security, any manipulative or deceptive device or any contrivance in contravention of SEC rules and regulations. Any buyer or seller of any security who suffers a monetary loss may bring a private civil suit to rescind the transaction or to receive monetary damages. Punitive damages are not recoverable. The 1934 act also provides for criminal sanctions for willful violations. Liability is imposed for false material statements in applications, reports, documents, registration statements, and press releases. For an individual, the penalty is a fine not to exceed $5 million, 20 years in prison, or both. An individual who proves (s)he had no knowledge of the rule or regulation will not be imprisoned. If the person is not a natural person (e.g., a corporation), the maximum fine is $25 million)

Integral Corp., with assets in excess of $4 million, has issued common and preferred stock and has 350 shareholders. Its stock is sold on the New York Stock Exchange. Under the Securities Exchange Act of 1934, Integral must be registered with the SEC because A. It issues both common and preferred stock. B. Its shares are listed on a national stock exchange. C. It has more than 300 shareholders. D. Its shares are traded in interstate commerce.

B. Its shares are listed on a national stock exchange. (The Securities Exchange Act of 1934 requires all regulated publicly held corporations to register with the SEC. Covered corporations either (1) list shares on a national securities exchange or (2) have at least 500 shareholders of equity securities and total gross assets exceeding $10 million)

The Securities and Exchange Commission is not empowered to A. Seek an injunction that will suspend trading in a given security. B. Sue for treble damages. C. Recommend criminal proceedings against accountants. D. Suspend a broker-dealer.

B. Sue for treble damages. (The SEC is not empowered to sue for damages at all. A lawsuit for treble damages is a civil remedy provided for violations of the antitrust laws, and the SEC has no jurisdiction over antitrust violations. However, the SEC can bring an action in a federal district court to impose civil penalties, for example, for insider trading. Moreover, in an action for violation of the securities laws, the SEC may seek any equitable relief that may be appropriate to benefit investors (Sarbanes-Oxley Act of 2002))

Which of the following disclosures must be contained in a securities registration statement filed under the Securities Act of 1933? A. A list of all existing shareholders. B. The principal purposes for which the offering proceeds will be used. C. A copy of the corporation's latest proxy solicitation statement. D. The names of all prospective accredited investors.

B. The principal purposes for which the offering proceeds will be used. (The purpose of registration is to provide adequate and accurate disclosure of financial and other pertinent information with which potential investors may evaluate the merits of the securities. Generally, registration calls for disclosure of a description of the registrant's business and property; a description of management; a description of the significant provisions of the security to be offered for sale, its relationship to registrant's other capital securities, and the use of the proceeds of the issuance; and the most recent certified financial statements. Disclosures must also be made about the compensation of officers and directors, their holdings of the registrant's securities, and their business dealings with the registrant)

Under Regulation D of the Securities Act of 1933, which of the following conditions apply to private placement offerings? The securities A.Cannot be sold for longer than a 6-month period. B.Cannot be the subject of an immediate unregistered reoffering to the public. C.Must be sold only to accredited institutional investors. D.May be sold to no more than 20 purchasers who are not accredited investors.

B.Cannot be the subject of an immediate unregistered reoffering to the public. (Rule 506 of Regulation D applies to securities sold under the private placement exemption created by section 4(2) of the 1933 Act. Securities sold under this exemption are restricted securities and may be resold only by registration or in a transaction exempt from registration. The securities' certificates bear a legend that the shares of stock are restricted and purchased for personal investment)

Under the Securities Act of 1933, which of the following statements is(are) correct regarding the purpose of registration? I.The purpose of registration is to allow for the detection of management fraud and prevent a public offering of securities when management fraud is suspected. II.The purpose of registration is to adequately and accurately disclose financial and other information upon which investors may determine the merits of securities A.I only B.II only. C.Both I and II. D.Neither I nor II.

B.II only. (One purpose of the Securities Act of 1933 is disclosure. The act was designed to provide complete and fair disclosure to potential investors. It applies only to the initial issuance of securities. Disclosure is accomplished through the requirement that a registration statement be filed with the SEC. Once potential investors have complete disclosure, the assumption is that they can make a reasonable decision. The second purpose is prevention, not detection of fraud, through enforcement of its antifraud provisions. Thus, although the 1933 act does not provide for evaluation of the merits of securities or examination by government auditors, its civil remedies, criminal penalties, and disclosure requirements (including financial statements audited by CPAs) help prevent fraud)

James Fisk recently acquired Valiant Corporation by purchasing all of its outstanding stock pursuant to a tender offer. Fisk demanded and obtained the resignation of the existing board of directors and replaced it with his own slate of nominees. Under these circumstances, A.Fisk had no right to demand the resignation of the existing board members; their resignations are legally ineffective, and they remain as directors. B.If Valiant is listed on a national stock exchange, Fisk must file his tender offer with the SEC. C.The former shareholders of Valiant are parties to a tax-free reorganization. Hence, they are not subject to federal income tax on their gain, if any, on transferring their stock to Fisk. D.If Valiant is engaged in interstate commerce, the acquisition is exempt under the antitrust laws because the SEC has jurisdiction.

B.If Valiant is listed on a national stock exchange, Fisk must file his tender offer with the SEC. (A tender offer is an offer to shareholders to buy their stock in order to gain control of a corporation. Under the Securities Exchange Act of 1934, anyone who makes a tender offer that would result in the purchase of more than 5% of a class of registered equity securities must file his or her tender offer with the SEC. Because Valiant is listed on a national stock exchange, its shares must be registered, and Fisk's tender offer must be filed prior to acquisition)

What is the standard that must be established to prove a violation of the antifraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934? A.Negligence. B.Intentional misconduct. C.Criminal intent. D.Strict liability.

B.Intentional misconduct. (Rule 10b-5 states that it is illegal for any person, directly or indirectly, to use the U.S. mail or any instrumentality of interstate commerce or a national securities exchange to defraud anyone in connection with the purchase or sale of any security. A plaintiff must prove each of the following: (1) a misstatement or omission of a material fact or other fraud; (2) its connection with any purchase or sale of securities; (3) the defendant's intent to deceive, manipulate, or defraud; (4) reliance on the misstatement; and (5) loss caused by the reliance)

Under the Section 10(b) Rule 10b-5 antifraud provisions of the Securities Exchange Act of 1934, which of the following conditions must a plaintiff prove to recover damages from an accountant? A.The plaintiff is in privity of contract with the accountant. B.The plaintiff relied on the accountant's intentional misstatement of material facts. C.The plaintiff is free from contributory negligence. D.The accountant acted without due diligence.

B.The plaintiff relied on the accountant's intentional misstatement of material facts. (Rule 10b-5 states that it is illegal for any person, directly or indirectly, to use the U.S. mail or any instrumentality of interstate commerce or a national securities exchange to defraud anyone in connection with the purchase or sale of any security. A plaintiff must prove each of the following: (1) a misstatement or omission of a material fact or other fraud; (2) its connection with any purchase or sale of securities; (3) the defendant's intent to deceive, manipulate, or defraud; (4) reliance on the misstatement; and (5) loss caused by the reliance)

A main provision of the Securities Act of 1933, as amended in 1934, is the requirement that A. Bonds be issued only under a trust indenture approved by the Securities and Exchange Commission (SEC). B. Public utility holding companies register with the SEC. C. New securities offered for sale in interstate commerce be registered with the SEC. D. All security brokers be licensed by the SEC.

C. New securities offered for sale in interstate commerce be registered with the SEC. (The Securities Act of 1933 was designed to provide complete and fair disclosure to potential investors. The 1933 act applies only to the initial issuance of securities. Disclosure is accomplished through the requirement that a registration statement be filed with the SEC. Given complete disclosure, the assumption is that potential investors can make reasonable decisions)

The antifraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934 A. Apply only if the securities involved were registered under the Securities Act of 1933 or the Securities Exchange Act of 1934. B. Require that the plaintiff show negligence on the part of the defendant in misstating facts. C. Require that the wrongful act be accomplished through the mail, any other use of interstate commerce, or through a national securities exchange. D. Apply only if the defendant acted with intent to defraud.

C. Require that the wrongful act be accomplished through the mail, any other use of interstate commerce, or through a national securities exchange. (The scope of Rule 10b-5 is broad but not absolute. Rule 10b-5 prohibits any person from directly or indirectly performing fraudulent (deceptive) acts by use of any means or instrumentality of interstate commerce, the mails, or any facility of any national securities exchange, in connection with the purchase or sale of any security)

Which of the following statements is true regarding the proxy solicitation requirements of Section 14(a) of the Securities Exchange Act of 1934? A.A corporation does not have to file proxy revocation solicitations with the SEC if it is a reporting company under the Securities Exchange Act of 1934. B.Current unaudited financial statements must be sent to each shareholder with every proxy solicitation. C.A corporation must file its proxy statements with the SEC if it is a reporting company under the Securities Exchange Act of 1934. D.In a proxy solicitation by management relating to election of officers, all shareholder proposals must be included in the proxy statement.

C.A corporation must file its proxy statements with the SEC if it is a reporting company under the Securities Exchange Act of 1934. (Within 10 days prior to mailing a proxy statement to shareholders, a company reporting under the Securities Exchange Act of 1934 must file its proxy statements with the SEC)

Under the Foreign Corrupt Practices Act (FCPA), an action may be brought that seeks A.Treble damages by a private party. B.Injunctive relief by a private party. C.Criminal sanctions against both the corporation and its officers by the Department of Justice. D.Damages and injunctive relief by the Securities and Exchange Commission.

C.Criminal sanctions against both the corporation and its officers by the Department of Justice. (The SEC may investigate violations of the FCPA, bring civil actions for its enforcement, and recommend that the Justice Department prosecute criminal violations. A director, officer, shareholder, or other agent who acts on behalf of the corporation in willful violation of the FCPA is subject to a fine of up to $100,000 and a prison term of up to 5 years or both. A corporation is subject to a fine of up to $2 million)

Integral Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934. For its current fiscal year, Integral filed the following with the SEC: quarterly reports, an annual report, and a periodic report listing newly appointed officers of the corporation. Integral did not notify the SEC of shareholder "short-swing" profits, report that a competitor made a tender offer to Integral's shareholders, and report changes in the price of its stock as sold on the New York Stock Exchange. Under the SEC reporting requirements, which of the following was Integral required to do? A.Report the tender offer to the SEC. B.Notify the SEC of shareholder "short-swing" profits. C.File the periodic report listing newly appointed officers. D.Report the changes in the market price of its stock.

C.File the periodic report listing newly appointed officers. (A covered corporation is required to file annual (10-K), quarterly (10-Q), and material events (8-K) reports with the SEC. Similar reports are sent to shareholders. The 10-K report contains information about the entity's business activities, securities, management, related parties, disagreements concerning accounting and disclosure, audited financial statements, etc. It is intended to bring the information in the registration statement up to date. Thus, newly appointed officers will be listed)

What defense must an accountant establish to be absolved from civil liability under Section 18 of the Securities Exchange Act of 1934 for false or misleading statements made in reports or documents filed under the Act? A.Lack of gross negligence. B.Exercise of due care. C.Good faith and lack of knowledge of the statement's falsity. D.Lack of privity with an injured party.

C.Good faith and lack of knowledge of the statement's falsity. (Section 18(a) imposes liability for making or causing a false or misleading statement (or omission) of a material fact in any filing with the SEC under the Act. A defense to a suit based on Section 18(a) is to prove that the defendant acted in good faith and had no knowledge that the statement was false or misleading. Good faith is an absence of an intent to deceive)

On May 1, Apel purchased 7% of Stork Corp.'s preferred stock traded on a national securities exchange. After the purchase, Apel owned 9% of the outstanding preferred stock. Stork is registered under the Securities Exchange Act of 1934. With respect to the purchase, Apel A.Is not required to file any report or information with the SEC because Apel owns less than 10% of the preferred stock. B.Is not required to file any report or information with the SEC because the security purchased was preferred stock. C.Must file with the SEC, the issuer, and the national securities exchange information concerning the purpose of the acquisition. D.Must file only with the SEC information concerning the source of the funds used to purchase the preferred stock.

C.Must file with the SEC, the issuer, and the national securities exchange information concerning the purpose of the acquisition. (As part of its regulation of tender offers, the Securities Exchange Act of 1934 requires any person who has acquired more than 5% of any registered equity security to file reports with the issuer, the exchange on which the security is traded, and the SEC. The information reported includes the identity of the purchaser, the source of funding, the purpose of the acquisition, and the number of shares owned)

Maco Limited Partnership intends to sell $6 million of its limited partnership interests. The state in which Maco was organized is also the state in which it carries on all of its business activities. If Maco intends to offer the limited partnership interests in reliance on Rule 147, the intrastate registration exception under the Securities Act of 1933, which one of the following statements is true? A.Maco may make up to five offers to nonresidents without the offering being ineligible for the Rule 147 exemption. B.The offering is not exempt under Rule 147 because it exceeds $5 million. C.Under Rule 147, certain restrictions apply to resales of the limited partnership interests by purchasers. D.Rule 147 limits to 100 the number of purchasers of the limited partnership interests.

C.Under Rule 147, certain restrictions apply to resales of the limited partnership interests by purchasers. (One exemption from registration under the Securities Act of 1933 is an intrastate issue of securities. Under the safe harbor provision of SEC Rule 147, an issue qualifies as intrastate if the issuer is organized or incorporated in the state in which the issue is made, 80% of the proceeds are to be used in that state, 80% of its assets are located there, the issuer does at least 80% of its business (gross revenues) within that state, all the purchasers and offerees are residents of the state, no resales to nonresidents occur for at least 9 months after the last sale, and steps are taken to prevent interstate distribution)

To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove the 1. Defendant's Intent to Deceive 2. Plaintiff's Reliance on the Registration Statement A. 1.Yes 2.Yes B. 1.Yes 2.No C. 1.No 2.Yes D. 1.No 2.No

D. 1.No 2.No (Under the 1933 act, the issuer, its chief executive and directors, its chief finance and accounting officers, other signers, the underwriters, and experts who prepared or attested to the statement are liable for misstatements or omissions of material fact. In a private action, a plaintiff establishes a prima facie case under Section 11 by proving damages and that (s)he was an acquirer of a security issued under a registration statement that misstated or omitted a material fact. Intent to deceive, negligence, reliance, privity, or that the plaintiff gave value need not be proven. Exercise of due diligence in determining the accuracy of the statement is a defense. An issuer, however, cannot assert the due diligence defense, but any defendant may show that the plaintiff knew of the misstatement or omission at the time of acquisition)

Which of the following persons is not an insider of a corporation subject to the Securities Exchange Act of 1934 registration and reporting requirements? A. The president. B. A member of the board of directors. C. A shareholder who owns 8% of the outstanding common stock and whose spouse owns 4% of the outstanding common stock. D. An owner of 15% of the total face value of the corporation's outstanding debentures.

D. An owner of 15% of the total face value of the corporation's outstanding debentures. (For the purposes of Section 16(b), an insider is an officer, a director, or a beneficial owner of 10% or more of any class of equity securities registered under the 1934 act. The holder of debentures is not an insider because a debenture is a debt security, not an equity security)

The SEC's antifraud Rule 10b-5 prohibits trading on the basis of inside information of a business corporation's stock by A. Officers and directors only. B. All officers, directors, and shareholders only. C. Officers, directors, and beneficial holders of 10% of the corporation's stock only. D. Anyone who bases his or her trading activities on the inside information.

D. Anyone who bases his or her trading activities on the inside information. (Rule 10b-5 is the SEC rule under the Securities Exchange Act of 1934 that prohibits any person from engaging in manipulative or deceptive acts in the purchase or sale of any security. It prohibits trading on the basis of material inside information and applies to anyone who has not made a full disclosure of the inside information. However, mere possession of inside information about stock to be traded is not always a basis for liability. For example, transactions may have been arranged prior to the insider's obtaining the information)

All of the following are functions of the Securities and Exchange Commission except the A. Review of stock trades by corporate insiders. B. Regulation of interstate offerings of new securities to the public. C. Setting of rules concerning the proxy process of large public companies. D. Determination of fair trading prices for the common stock of large public companies.

D. Determination of fair trading prices for the common stock of large public companies. (The SEC is charged with enforcement of federal securities laws. Under the Securities Act of 1933, the offer or sale of a security to the public requires registration with the SEC absent a specific exemption. However, the 1933 act is essentially a disclosure statute. The SEC does not evaluate the merits of securities. Its role is to enforce the laws ensuring the public availability of information to potential investors)

Which of the following statements is true about corporations subject to the reporting requirements of the Securities Exchange Act of 1934? A.The annual report (Form 10-K) need not include audited financial statements. B.The annual report (Form 10-K) must be filed with the SEC before the end of the corporation's fiscal year. C.A quarterly report (Form 10-Q) need only be filed with the SEC by those corporations that are also subject to the registration requirements of the Securities Act of 1933. D.A report (Form 8-K) must be filed with the SEC after a material important event occurs.

D.A report (Form 8-K) must be filed with the SEC after a material important event occurs. (Current reports must be filed on Form 8-K describing specified material events: changes in control of the registrant, the acquisition or disposition of a significant amount of assets other than in the ordinary course of business, bankruptcy or receivership, resignation of a director, a change in the firm's certifying accountant, and material changes in financial condition or operations. Also, Form 8-K is a means of making Regulation FD disclosures. This regulation requires public disclosure of material nonpublic information that the issuer discloses to certain market professionals or to shareholders likely to trade on the information. If selective disclosure is intentional, public disclosure must be simultaneous)

Which of the following corporations are subject to the accounting requirements of the Foreign Corrupt Practices Act (FCPA)? A.All corporations engaged in interstate commerce. B.All domestic corporations engaged in international trade. C.All corporations that have made a public offering under the Securities Act of 1933. D.All corporations whose securities are registered pursuant to the Securities Exchange Act of 1934.

D.All corporations whose securities are registered pursuant to the Securities Exchange Act of 1934. (The accounting requirements of the FCPA apply to all companies required to register and report under the Securities Exchange Act of 1934. These companies must maintain books, records, and accounts in reasonable detail that accurately and fairly reflect transactions. The FCPA also requires these companies to maintain a system of internal accounting control that provides certain reasonable assurances, including that corporate assets are not used for bribes)

Rey Corp.'s management intends to solicit proxies relating to its annual meeting at which directors will be elected. Rey is subject to the registration and reporting requirements of the Securities Exchange Act of 1934. As a result, Rey must furnish its shareholders with A.A copy of its registration statement and bylaws. B.A preliminary copy of its proxy statement at the same time it is filed with the SEC. C.An annual report containing its audited statements of income for the 5 most recent years. D.An annual report containing its audited balance sheets for the 2 most recent years.

D.An annual report containing its audited balance sheets for the 2 most recent years. (Financial statements of the company must be provided only for annual meetings at which directors are to be elected (in the annual report) or if a merger or authorization to issue new shares is at issue. Audited balance sheets for the last 2 years and audited statements of income, cash flows, and changes in equity for the last 3 years should be included. Furthermore, even when no solicitation is made, management must still furnish an information statement similar to a proxy statement to all shareholders who have the right to vote at the meeting)

Under Section 12 of the Securities Exchange Act of 1934, in addition to companies whose securities are traded on a national exchange, what class of companies is subject to the SEC's registration requirements? A.Companies with annual revenues in excess of $5 million and 300 or more shareholders. B.Companies with annual revenues in excess of $10 million and 500 or more shareholders. C.Companies with assets in excess of $5 million and 300 or more shareholders. D.Companies with assets in excess of $10 million and 500 or more shareholders.

D.Companies with assets in excess of $10 million and 500 or more shareholders. (All regulated, publicly held companies must register with the SEC. Registration is required of all companies that have at least 500 shareholders of equity securities and total gross assets exceeding $10 million)

According to the Securities Act of 1933, which of the following statements is correct regarding an issuer of securities? A.All securities issuers must provide potential investors with a prospectus containing specified information. B.An issuer is permitted to advertise an initial offering of securities only through distribution of the prospectus. C.All securities issuers must register the securities offering with the Securities and Exchange Commission (SEC). D.If an issuer sells a security and fails to meet certain disclosure requirements, the purchaser may sell it back to the issuer and recover the price paid.

D.If an issuer sells a security and fails to meet certain disclosure requirements, the purchaser may sell it back to the issuer and recover the price paid. (A successful plaintiff is entitled only to monetary damages under Section 11. They are generally measured by the plaintiff's loss, but resale is not required to prove loss. If the purchaser sells the security back to the issuer, the purchaser will recover the price paid)

Under the Securities Exchange Act of 1934, a corporation whose common stock is listed on a national stock exchange A.Is prohibited from making private placement offerings. B.Must submit Form 10-K to the SEC except in those years in which the corporation has made a public offering. C.Must distribute copies of Form 10-K to its shareholders. D.Is subject to having the registration of its securities suspended or revoked.

D.Is subject to having the registration of its securities suspended or revoked. (The SEC is authorized by the 1934 act to impose sanctions to enforce its provisions. The SEC may deny, suspend, or revoke registration, or it may suspend trading of the securities. These sanctions are in addition to civil and criminal liability imposed by the federal securities laws)

Dee is the owner of 12% of the shares of common stock of D&M Corporation that she acquired in Year 1. She is the treasurer and a director of D&M. The corporation registered its securities in Year 2 and made a public offering pursuant to the Securities Act of 1933. If Dee decides to sell part of her holdings in Year 9, the shares A.Would be exempt from registration because the corporation previously registered them within 3 years. B.Must be registered regardless of the amount sold or manner in which they are sold. C.Would be exempt from registration because she is not an issuer. D.Must be registered if Dee sells 50% of her shares through her broker to the public.

D.Must be registered if Dee sells 50% of her shares through her broker to the public (In general, any offer to sell securities in interstate commerce is subject to registration unless the securities or the transaction is exempt. Most transactions are exempt because they involve sales by persons other than issuers, underwriters, or dealers, e.g., transactions by ordinary investors selling on their own account. Dee, however, is considered an issuer because she is a controlling person, that is, one who owns more than 10% of the company's stock and who has the direct or indirect ability to control the company. A sale of 6% of D&M's common stock to the public in the ordinary course of business (e.g., through a broker) would not qualify for an exemption under the Securities Act of 1933 and would be subject to SEC registration)

Given evidence of a violation of the federal securities laws, the SEC lacks the power to A.Subpoena witnesses. B.Compel the production of books and records anywhere in the United States. C.Determine responsibility for a violation in an administrative hearing and impose certain sanctions. D.Prosecute criminal cases.

D.Prosecute criminal cases. (The SEC is a federal administrative agency with both quasi-legislative and quasi-judicial authority. It issues rules and regulations under the securities laws, but it is also empowered to enforce these laws. Its powers include the ability to subpoena witnesses, books, and records and to conduct administrative hearings to adjudicate cases involving alleged breaches of the rules and regulations. It can also issue cease-and-desist orders directed against potential as well as actual violations. Because administrative agencies cannot impose criminal sanctions, the Justice Department must prosecute criminal cases involving violations of the securities laws)

The partnership of Rodgers & Higgs, CPAs, performed audits of Alt Corp., a publicly-traded company, for the past several years. After issuing the current year's audit report, the CFO of Alt confessed to having committed fraud against Alt. Under which of the following statutes would the investors most likely bring suit against Rodgers & Higgs? A.Securities Act of 1933, if they can prove ordinary negligence. B.Securities Act of 1933, if they can prove gross negligence. C.Securities Exchange Act of 1934, if they can prove ordinary negligence. D.Securities Exchange Act of 1934, if they can prove scienter.

D.Securities Exchange Act of 1934, if they can prove scienter. (The Securities Exchange Act of 1934 requires that the plaintiff prove there is (1) an oral or written misstatement or omission of a material fact or other fraud, (2) a connection with any purchase or sale of securities, (3) the defendant's intent to deceive (scienter), (4) reliance on the misstatement or indirect reliance (fraud-on-the-market), and (5) loss caused by the reliance. If the investors have lost money and can prove scienter on the part of the CPAs, they will have satisfied all the requirements of the Securities Exchange Act of 1934)