Ch 19

Question 0

Securities and Exchange Commission (SEC)

Answer 0

Independent regulatory agency responsible for interprereting
And investigating securities law violations

Issues new rules, inspects securities firms and brokers

Question 1

Security

Answer 1

Stock certificate, bond, note, debenture, warrant or
Other record evidencing ownership interest

Or in promise to repay corporation’s debt

Question 2

Securities act of 1933

Answer 2

Governs initial sales of stock by businesses

Purpose of act is to prohibit fraud, provide transparency/disclosure
Stabilize securities industry making info available to public

Question 3

Investment contract

Answer 3

In securities law, a transaction where person invests in common
Enterprise w/reasonable expectation that profits will be primarily
From efforts of others

Question 4

Prospectus

Answer 4

Written document required by securities laws that describes
The security being sold, financial operations of issuing corp.,
Investment risk of security

Designed to provide sufficient info to enable investors to
Evaluate risk involved in purchasing security

Question 5

EDGAR

Answer 5

Electronic Data Gathering, Analysis and Retrieval

Electronically posted documents filed with the SEC

Question 6

Red Herring Prospectus

Answer 6

Preliminary prospectus that can be distributed to potential
Investors after the registration statement for securities offering
Has been filed with the SEC

Question 7

Tombstone Ad

Answer 7

Advertisement historically in format resembling tombstone
Of securities offering

Ad tells potential investors where and how they can obtain
A prospectus

Question 8

Free writing prospectus

Answer 8

Any type of written, electronic or graphic offer that describes
The issuing corporation or it’s securities

Includes legend indicating that investor can obtain prospectus
At SECs website

Question 9

Exempt securities

Answer 9

Specific securities that are exempt from registration requirements
of Securities Act 1933

Can generally be resold without being registered

Question 10

Registration A Offerings

Answer 10

Securities issued by issuer that has offered less than $5 million in securities in 12 month period are exempt from registration

Cheaper way for small companies to raise capital

Question 11

Investment company

Answer 11

Company that acts on behalf of many smaller shareholders/owners
By buying a large portfolio of securities

and professionally managing that portfolio

Question 12

Mutual fund

Answer 12

Specific type of investment company that continually buys and
Sells to investors shares of ownership in a portfolio

Question 13

Small offerings under Regulation D

Answer 13

SECs regulation D contains 4 separate exemptions from

Registration requirements for limited offers in 12 month period

Question 14

Accredited investor (in context of securities offering)

Answer 14

Sophisticated investor such as bank, insurance company,
An investment company, issuer’s executive officers + directors,

Or person whose net worth exceeds certain limits

Question 15

Affiliate

Answer 15

One who controls, is controlled by or is in common control

With the issuer

Question 16

3 basic defenses to violation of the 1933 Act, how defendant can avoid liability

Answer 16

1 statement or omission was not material

2 plaintiff knew about misrepresentation at time of purchasing
The stock

3 defendant exercised due diligence

Question 17

Due diligence

Answer 17

Required standard of care that certain professionals must meet
To avoid liability for securities violations

Question 18

Securities Exchange Act of 1934: Section 12 companies

Answer 18

Companies that have assets in excess of $10 million and over
500 shareholders

Required to register their securities under the Section 12 of 1934
Act

Question 19

SEC Rule 10b-5

Answer 19

Rule of SEC makes it unlawful in connection with purchase or
Sale of security to make untrue statement of material fact

Or omit material fact if omission causes statement to be
misleading

Question 20

Insider trading

Answer 20

Purchase or sale of securities on basis of info that hasn’t been
Made available to the public

Question 21

Tippee

Answer 21

Person who receives inside info

Info must be received from someone’s breach of fiduciary duty

Question 22

When are proxy statements regulated by the SEC?

Answer 22

When section 12 company’s proxy statement has corporate
Official requesting authority to vote on behalf of shareholders
In particular election on issues

Question 23

Bounty payment

Answer 23

Reward given to person or persons who perform certain service,
Such as informing legal authorities of illegal actions

Question 24

What do federal securities laws not take priority over?

Answer 24

State securities laws

Question 25

Corporate governance

Answer 25

Set of policies or procedures affecting the way a corporation
Is directed or controlled

Question 26

Stock option

Answer 26

Agreement that grants the owner the option to buy a given

Number of shares of stock, usually within a set time period

Question 27

Corporate governance problem: outside directors on board of directors

Answer 27

Independent directors may not be truly independent directors

They may be friends or business associates with leading officers

Question 28

2 minimum required actions under corporate governance

Answer 28

1 audit to evaluate managers

2 legal protections for shareholders, where violators can be
Punished and shareholders can be compensated for their losses

Question 29

Role of board of directors?

Reality?

Answer 29

Directors have responsibility of ensuring that officers are operating
Wisely and in the exclusive interest of the shareholders

In reality the board of directors spend little time monitoring officers

Question 30

Board committee: Audit committee

Answer 30

Crucial board committee oversees corporation’s accounting
And financial reporting processes

Including internal audit, outside audit and internal controls

Question 31

Internal controls

Answer 31

Measures taken to ensure reporting results are accurate

Question 32

Board committee: compensation committee

Answer 32

Monitors and determines compensation paid to officers

Responsible for assessing officers’ performance and designing
A compensation system to align officers’ interests with shareholders