D216 - Unit 8
Lawnscape Company and Mowers Inc. make yard tools. Both companies use only steel produced in the United States. Lawnscape's ad claims, "We use only U.S. steel, while our competitor uses inferior foreign steel!" Under the advertising standards of the Federal Trade Commission Act, this statement is most likely
" a false claim about a competitor's product." In this case Lawnscape is making a false claim that appears to be based on factual evidence. Advertising that appears to be based on factual evidence but, in fact, is not reasonably supported by evidence will be deemed deceptive.
Jazz Inc. makes and markets music. The company wants to make an initial public offering of securities via the Internet. Most likely, this offering
" can avoid high costs and complicated procedures." Setting up its IPO on the internet may save Jazz the costs of hiring an investment banker and other agents, but it does not absolve the company from all of the other requirements. Jazz must still produce the registration statement.
Which firm would qualify as a well-known seasoned issuer (WKSI)?
"A firm that has $1 billion stock outstanding". A firm with at least $700 million of stock outstanding would qualify as a well-known seasoned issuer.
Who monitors the external auditor of a company?
"Audit committee". The Sarbanes-Oxley Act of 2002 entrusted the audit committee with the responsibility of appointing the external auditors.
What determines the compensation of the CEO of a publicly listed corporation?
"Compensation committee". An important committee of the board of directors is the compensation committee, which determines the compensation of the company's officers. As part of this process, the committee must assess the officers' performance and attempt to design a compensation system that will align the officers' interests with those of the shareholders.
A business motto says, "they cannot believe that it's not sour cream" when, in fact, the product is sour cream. The Federal Trade Commission issues a cease-and-desist order and demands that it advertises anew as producing sour cream. What is this sanction called?
"Counteradvertising". When a business is required to advertise anew, it is complying with a sanction known as counteradvertising.
Credit Loan Company extends credit in the ordinary course of its business. Under the Truth-in-Lending Act, Credit Loan must inform potential borrowers of
"Credit Loan's credit terms." A key statute regulating the credit and credit-card industries is the Truth-in-Lending Act (TILA), the name commonly given to Title I of the Consumer Credit Protection Act, as amended. The TILA is basically a disclosure law. It is administered by the Federal Reserve Board and requires sellers and lenders to disclose credit terms and loan terms so that individuals can shop around for the best financing arrangements.
The Sarbanes-Oxley Act (SOX) of 2002 requires senior-level corporate officers to establish and maintain an effective system of internal controls. What are internal controls?
"Disclosure measures and procedures to ensure accuracy and timeliness of company financial reports". The Sarbanes-Oxley Act requires high-level managers to establish and maintain an effective system of internal controls. The system must include disclosure controls and procedures to ensure that company financial reports are accurate and timely and to document financial results prior to reporting.
A consumer is told that he cannot receive a credit card because he receives public assistance benefits. Under which act might he bring suit against the lender?
"Equal Credit Opportunity Act". The Equal Credit Opportunity Act prohibits denying credit or credit discrimination because an individual receives certain forms of income, such as public assistance benefits.
A salesperson claims that many flavored waters contain no sugars, leading to weight loss. The salesperson neglects to mention that these same flavored waters may contain other types of artificial sweeteners, which may have negative health effects. What has the salesperson's statement likely contained?
"Half-truth". The salesperson's statement contained a half-truth because he mentions sugar, but not the artificial sweeteners, which is a true but misleading and incomplete statement.
Who is responsible for filing the management's assessment of internal controls report with the SEC?
"Independent auditor". Section 404(b) of the Sarbanes-Oxley Act of 2002 requires independent auditors to report on management's assessment of internal controls to the SEC.
A person engages colleagues to invest in a new offshore company but uses the investments to pay themselves and other initial investors. What is this type of arrangement?
"Ponzi scheme". A Ponzi scheme is where a person engages in fraudulent investment activity that pays a return to investors from new capital to the person (and others) rather than from a legitimate investment.
Under which type of exemption must an issuer believe that each unaccredited investor has sufficient knowledge to be capable of evaluating the investment's potential return and risk?
"Private placement". A private placement exemption applies for transactions not involving any public offering and where the investors each have sufficient knowledge to understand and determine the securities' merits and risks.
A share of stock is determined to be part of an exempt transaction under Regulation A. Even if it is exempt from the registration requirements, which law might still apply for antifraud provision
"Securities Act of 1933". Even if a security is exempt under Regulation A for registration, it is still subject to the antifraud provisions of the Securities Act of 1933.
Which securities law or act governs when the Securities and Exchange Commission attempts to prohibit the use of manipulative practices in violation of its rules and regulations?
"Securities Exchange Act of 1934". The Securities Exchange Act of 1934 applies to and governs these manipulative practices.
Who is responsible for the establishment and maintenance of systems of internal control in a corporation?
"Senior-level corporate officers". The Sarbanes-Oxley Act requires high-level managers to establish and maintain an effective system of internal controls. The system must include disclosing controls and procedures to ensure that company financial reports are accurate and timely and to document financial results prior to reporting.
Who certifies for the accuracy of information in the financial statements filed with the SEC?
"The CEO and CFO". The Sarbanes-Oxley Act (SOX) of 2002 requires the CEO and the CFO to certify financial statements that are filed with the SEC. CEOs and CFOs have to certify that filed financial reports fully comply with SEC requirements and that all of the information reported fairly represents in all material respects, the financial conditions and results of operations.
What is the stated objective of the Sarbanes-Oxley Act (SOX) of 2002?
"To address corporate governance through increased corporate accountability". The Congress passed the Sarbanes-Oxley Act of 2002 to address issues relating to corporate governance. Generally, the act attempts to increase corporate accountability by imposing strict disclosure requirements and harsh penalties for violations of securities laws.
What is the Sarbanes-Oxley Act certification requirement for systems of internal control by the CEO and CFO?
"To maintain an internal control system and disclose any deficiencies in the system to the independent auditors". As per SOX-2002, the signing officer or officers must certify that they have established an internal control system to identify all material information and that any deficiencies in the system were disclosed to the auditors.
When might a court order treble (triple) damages under the Telephone Consumer Protection Act (TCPA)?
"Willfully violating the act". The willful or knowing violation of the Telephone Consumer Protection Act allows a court to award treble damages.
An outside directors is
"a member of a company's board of directors who is not an employee or stakeholder in the company." Outside directors are paid an annual retainer fee in the form of cash, benefits and/or stock options. Corporate governance standards require public companies to have a certain number or percentage of outside directors on their boards.
Under the Securities Act of 1933, securities include
"any instrument representing corporate ownership or debt." Under the Securities Act of 1933, securities include any instrument representing corporate ownership or debt. The Securities Act of 1933 was passed after the crash of 1929 as a way to regulate the buying and selling of stock (ownership) and bonds (debt).
Hearth & Home Furniture store advertises bedroom suites at a "Special Low Price of $599." When Ilene tries to buy one of the suites, Jill, the salesperson, tells her that they are all sold and no more are obtainable. Jill adds that Hearth & Home has other bedroom suites available for as low as $2,599. This is
"bait-and-switch advertising." Some retailers systematically advertise merchandise at low prices to get customers into their stores. Under the FTC guidelines, bait-and-switch advertising occurs if the seller does any of the following: 1. refuses to show the advertised item, 2. fails to have a reasonable quantity of the item in stock, 3. fails to promise to deliver the advertised item within a reasonable time, or 4. discourages employees from selling the advertised item.
Bev is the chief executive officer of Chef Cafés Inc., which is required to file certain financial reports with the Securities and Exchange Commission (SEC). Under the Sarbanes-Oxley Act of 2002, Bev must
"certify that the reports are complete and accurate." Section 906 of the Sarbanes-Oxley Act requires that chief executive officers certify the accuracy of the information in the corporate financial statements. The statements must "fairly represent in all material respects, the financial conditions and results of operations of the issuer." This requirement makes the officers directly accountable for the accuracy of their financial reporting and precludes any "ignorance defense" if shortcomings are later discovered.
Dez is the chief financial officer of Elements Corporation, which is required to file certain financial statements with the Securities and Exchange Commission (SEC). Under the Sarbanes-Oxley Act of 2002, Dez must personally
"certify that the statements are accurate." Section 906 of the Sarbanes-Oxley Act requires that chief financial officers certify the accuracy of the information in the corporate financial statements. The statements must "fairly represent in all material respects, the financial conditions and results of operations of the issuer." This requirement makes the officers directly accountable for the accuracy of their financial reporting and precludes any "ignorance defense" if shortcomings are later discovered.
Mattress Company advertises a special sale—all bedding, half price. The ad does not state that the sale price does not include delivery or shipping costs. To avoid claims of deceptive advertising, Mattress should
"clearly and conspicuously disclose the shipping cost in its ads." It can be assumed from the ad that Mattress usually offers free shipping. A consumer would reasonably assume that it applies to the sale merchandise as well. In this case, it does not, and to avoid a problem, Mattress needs to say so.
Rollo has a credit card from Shopping Cards Inc. To change the terms, Shopping Cards must
"give Rollo advance notice." In an amendment to TILA, A company must provide forty-five days' advance notice to consumers before changing its credit-card terms.
Consumer Staples Inc. includes in its advertising claims that the product is guaranteed to regrow a full head of hair (accompanied by before and after pictures), obvious exaggerations, vague generalities, and puffery about its products. The firm may be subject to sanctions for
"guaranteeing that it will regrow hair." Deceptive advertising occurs if a reasonable consumer would be misled by the advertising claim. Advertising that appears to be based on factual evidence but, in fact, is not reasonably supported by evidence will be deemed deceptive. The problem here is that they have included before and after pictures with no disclaimer.
Equity Corporation, and its officers, directors, employees, and shareholders, buy and sell securities. Section 10(b) of the Securities Exchange Act of 1934 applies to the trading of securities
"in almost any circumstances." Section 10(b) is one of the more important sections of the Securities Exchange Act. This section prohibits the use of any manipulative or deceptive mechanism in violation of SEC rules and regulations. Among the rules that the SEC has promulgated pursuant to the 1934 act is SEC Rule 10b-5, which prohibits the commission of fraud in connection with the purchase or sale of any security. SEC Rule 10b-5 applies to almost all cases concerning the trading of securities, whether on organized exchanges, in over-the-counter markets, or in private transactions. Generally, the rule covers just about any form of security. The securities need not be registered under the 1933 act for the 1934 act to apply. The audit committee of the Board is responsible for seeing to it that there is compliance.
Furnaces & Filters Inc. is a public company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, to ensure that the firm's financial results are accurate and timely, its senior officers must set up and maintain
"internal "disclosure controls and procedures." Sections 302 and 404 of the Sarbanes-Oxley Act require high-level managers (the most senior officers) to establish and maintain an effective system of internal controls. The system must include "disclosure controls and procedures" to ensure that company financial reports are accurate and timely and to document financial results prior to reporting. Senior management must reassess the system's effectiveness annually. Some companies have had to take expensive steps to bring their internal controls up to the federal standards. Hundreds of companies have reported that they identified and corrected shortcomings in their internal control systems as a result.
Dairy Stores Inc. owns and operates convenience stores. The firm wants to make an initial public offering of securities. If Dairy qualifies for an exemption from the federal registration requirement, the firm is
"not necessarily exempt from a state registration requirement." Per the U.S. Securities and Exchange Commission (SEC), under the Securities Act, if a company's offering qualifies for certain exemptions from registration, that offering is not required to be registered or qualified by state securities regulator.
Leo's application to Metro Bank for a credit card is denied on the basis of what Leo believes is an inaccurate credit report. Leo should
"obtain his credit report and notify the reporting agency of inaccuracies." Any time a consumer is denied credit or insurance on the basis of their credit report, the consumer must be notified of that fact.
United Delivery Corporation is a public company whose shares are traded in the public securities markets. Under the Securities Act of 1933, United Delivery is required to
"register its securities transactions unless they qualify for an exemption." United Delivery is required to register its securities unless they qualify for an exemption. Save & Continue
The Compensation Committee of the Board is responsible for:
"selecting the components and amounts of executive compensation." The components of compensation plans, as well as how those components are structured and implemented, vary substantially between corporations. Most compensation plans consist of one or more of the following components: Base salary; Bonuses—typically short-term goals with cash-based incentives; Long-term incentives—often come with corporate equity; Benefits—components such as health, dental or life insurance; vacation time; or company-sponsored savings and investment plans; Perquisites—grants or privileges such as company cars, business cell phones and use of corporate properties. While the committee bears the authority for compensation, consistent pressure from investors requires the committee members to establish clear performance targets and a clear mechanism for measuring whether executives have met their benchmarks.
Auto & Life Insurance Company fails to notify its new customers when they are charged higher premium rates as a result of their credit scores. This is a willful violation of
"the Fair Credit Reporting Act." Any time a consumer is denied credit or insurance on the basis of her or his credit report, the consumer must be notified of that fact. The notice must include the name and address of the credit reporting agency that issued the report. The same notice must be sent to consumers who are charged more than others ordinarily would be for credit or insurance because of their credit reports.
Spectrum Paints Inc. is a public company whose shares are traded in the public securities markets. Under the Sarbanes-Oxley Act of 2002, the firm is subject to the direct corporate governance requirements of
"the federal government." In 2002, following a series of corporate scandals, Congress passed the Sarbanes-Oxley Act. The act also created a new entity, called the Public Company Accounting Oversight Board, to regulate and oversee public accounting firms. Other provisions of the act established private civil actions and expanded the SEC's remedies in administrative and civil actions. The Sarbanes-Oxley Act introduced direct federal corporate governance requirements for publicly traded companies. The law addressed many of the corporate governance procedures just discussed and created new requirements to make the system work more effectively. The requirements deal with independent monitoring of company officers by both the board of directors and auditors.
Orbital Flights Inc. is required to register its securities under Section 12 of the Securities Exchange Act of 1934. This means that, with respect to Orbital, Section 16(b) of the act covers
"the short-swing activities of Orbital's insiders." The short-swing profit rule is a Securities and Exchange Commission (SEC) regulation that requires company insiders to return any profits made from the purchase and sale of company stock if both transactions occur within a six-month period. Section 16(b) of the 1934 act provides for the recapture by the corporation of all profits realized by an insider on purchase and sale, or sale and purchase, of the corporation's stock within any six-month period. It is irrelevant whether the insider uses inside information—all such short-swing profits must be returned to the corporation. The audit committee would monitor this.
Movie Time Corporation files a registration statement and delivers a prospectus to the appropriate parties. These items are intended to enable the evaluation of certain financial risks by
"unsophisticated investors." A sophisticated investor is a high-net-worth investor who is considered to have a depth of experience and market knowledge that makes them eligible for certain benefits and opportunities. An unsophisticated investor, on the other hand, is someone new to the market or does not have sufficient knowledge of the investment opportunity to make an informed decision. As such, the registration document must be written in simple, easy to understand English.
Home Stuff Corporation is poised to issue securities that, under the Securities Act of 1933, are exempt. This means that the securities can be sold
"without being registered."Certain types of securities are exempt from the registration requirements of the Securities Act because they are low-risk investments or are regulated by other statutes. Exempt securities maintain their exempt status forever and can also be resold without being registered.
prospectus
A prospectus is a formal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering to the public. A prospectus is filed for offerings of stocks, bonds, and mutual funds.
What is being used when a promotion matches the rest of a web page's content?
Native ad". A native ad is an advertisement that follows the web page's native form, or content, and functions as part of the user experience.
Household Products Corporation wants to make an offering of securities to the public. The offering is not exempt from registration under the Securities Act of 1933. Before the firm sells its securities, it must provide investors with
a prospectus." Before the firm sells its securities, it must provide investors with a prospectus. Section 5 of the Securities Act broadly provides that if a security does not qualify for an exemption, that security must be registered before it is offered to the public.
Pharma Corporation is a public company whose shares are traded in the public securities markets. With respect to financial and other significant information concerning its securities, the Securities Act of 1933
requires disclosure." The act was designed to prohibit various forms of fraud and to stabilize the securities industry by requiring that investors receive financial and other significant information concerning the securities being offered for public sale. Basically, the purpose of this act is to require disclosure. Much of the information must be included in the registration statement and/or the prospectus. There is also a requirement that financial statements, etc. be publicly available.