Biz Law - Government Regulations

Question 1

Accredited investor

Answer 1

Investors who would not be wiped out by an unsuccessful investment.

• Banks, insurance companies and purses with net worth of over $1 million,
• Persons with annual income of over $200,000 for last two years
• Persons making purchases of more than $150,000 where purchase price is not more than 20% a person’s net worth at time of sale

Question 2

Broker

Answer 2

Person who serves as agent of investor in buying or selling securities of investor. Broker acts as an agent and owes fiduciary duty to the investor.

Question 3

Buying stock on margin

Answer 3

Using credit to buy and hold stock.

Percentage of credit allowed is controlled by the Federal Reserve Board and enforced by the SEC.

Question 4

Controlling person

Answer 4

Person who controls or is controlled by the issuer. Can be major stockholder, director or officer.
An offer to sell securities to public made by controlling person is subject to registration requirements of SEC 1933 act.

Question 5

Dealer

Answer 5

Person who asked for himself and buys securities from or sell securities to the investor. Dealer does not act as agent in the transaction.

Question 6

Disclosure

Answer 6

Providing all material facts. Full disclosure is required in many aspects of the 1933 and 1934 acts.

Question 7

Due diligence

Answer 7

Reasonable professional standard of care that would relieve a person of liability under the 1933 act on a registration statement that contain untrue statements of a material fact or omissions of a material fact.

Question 8

Exemption

Answer 8

Release from legal obligation. Certain types of securities and security transactions are exempt from registration requirements of new securities.

Question 9

Expert

Answer 9

Person whose professional statement or report is used in a registration statement. They are liable if a registration statement contains untrue statements of material fact or omissions of a material fact unless expert acted with due diligence

Question 10

Insider

Answer 10

Director, officer or person who owns more than 10% of class of securities registered under Section 12 of 1934 act.
Insiders must register with SEC initial ownership of securities of company and subsequent changes in ownership.
Stock ownership of 10% includes direct and indirect ownership.
Insiders are covered in the 1934 act.

Question 11

Issuer

Answer 11

Person who issues securities. Person can be corporation, partnership or other organization.

Question 12

Matched orders

Answer 12

Sale of securities by one party and purchased by another party to manipulate price and give appearance of active trading. This is violation of anti-trust provisions of 1934 act.

Question 13

Offering circular

Answer 13

Legal offering document describing an offering a security for sale. Compared to prospectus, this is less detailed and unaudited.
It is filed with SEC before issuance of securities and is used with low-dollar Regulation A issues.
This must be given to all issuers of the security.

Question 14

Primary offering

Answer 14

New securities initially offered by issuer to the underwriters, then to the general public.
Offerings are either primary or secondary.

Question 15

Prospectus

Answer 15

Legal offering document describing an offering a security for sale. Prospectus must be given to all persons who are offered the opportunity to buy securities.
It is a summary of the registration statement.

Question 16

Proxy

Answer 16

Shareholders written assignment of the right to vote on the shares owned by the shareholder

Question 17

Proxy statement

Answer 17

Document that contains detailed info and must be included in proxy solicitation. Before sending to shareholders, must be submitted to SEC which ensures that full disclosure is made.

Question 18

Registration statement

Answer 18

Formal document filed with the SEC before company can undertake primary offering of securities. These are public information.

Question 19

Restricted security

Answer 19

Security purchased from issuer in nonpublic offering that is subject to restrictions on resale. Must be registered before resale unless SEC Rule 144 exempts it.

Question 20

Scienter

Answer 20

Intensional misconduct, intent to deceive, manipulate or do fraud.
Is required for Rule 10b-5 violation

Question 21

Secondary offering

Answer 21

Securities that are purchased and sold through stock exchange or over-the-counter sales. These were previously issued by the corporation and held by an investor.

Question 22

Securities exchange

Answer 22

Same as stock exchange. An organize secondary market where investors can buy and sell securities. Best known example is New York Stock Exchange.

Question 23

Security

Answer 23

Stock, bond, investment contract, or plans to make profits by efforts of other persons. For federal securities law, a security is more than just stock of a corporation. It includes both equity and debt interest. It is an investment of money in an enterprise with expectations of profits from the efforts of others.

Question 24

Short–swing profit

Answer 24

Profit made by purchase and sale of a security within a six-month period of time. Insiders cannot keep short-swing profits.

Question 25

Tender offer

Answer 25

An offer to buy shares of the company. Usually is part of an effort to gain control of the company and is made to existing shareholders.
May contain conditions regarding the offer. Typical condition is that at least 50% of the shareholders must except the offer before the shares will be purchased.

Question 26

Tippee

Answer 26

Person to whom material nonpublic information, called a tip, is transmitted. If tippee uses info to buy or sell securities, tipper is liable under SEC rule 10b-5.

Question 27

Underwriter

Answer 27

Person or organization who buys securities from the issuer for resell the general public, usually an investment banker. For large stock offerings, underwriters often form a syndicate.
Underwriters buy all securities offered and own what cannot be sold to the public.
A dealer who sell securities for underwriter for commission is not considered an underwriter.

Question 28

Wash sale

Answer 28

Sale and purchase of a security by the same person. It manipulates price and gives the appearance of active trading. It violates the anti-fraud provisions of the 1934 act.

Question 29

Securities Act of 1933

Answer 29

Purpose is to protect the unsophisticated investing public.
Protection is accomplished by enforcing anti-fraud provisions requiring new issues of securities be registered with the SEC. Registration requires full disclosure of all important info.
Each investor or potential investor must be given a prospectus.

Question 30

Social Security (FICA)

Answer 30

Social Security Administration under Department of Health and Human Services.
Federal Insurance Contributions Act (FICA).

FICA compensation includes:
– Earnings from wages and salary
– Vacation pay and dismissal pay
– Bonuses, commissions and prizes
– Not the expenses reimbursed
– Not fringe benefits paid by employer

Employees subject to withholding:
– Corporate officers
– Domestic workers making at least $50 per quarter
– Need not include spouse and minor children of employer
– Not independent contractors

Question 31

Legal liability for payroll and Social Security taxes

Answer 31

Employer is generally required to withhold in contacts on each payment of wages to employee.
If a responsible person who willfully fails to withhold, account for, or pay over withholding tax is liable for penalty up to 100% of such tax.

Question 32

Federal Unemployment Tax Act (FUTA)

Answer 32

Provide economic security for temporarily unemployed workers.

Employer is obligated to pay FUTA taxes if employer either:
– Paid wages of $1500 or more in calendar quarter or
– Had one or more employees for any 20 calendar weeks during the year.

FUTA tax is deductible as ordinary and necessary business expense of employer.
Unlike FICA, only employers pay the tax.

FUTA sanctions: willful failure to pay, follow returns, or keep records is misdemeanor with fine up to $10,000 or imprisonment of not more than one year, or both. There are civil penalties of additional tax for late filing and liability for double the tax amount.

Question 33

Worker’s Compensation

Answer 33

Enacted by states to protect employees and their families from risks of financial loss from accidental injury, death, disease or disability resulting from employment.
These benefits are nontaxable.

Question 34

Occupational Safety and Health Act

Answer 34

Occupational safety and health administration should OSHA of department of labor.
Requires that employers provide place that is free from recognized hazards.

Exempted employers include:
- US government
– States and their political subdivisions
– Certain industries covered by other federal safety statutes

Both employers and employees are required by OSHA to comply with safety rules.
Act says employers cannot discharge or discriminate against employee for filing complaint with OSHA or for refusing to work in high-risk area.

Enforcement occurs through inspections and issuance of citations requiring employers to correct violations. Employers can require OSHA to obtain warrant before inspection.
OSHA may impose civil and criminal penalties.

Question 35

Civil Rights Act of 1964

Answer 35

Prohibits discrimination in employment on basis of race, color, national origin, religion or sex. Most employment decisions such as hiring, firing, composition and employee training are covered.

Question 36

Equal Pay Act of 1963

Answer 36

Prohibits pay discrepancies based on sex.

Question 37

Age Discrimination in Employment Act (ADEA)

Answer 37

Prohibits discrimination in appointment against employees who are 40 years of age or older.
Protects employees from compulsory retirement.

Remedies available include:
– Back pay and other benefits
– Additional award of liquidated damages
– Reasonable attorney fees
– Equitable remedies such as reinstatement and promotions

Question 38

Americans with Disabilities Act (ADA)

Answer 38

Prohibits discrimination in employment around hiring, firing, promotion and pay against qualified persons with disability.

Disability is defined as:
– Physical or mental impairment that substantially limits one or more of individuals major life activities
– A record of such impairment
– One who is regarded as having such an impairment

Examples:
– Individuals with alcohol abuse problems
- Individuals with AIDS
- Not individuals using illegal drugs

Question 39

Fair Labor Standards Act (FLSA)

Answer 39

Aka Wage-Hour Law.

Covers employers engaged in interstate commerce. Certain employees are exempt from FLSA including executive, and then afraid of, professional and outside sales personnel.

Covered employees are entitled to specified minimum wage.
Covered employees are generally entitled to be paid time and a half four hours worked in excess of 40 hours per week.

Employers who violate FLSA can be held liable for civil penalties as well as criminal penalties for willful violations.

Question 40

Employee Retirement Income Security Act (ERISA)

Answer 40

Federal act re: pension plans. Does not require that employers set up pension funds. Rather, establishes complex rules for management of private pension funds.

Pension plans maybe contributory or noncontributory by employees.

Requires:
– Generally that pension plant managers diversify plan investments
– Plan participants receive annual reports with specific information
– Funding and plan termination insurance requirements
– Establish the Pension Benefit Guarantee Corporation (an insurance agency)
- Vesting requirements determining when employees rights to receive benefit becomes non-forfeitable
– Ability of employer to delay employees rights to participate in any pension plan
– Gives plan participants and beneficiaries right to sue to enforce their rights
– Criminal penalties for any willful violations the act

Question 41

Consolidated Omnibus Budget Reconciliation Act (COBRA)

Answer 41

Requires employers to sponsor a group health plan to allow “qualified beneficiaries” to elect to continue coverage if they lose coverage after occurrence of a “qualifying event”.
Generally provides a maximum continuation. 18, 29, or 36 months, depending on event.

Qualified beneficiaries: covered employees, their spouses, their dependent children.

Question 42

National Labour Relations Act (NLRA)

Answer 42

Aka Wagner Act. 1935.
gave employees right to organize by forming, enjoying, and assisting labor organizations. Also established right of employees to engage in collective bargaining and to strike.

Act requires employer to bargain in good faith with regard to wages, hours, and other terms and conditions of employment.

Question 43

Comprehensive Environmental Response, Composition, and Liability Act (CERCLA)

Answer 43

Environmental Protection Agency (EPA).
Creates fund to clean up hazardous waste sites.
Requires EPA to identify US sites where hazardous waste has been disposed of, store, abandoned, or spilled and to rank sites by severity of risk.

EPA can order responsible party to clean up a site. Responsible party is:
– Generator who deposited the waste
– Transporter of the waste to the site
– Owner of the site at time of disposal
– Current owner and operator of site

Liability of responsible party is joint and several: one party can be held responsible for all cleanup costs regardless of degree of responsibility.
Responsible party can see recovery of costs or a contribution from other responsible parties.

Only defense is available:
– Acts of God
– Act of war
– Act or omission of a third-party: third-party defense

To use third-party defense, party must show:
– Third-party was solely responsible for hazardous condition
– Third-party was not their employee
– No contractual relationship exists with the third-party

Question 44

Clean Air Act

Answer 44

EPA establishes national ambient air quality standards. The standards are maximum levels of air pollutants.

Requires the air-quality not fall in those areas that currently meet national ambient air-quality standards.
Required preservation of natural visibility within major national parks and wilderness areas.
Requires EPA to establish emission standards protect public health, with insertion margins of safety.

Standers must be achieved by:
– State of limitation plans approved by EPA
– Technological controls established by EPA
– Mobile source controls established by EPA

For new sources of omissions in areas that have achieved national air quality goals, the best available control technology is required.

Penalties include imposing bans on construction of new sources of pollution, limits on Federal highway funds, and withholding of federal air pollution funds.

Question 45

Clean Water Act

Answer 45

Federal Water Pollution Control Act of 1972, amended in Clean Water Act of 1977, and Water Quality Act 1987.

Eliminate discharge of pollutants in navigable bowl waters of US.
Navigable waters are all waters of US using interstate commerce.
Includes all freshwater wetlands adjacent to all covered waterways.

Question 46

Safe Drinking Water Act of 1974

Answer 46

Amended in 1996, EPA sets standards for pollution in drinking water.

Question 47

National Pollutant Discharge Elimination System (NPDES)

Answer 47

Major program set up under Clean Water Act.
Program requires permits in order to discharge pollutants from any point source into navigable waters.

New sources are subject to more stricter standards based on national standards of performance.

Question 48

Resource Conservation and Recovery Act (RCRA)

Answer 48

A.k.a. solid waste disposal act.

EPA empowered to:
– Identify and list hazardous waste
– Develop standards for management of hazardous waste by those who either generator or transport them
– Establish standards for construction and operation of hazardous waste treatment, storage, and disposal facilities

Imposes “cradle to grave” responsibility on those who generate hazardous waste. Generators must obtain ID number from EPA. They are required to use transportation manifest.
Operators of hazardous waste facility must obtain permits and meet stringent requirements.

Question 49

Patents

Answer 49

Patent granted by US patent and trademark office can be used obtained for invention, discovery, process, or design that is genuine, novel, useful and not obvious based on current technology.

Generally gives holder exclusive rights for 20 years from filing date of application. Design patents are valid for 14 years.

After expired, invention or design becomes part of public domain. Anyone can use patent without compensating patent holder.

In US, first to invent rule applies, not the first to file rule.
Does not protect independent subsequent development by others.

Question 50

Copyrights

Answer 50

Copyright Revision Act of 1976.

Only protects tangible writings.

Copyright infringement is the copying of substantial and material part of the copyright at work without consent.

Exceptions:
– Writing a book review including excerpts from the work
– Multiple copies of extracts used for classroom in minor amounts
– Use for research, with appropriate recognition