Unit 11

State securities regulation statutes

Blue Sky Laws

The Securities Act of 1933

Contains rules on proxy solicitation Correct Is limited to new securities issues Applies to trading securities in the secondary market Contains penalty provisions including fines but not prison terms

Which of the following is false? The Securities and Exchange Commission (SEC) is composed of ten members. The SEC was created by Congress. The SEC is bipartisan: not more than three commissioners may be from the same political party. The SEC has the power to issue subpoenas.

Correct The Securities and Exchange Commission (SEC) is composed of ten members. The SEC was created by Congress. The SEC is bipartisan: not more than three commissioners may be from the same political party. The SEC has the power to issue subpoenas.

For the purposes of defining a security, the U.S. Supreme Court has stated the following: "The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." In connection with the definition of a security, which of the following is true?

Correct The fact that investors are required to exert some efforts if a return is to be achieved does not automatically preclude a finding that a scheme is a security. The fact that investors are required to exert some efforts if a return is to be achieved automatically precludes a finding that a scheme is a security. The definition of a security does not include treasury stock. The definition of a security includes a will.

On February 15, Donald, a director of the Mickey Mouse Corporation, purchases 1,000 shares of Mickey Mouse for $50 a share. On June 1, Donald sells the shares for $60 a share. What result?

Donald must split his $10,000 profit with Mickey Mouse Corporation since he is an insider. Since Donald has held his shares more than 90 days, his short-swing profit will not be recaptured. Since Donald is not an officer in the corporation, the short-swing profit provisions are inapplicable. Correct Donald must pay back the $10,000 profit even if he had no inside information.

Held that proof of scienter is required in private damage actions under Rule 10b-5

Ernst & Ernst v. Hochfelder

If a company engages in exclusively intrastate business, the federal securities laws will not apply.

False

The SEC's fundamental mission is to assure adequate disclosures in connection with the extension of consumer credit.

False

The Securities Act of 1933 authorized the establishment of the Securities and Exchange Commission.

False

The Securities Act of 1933 does not apply to unincorporated entities.

False

The Securities Exchange Act of 1934 does not require disclosures when control of a company is being sought through a tender offer.

False

The Securities Exchange Act of 1934 is known as the "Truth in Securities Law."

False

Federal law passed in response to bribery of foreign officials by American companies

Foreign Corrupt Practices Act

The U.S. Supreme Court has refined Rule 10b-5 in the following manner:

Proof of scienter is not required in private damage actions under Rule 10b-5. In private damage actions, negligence alone will result in liability. Correct Before a tippee has a duty to disclose or abstain from trading, there must be a breach of the insider's fiduciary duty. Before a tippee may be held liable, he must pass on his inside information to other investors.

Prohibits the use of any scheme, device or artifice to defraud in connection with the sale or purchase of any security

Rule 10b-5

SEC rule providing that a person who has inside information about a tender offer must either disclose the information or refrain from trading

Rule 14e-3

Provides for recapture of short-swing profits made by corporate insiders

Section 16(b)

Applies to new securities issues

Securities Act of 1933.

Applies to trading in the secondary market

Securities Exchange Act of 1934

Independent regulatory agency that investigates complaints or violations of law in securities transactions

Securities and Exchange commission

The Securities Act of 1933 is known as the "Truth in Securities" law.

True

The Securities Exchange Act of 1934 applies to corporations whose equity securities are traded over the counter if the company has at least $10 million in assets and 500 or more shareholders.

True

Under the Securities Act of 1933, the SEC has the power to issue a stop order to halt trading in the stock, even after the securities have gone on sale.

True

Used by courts in insider trading cases to hold noninsiders liable for misappropriating information from employers

misappropriation theory