Chapter 3 - The Securities Exchange Act of 1934 and Related Rules

When can a merged be completed?

A merger may not be completed until 30 days after the notice is filed.

How is an issuer share buyback conducted?

A modified Dutch Auction.

Any trade that's subject to investigation by a member firm requires what?

A written statement to be submitted to its SRO within one week after the completion of the investigation and a written statement of the firm's findings must be submitted to its SRO by the 15th of the month following the calendar quarter in which the trade occured.

What is the disclosure of insider transactions section of SOX?

All insider transactions are now reported electronically by the end of the second day following the date of the transaction.

What is the code of ethics for senior executives section of SOX?

All public companies are required to either establish a formal code of ethics for their principal executive and financial officers, or disclose in the annual report why the company doesn't have a code of ethics.

What is Form 10-K?

Also referred to as the annual report, will include information that a company is required to disclose to the SEC.

What is a covered person?

An issuer or individual that's making a tender offer, or the investment bank acting as the dealer-manager in the transaction.

What is the bounty award for eligible whistleblowers?

Between 10% and 30% of the monetary sanctions collected in actions brought by the SEC and/or actions brought by certain other regulatory and law enforcement authorities.

Are closed-end investment companies securities and open-end investment company (mutual fund) securities registered under the Investment Company Act of 1940 considered 13(f) securities?

Closed-end funds, yes; open-end - no.

What is Rule 10b-18?

Created by the SEC to control how an issuer, or an affiliate, may buy its own stock in the secondary market.

What is Regulation M-A?

Designed to facilitate communications and disclosures made by companies engaged in cash and stock tender offers, or mergers and acquisitions.

What is Section 12(k) of the Exchange Act?

Gives the Commission the authority, in an emergency, to issue orders to alter, supplement, suspend, or impose requirements or restrictions with respect to any matter subject to SEC or SRO regulation.

What is Form 8-K?

If an event occurs that would materially affect the issuer's financial condition or share price, a report must be made to the SEC.

What is Regulation FD?

Issuers that make disclosure of material, non-public information must do so publicly.

What is the purpose of a pricing opinion?

It addresses whether the price offered is fair (within a reasonable range of prices).

What is Section 12(k)(1) of the Exchange Act?

It gives the SEC the authority to impose certain trading suspensions if it finds the action is in the public interest and for the protection of investors. The SEC may: - Suspend trading in any security (other than an exempted security) for a period not exceed 10 business days, and; - Suspend all trading on any national securities exchange or otherwise 9in securities other than exempted securities) for a period not exceeding 90 calendar days. This type of suspension may not take effect if the SEC notifies the President of the United States and the President disapproves of the suspension.

How long may emergency orders remain in effect?

No more than 10 business days, including extensions.

What is short tendering?

Tendering securities that you don't own.

What is the maximum fine and prison sentence for individuals for violating the Exchange Act?

The maximum fine is $5,000,000, imprisonment for 20 years, or both, for individuals.

What is SEC Rule 14a-8?

The rule that addresses when a company must include a shareholder proposal in its proxy.

What is the amount of stock limited to purchase on any single day (Rule 10b-18)?

The total volume on any single day may not exceed 25% of the ADTV for that security.

What are the civil penalties for violating insider trading rules?

Up to three times the amount of gain, or loss avoided, in the transactions. The SEC may also demand disgorgement of profits.

What is painting the tape?

When washed sales or price manipulates appear on the Consolidated Tape?

What is disgorgement?

Where a corporation may sue for a recovery of the profit if an insider sells stock at a profit within six months of its acquisition.

When must action be brought when discovering manipulative activity?

Within three years of the manipulative activity and within one year of discovery.

Are Pink Sheets that are not Section 12 and ETFs considered 13(f) securities?

Yes.

What is the maximum fine for businesses for violating the Exchange Act?

$25,000,000.

The Rule 10b-18 safe harbor is available to an issuer that bids or purchases its common stock either:

- From the reopening of trading to the close of trading on the same day as the imposition of the market-wide trading suspension or; - At the next day's opening, if the market-wide trading suspension was in effect at the scheduled close of trading.

In a partial tender offer, a person is considered to own (to be long stock) if:

- Has title to the stock (or the person's agent has title to the stock). This includes owning the stock or an equivalent security, such as a convertible security, warrant, or right. - Has entered into an unconditional contract to buy the stock, but has not yet received it. - Owns a call option and has exercised the option.

A publicly traded corporation is required to register with the SEC if:

- It has total assets of more than $10 million that are held of record by either: -- 2,000 or more persons, or; -- 500 or more persons who are not accredited investors. - If its securities trade on a national securities exchange.

The Securities Exchange Act of 1934 covers many activities in the securities markets, including:

- Regulation of transactions in the secondary market, including anti-manipulation rules and regulation of the extension of credit in securities transactions. - Registration and regulation of broker-dealers. - Registration and regulation of securities exchanges. - Oversight of industry self-regulatory organizations (SROs). - Registration and regulation of companies with securities trading in the secondary market, including regular financial disclosures, proxy rules, and insider reporting.

What are the conditions required to make a tender offer?

- Shareholders must be notified of a tender offer no later than 10 business days from the date the tender is made. - Management of the subject company must advise shareholders of whether they recommend or decline the tender offer, or express that they have no opinion and remain neutral, or are unable to take a position on the tender offer. - Tender offers must generally be held open for at least 20 business days from the time they're announced to the security holders. - If the person making the offer increases or decreases the percentage of the class of securities being sought, the consideration being offered, or the dealer's soliciting fee, the offer must remain open for at least 10 business days from the date that notice of the change is given to security holders. - In order to extend the offer, the person making it must make a public announcement (such as a press release) no later than the earlier of (i) 9:00 a.m., Eastern Time, on the next business day after the scheduled expiration date of the offer, or (ii) for exchange-listed securities, the opening of the exchange on the next business day after the scheduled expiration of the offer. The notice must also disclose the approximate number of securities tendered to date. - It's considered fraudulent for a person that makes a tender offer to fail to pay the consideration offered, or fail to return the securities tendered, promptly after the offer is terminated or withdrawn. (Prompt payment generally means no more than two business [settlement] days from the conclusion of the offer).

What are the conditions of a 10b5-1 plan?

- The following must be executed prior to the person becoming aware of the insider information: -- A written, binding plan has been entered into to purchase or sell the security. -- The plan instructs another person to purchase or sell the security for this person. - The details of the plan must describe: -- The specified amount of securities to be purchased or sold, and the price and date on which the securities were to be sold, or; -- Include a written formula or algorithm for determining the amount of securities to be purchased or sold, and the price and the date on which the securities were to be purchased or sold. -- The person who created the plan is not permitted to exercise any subsequent influence over how, when, or whether to effect purchases or sales, and the individual who makes the purchase and sale decisions must not be aware of the material, non-public information.

If the following conditions are met, the SEC will assume that the issuer is not trying to manipulate its own stock price:

- Use one broker-dealer to place bids and make purchases in any trading session. - Avoid making purchases at certain times of the day. - Limit the bid or purchase price of securities at certain prices. - Limit the amount of stock purchased on any single day.

What is the annual reports section of SOX?

A company's management must institute a system of internal controls so that its financial reports will be as accurate and reliable as possible.

What is SEC Rule 14e-5?

A covered person in a tender offer may not purchase the common stock or convertible securities of the same issuer during the period that the tender is open.

What is the Hart-Scott-Rodino (HSR) Act?

A federal antitrust law that requires certain companies or financial investors, such as hedge funds planning a merge or acquisition, to file notice with the Federal Trade Commission (FTC) and the Antitrust Division of the Justice Department, before the deal is completed.

What is defined as an emergency under Rule 12(k)?

A major market disturbance characterized by: - Sudden and excessive fluctuations of securities' prices generally, or a substantial threat of such fluctuations, that threaten fair and orderly markets, or; - A substantial disruption of the safe or efficient operation of the national system for clearance and settlement of securities, or threat to such operation.

What is trading ahead?

A prohibited practice where trading by a firm or individual based on information regarding a large client's potential buying.

What is a preliminary proxy statement?

A proxy that must be filed with the SEC at least 10 days prior to the date the definitive proxy is sent to shareholders.

What is a block purchase defined under Rule 10b-18?

A quantity of stock that either: - Has a purchase price of $200,000 or more. - Is at least 5,000 shares with a purchase price of at least $50,000. - Is at least 20 round lots that total 150% or more of the trading volume for that security (or, if trading volume data is not available, is at least 20 round lots that total 1/10th of 1% of the outstanding shares of the security, less the shares beneficially owned by affiliates.

What does Regulation M-A require?

A summary term sheet to be provided to investors as part of the disclosures made in a tender offer or merger.

What is Schedule 13G?

An alternative to Schedule 13(D), is usually filed by institutional investors (e.g., mutual fund companies) that have no intention of influencing or controlling the issuer (passive investors).

What is Form 35of SEC Rule 16a-1?

An annual filing by insiders covering certain transactions, such as gifts.

What are the criminal penalties for violating insider trading rules?

An individual is subject to fines of up to $5 million and/or imprisonment for up to 20 years for each violation.

What is an insider according to SEC Rule 16a-1?

An insider is a director, officer, or owner of more than 10% of the stock of a corporation.

What is the financial disclosure section of SOX?

Annual and quarterly reports filed with the SEC must disclose all material off-balance sheet transactions.

How does the SEC determine which securities are equity securities and whether the filing of Form 13F is required?

Any equity security that's registered pursuant to Section 12 of the Securities Exchange Act.

What is Section 14 of the Exchange Act?

Any person who makes a tender offer and becomes the owner of more than 5% of a company is required to file Schedule TO (tender offer) as soon as feasible on the commencement date.

What is the Whistleblower Program?

Created by Congress to provide monetary incentives for individuals to come forward and report possible violations of the federal securities laws to the SEC.

What is the Sarbanes-Oxley Act (SOX)?

Created in 2002, the SEC implemented new disclosure and corporate governance rules for publicly traded companies. These rules make senior management more directly accountable for the company's internal control system and the financial information that is releases to the public.

What is shorting against the box?

Executing a short sale against a long position held elsewhere.

What is the EDGAR system?

Free access provided by the SEC to various forms, schedules, and reports. Stands for the Electronic Data Gathering, Analysis, and Retrieval.

What is a Form 10-Q?

From an SEC reporting company, a requirement to be filed after the end of each of the first three fiscal quarters of each fiscal year.

What is a definitive proxy?

Given to shareholders to provide them with the information that will allow them to make an informed decision on the matter being voted on and must be filed with the SEC by no later than the date it's first sent to shareholders.

What is SEC Rule 16a-1?

Insider individuals are required to report to the SEC within 10 days of becoming insiders regarding the amount of the issuer's equity securities they own. They're also required to report any changes in their position no later than the second business day following the change in position.

What does a 10b5-1 plan allow?

It allows a person to have an affirmative defense against insider trading if certain conditions are met.

What is an information barrier?

It consists of a set of procedures for preventing the transmission of confidential information from one department to another within a broker-dealer.

What is SEC Rule 13e-3?

It governs the going private transactions by certain issuers or their affiliates, and involves transactions in which an issuer or an affiliate of the issuer is purchasing its common stock, which will likely cause the company to be delisted from an exchange or no longer considered a reporting issuer.

What is insider trading?

It involves the purchase or sale of securities using material, non-public information about those securities in a fradulent manner.

What is SEC Rule 14-e3?

It prohibits a person from trading while in possession of material, non-public information concerning a tender offer.

What is SEC Rule 14a-6?

It relates to the filing of information on the Proxy Statement (Form 14A). The SEC requires a company to provide shareholders with a proxy statement prior to its annual meeting.

What is the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA)?

It required broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of the broker-dealer's business, to prevent the misuse of material, non-public information by the broker-dealer or associated person.

What is Section 13(D) of the Exchange Act?

It requires anyone who acquires more than 5% of an issuer's equity securities to notify the issuer, the exchange where the securities are traded, and the SEC within 10 days after the acquisition.

What is the additional requirement of the HSR Act?

It requires financial investors to file and comply with the 30-day waiting period for stock transactions and a 15-day period for cash transactions, unless the purchase was for investment purposes only and without the intent to control the company.

What are Rules 13a-11 and 13a-13 of the Act?

It requires issuers of securities are registered with the SEC (Section 12 securities) file an annual report on Form 10-K and quarterly reports on Form 10-Q.

What is SEC Rule 13f-1 of the Exchange Act?

It requires quarterly filings when institutional investment managers (e.g., investment companies, holding companies, and hedge funds) exercise investment discretion over at least $100,000,000 in equity securities.

What is the CEO and CFO certifications of annual and quarterly reports section of SOX?

It requires the principal executive officer and the principal financial officer of public companies to personally certify that the company's quarterly and annual reports are accurate and complete, and that effective controls and procedures have been established relating to the disclosure of all material information.

What position must you have in order to tender securities?

Net long.

Are insiders allowed to sell short a stock?

No.

What are short-swing profits?

Profits earned within six months of purchase.

What is the loans to officers and directors section of SOX?

Prohibits publicly traded companies from making personal loans to their executive officers and directors.

What is the Official List of Section 13(f) securiites?

Published by the SEC, a list of equity securities that will require an institutional investment manager to file Form 13F.

What is SEC Rule 13e-4?

Regulation of an issuer making a tender offer for its own securities (share buybacks).

What is Section 404 of SOX?

Requires an SEC-reporting company (public company) and its internal auditory (accounting firm) to test the internal controls that are relevant to its financial reporting.

What is a summary term sheet?

Serves as an overview of material information and must provide a cross-reference to the more detailed disclosures found later in the document.

What is a modified Dutch Auction?

Shareholders select the price within a specified price range at which they're willing to sell their shares.

What are matched orders?

Similar to wash sales, they involve two persons acting in concert to buy and sell a security for the purpose of raising or depressing its price.

Who is responsible for criminal action?

The Department of Justice (DOJ).

What is the SEC and what created it?

The Exchange Act authorized the creation of the Securities and Exchange Commission, which has been charged with enforcing the securities laws and with creating rules to implement those laws.

How many shares are accepted in a partial tender offer?

The exact number of shares to be accepted from any person tendering stock is unknown until all tenders are collected and counted.

What is Form 4 of SEC Rule 16a-1?

The form filed regarding changes in beneficial ownership.

What is Form 3 of SEC Rule 16a-1?

The initial filing when an individual becomes an insider.

What are restricted lists and watch lists?

The restricted and watch lists include securities that employees are either restricted or prohibited from trading, or issues that are subject to closer scrutiny by the member firm. The restricted list must be distributed to employees, while the content of the watch list are generally known only to selected members of the legal and compliance departments.

What is Rule 10b-5?

This rule makes it unlawful, in connection with the purchase or sale of any security, to: - Employ any device, scheme, or artifice to defraud. - Make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. - Engage in an act, practice, or course of business that operates or would operate as a fraud or deceit upon a pesron.

What are wash sales?

Wash sales represent the purchase and sale of securities by an individual without any beneficial change of ownership for the purpose of raising or depressing the price of the security.