Accountants' Liability and Securities Law Ch. 32

Before a registration statement is filed, the '33 Act and the SEC regulations require extensive documentation, including which of the following?

- A letter of intent - Comfort letters - An underwriting agreement

The Sarbanes-Oxley Act was intended to impost stricter regulation and controls on how corporations do business through regulation of which of the following areas?

- Auditing - Internal corporate governance - Financial reporting

Securities regulations include which of the following?

- Disclosure requirements - Registration requirements - Specific requirements to exempt a securities offering from the federal securities scheme

Audit committees have substantial regulatory obligations under the SOX Act. These obligations include which of the following?

- Implementing a system of controls that involves a comprehensive examination of the audit reports and methods used by the company and outside auditors to properly report information that truly reflects the financial condition of the company - Establishing a structure that facilitates communication directly between the audit committee and the auditors - Having the authority to engage, monitor, and terminate the company's outside auditing firm

Which of the following are components of how federal securities statutes define securities?

- Securities statutes use a catchall definition of other investment transactions in a more generic sense. - The law recognizes specific forms of securities.

Which of the following laws have been passed in response to various historical events in the financial markets that have undermined public confidence in its institutions?

- The Sarbanes-Oxley Act - The Dodd-Frank Act - The Jobs Act

How did the U.S. Congress respond to the financial crisis that began in 2008?

- The U.S. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act - The government provided loans to key industries to help them through the crisis.

Section 13 of the Exchange Act requires public companies to file regular reports with the SEC in order to maintain their registration and to provide the public with ongoing disclosures via ______.

- annual reports - quarterly reports - special reports

The SEC's ______ was/were substantially increased by the SOX Act.

- enforcement alternatives - enforcement budget - jurisdiction

The PCAOB ______ the Sarbanes-Oxley Act mandates

- implements - enforces - administers

The SEC's executive powers include the power to ______.

- issue cease and desist orders - initiate criminal charges against an individual and/or company that has allegedly violated securities laws - investigate potential violations of securities laws and regulations

The Exchange Act's broad array of mandates on public companies includes ______.

- regular disclosure reports - disclosure of tender offers - restrictions on proxy voting

The Exchange Act's broad array of mandates on public companies includes disclosure requirements and trading restrictions for officers, directors, and shareholders owning more than ______ of the stock.

10 percent

Whistleblower rewards under the Dodd-Frank Act range from ______ to ______ percent of the recovery.

10; 30

A company becomes a reporting company subject to the Exchange Act if a class of its equity securities (other than exempted securities) is held by either ______ investors or ______ investors who are not accredited investors and on the last day of the issuer's fiscal year, its total assets exceed $______ million.

2,000; 500; 10

Under the Sarbanes-Oxley Act, anyone who alters, destroys, or conceals relevant documents is subject to up to how many years of incarceration?

20

Securities regulations include all but which of the following?

A categorical prohibition against the issuance of preferred stock

Which of the following is false regarding the primary market?

A company is said to "go public" when it sells its preferred stock shares for the first time to inside investors through the use of public markets such as the NYSE.

______ committees must have a structure in place to process and investigate any whistleblower complaints, and any party that engages in ______ is subject to civil action and federal criminal prosecution.

Audit; retaliation

The SOX Act makes key corporate officers more accountable for financial reporting by requiring that ______ and ______ personally certify the accuracy of all required SEC filings.

CEOs; CFOs

Under the ______ Act, the U.S. Congress imposed tighter restrictions on public corporations, financial markets, and the extent to which firms engage in risky investment transactions.

Dodd-Frank

True of false: The SOX Act requires a formal allegation of wrongdoing as a prerequisite for intervening in an extraordinary payment.

False

True or false: Due to the gravity of the action, the SEC does not have the power to suspend or revoke the professional licenses of brokers and others regulated by securities laws.

False

True or false: Government regulators have largely disregarded websites that blur the line between stock market simulation and reality by offering some type of reward or prize for successful trading.

False

True or false: In applying misappropriation theory, courts require that the breach of duty required to trigger liability be a breach of fiduciary duty.

False

______ commissioners, appointed by the U.S. ______ and subject to advice and consent approve by the U.S. ______, compose the SEC.

Five; president; Senate

Which of the following is true regarding the final prospectus?

It must be sent to any purchaser either before or at the time they purchase the securities.

Crowdfunding is done via the Internet through crowdfunding firms such as ______ or ______

Kickstarter; Peerbackers

The complementary theories of insider trading recognized by the U.S. Supreme Court include all but which of the following?

Malfeasance

Which of the following is false regarding the powers of the SEC?

Pursuant to its judicial powers, the SEC issues interpretative letters and no-action letters to advise the securities investment and trading community on how the SEC will treat a proposed transaction.

The SOX Act seeks to increase auditor independence through all but which of the following?

Requiring accounting firms to elect whether to offer auditing services or nonauditing services to the public

In the wake of multiple corporate corporate fraud and malfeasance scandals that began to emerge in 2000, a public outcry and a growing lack of investor confidence in corporate financial disclosures caused the U.S. Congress to overhaul the entire corporate governance regulatory by passing the _____ Act in 2002.

Sarbanes-Oxley

The ______ Act amended both the Securities Act of 1933 and the Securities Exchange Act of 1934 to address the corporate misdeeds that became public in 2000.

Sarbanes-Oxley

The ______ Act provided for additional enforcement apparatus and increased penalties for violation of existing securities laws.

Sarbanes-Oxley

The ______ requires public companies to establish a code of ethics and conduct for its top financial officers and generally prohibits a public corporation from ______ its officers and directors.

Sarbanes-Oxley Act; lending money to

The primary scope of the ______ is the regulation of original issuance (and reissuance) of securities to investors by business venture issuers.

Securities Act of 1933

The ______ regulates the issuance of securities to public investors by requiring that companies file certain information intended to ______ investors who are considering entering into a securities transaction.

Securities Act of 1933; inform

The centerpiece of the regulation of trading of securities is the ______.

Securities Exchange Act of 1934

Which of the following is true regarding securities law?

Securities law is primarily a matter of federal statutes and regulations, but all states have similar disclosure and fraud laws within state borders.

______ securities laws are commonly known as ______ laws.

State; blue-sky

Which of the following is false regarding the Securities Act of 1933?

The U.S. Congress has provided special exemptions for issuance of securities to relatively large groups of unqualified investors.

The SEC regularly updates its guidance for reporting companies as to what specific subjects must be included in disclosures. Most recently, the SEC has issued guidance or regulations covering disclosure regarding all but which of the following?

The minimum score that a company must earn on the MSCI Socially Responsible Investing Index

The '33 Act separates the registration process into all but which of the following stages?

The winding up period

Which of the following is false regarding blue-sky laws?

They consist of state, federal, and international securities laws.

True or false: Certain types of debt instruments, such as a promissory note secured by a home mortgage, are not securities.

True

True or false: Much of the regulation concerning fraud or securities sales boils down to whether the seller or issuer has made truthful and sufficiently full disclosures about the security itself.

True

True or false: Public companies have been subject to regulatory safeguard requirements since the Exchange Act of 1934 was enacted.

True

True or false: The Howey test remains largely intact.

True

True or false: Under the SOX Act, an officer who certifies a required financial report filing knowing that the report is inaccurate will be subject to criminal penalties of up to $1 million in fines and 10 years of incarceration.

True

True or false: As a practical matter, the '33 Act requirements for registration only apply to a limited number of issuers.

True the '33 Act requirements for registration only apply to a limited number of issuers.

The U.S. Supreme Court has defined a fact as material under federal securities laws if there is ______ that a(n) ______ investor would consider it important in making a securities-related decision.

a substantial likelihood; reasonable

The SOX Act requires that public companies maintain ______ committees composed entirely of independent ______.

audit; directors

Violators of the SOX Act are subject to ______.

both civil penalties and criminal prosecution

Multiple Choice Question After securities are permitted to be sold to the public, ______ still subject to the SEC's oversight.

both the prospectus and the marketing materials are

Fundamentally, the Dodd-Frank whistleblower provisions are based on a(n) ______ plan.

bounty

Under the SOX Act, to prevent the secret looting of a company by its officers, executive performance bonuses are required to be retroactively forfeited back (known as a ______ provision) to the company if the bonuses were tied to any financial reports that later were deemed to be false or to have been issued without appropriate controls.

clawback

A(n) ______ includes an opinion of the issuer's corporate counsel verifying the business venture's adherence to corporate formalities and compliance and an opinion from the business venture's accounting firm verifying the accuracy of the business's financial records.

comfort letter

According to the U.S. Supreme Court in SEC v. W.J. Howey Co., "(A)n investment contract for the purposes of the Securities Act means a ______, transaction or scheme whereby a person invests his money in a(n) ______ enterprise and is led to expect profits solely from the efforts of a promoter of a third party, it being ______ whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in that enterprise."

contract; common; immaterial

The issuance and trading of securities are regulated through various laws that have been passed in response to various historical events in the financial markets that have undermined public confidence in its institutions, such as the ______ and the ______.

corporate and accounting scandals in 2001; global recession of 2008

Multiple Choice Question The underlying premise of all securities regulation is ______.

disclosure

Crowdfunding may be used to raise money ______.

either through debt or equity

The SOX Act ______ the ______ for ______ lawsuits to be filed by defrauded investors attempting to recover lost money.

extended; statute of limitations; civil

Upon approval by a(n) ______, the SOX Act allows the SEC to force any extraordinary corporate payouts into a government-controlled ______ that is held pending further investigation by authorities.

federal court; emergency escrow fund

The Sarbanes-Oxley Act imposes higher levels of fiduciary responsibility for those involved in corporate ______.

governance

The SOX Act ______ the scope and methods of enforcing securities law.

greatly expanded

Unlike many administrative agencies, the SEC is an ______ agency that ______ a seat in the U.S. president's cabinet and ______ subject to direct control by the President.

independent; does not have; is not

Whereas the '33 Act regulates the ______ of securities to the public by a corporation, the Exchange Act regulates the sale of securities between investors ______ an investor has purchased them from a business entity issuer.

issuance; after

The materiality requirement uses a(n) ______ standard to test whether misinformation is likely to have induced an investor to purchase the securities.

objective

Securities transactions occur in two settings: (1) original and reissuance of securities by a business to raise capital (known as the ______ market), and (2) the purchase and sale of issued securities between investors (known as the ______ market).

primary; secondary

The ______ intended to give investors a realistic view of the issuer's business, risk factors, financial position, financial statements, and disclosures concerning directors, officers, and controlling shareholders.

prospectus is

There are two statutory provisions that trigger reporting under the Exchange Act. The second trigger is when a ______ offering occurs ______ a securities exchange listing.

public; without

During the waiting period, the SEC may issue a ______ order that prevents the registration from taking effect. If the SEC does not act, the registration statement becomes effective ______ days after it was filed.

refusal; 20

The second part of the ______ is ______ that documents and supports the ______.

registration statement; supplemental information; prospectus

The Sarbanes-Oxley Act expanded the definition of ______ and created a new federal criminal law outlawing ______ fraud.

securities fraud; conspiracy to commit

SOX Act regulations set standardized financial reporting formats and restrict certain types of accounting methods that are not transparent to auditors, such as using ______ to hold corporate assets.

special offshore tax entities

The federal securities laws are rooted in the ______

stock market crash of 1929

Potential investors who are interested in learning more about the stock market or wish to try a particular trading strategy without risking their money have several Internet-based stock market simulators at their disposal. These simulators are referred to as ______.

stock market games

During the SEC review phase, an issuer may use newspaper or other media advertising that contains limited information about the offering. This is called a(n) ______.

tombstone ad

Under the SOX Act, anyone who alters, destroys, or conceals relevant documents is subject to up to 20 years of incarceration. The law applies ______ to any party who has ______ the documents and covers any actions performed ______ a formal investigation is commenced.

universally; control over; either before, during, or after

A(n) ______ is a party that communicates information relating to illegal conduct in financial reporting or corporate governance and is protected against retaliation by the company.

whistleblower