CH 3 SEC 1934 Flashcards
Can issuers selectively release insider information if the recipient promises not to act on it?
No. The selective release of insider information is prohibited.
What does Regulation M-A apply to?
Regulation M-A applies to going-private transactions.
How many minutes before trading ends may issuers of actively traded securities purchase their own shares?
Issuers of actively traded securities may not purchase their own shares during the last 10 minutes of trading.
What form must a person file with the SEC within 10 days of becoming an insider?
Form 3.
If a client is long 900 shares of ABC and short 4 ABC calls, what is his net long position for tendering?
500 shares. The 4 short calls (each representing 100 shares) reduce his net long position by 400 shares.
What is considered equivalent to stock for participating in a tender offer?
Convertible securities, rights, or warrants of the issuer. Conversion/exercise is NOT required unless accepted.
How many times is a quarterly Form 10-Q filed each year?
Three times per year since the fourth quarter is included in the annual report.
Must the amount of compensation received by the party writing the fairness opinion be disclosed?
False. The fact that the writer will be compensated must be disclosed, but not the amount of compensation.
Define a reporting company.
One that is SEC-registered, listed on an exchange, and has total assets exceeding $10 MM with 500 or more shareholders.
What is the maximum bounty for reporting an insider trading violation?
A bounty of up to 30% may be offered to a person who reports an insider trading violation.
If the terms of a tender offer are changed, how many additional days must the offer remain open?
For at least 10 business days from the change.
What form must be filed if an insider purchases or sells stock?
Form 4 must be filed with the SEC within two business days of the trade.
Name two prohibitions that relate to being an insider.
- No shorting of the stock and 2. No keeping of short-swing profits.
What is the maximum civil penalty that the SEC may impose under the Insider Trading Act?
Treble damages (three times the profit made/loss avoided) and disgorgement of any profit.
Can Jim sell short the stock for which he is an insider?
No. Jim is prohibited from selling short the stock for which he is an insider.
Can a supervisor of an individual who violated insider trading rules be penalized?
True.
What is the primary purpose of Regulation FD?
To prevent the selective disclosure of material inside information to securities professionals.
List some reasons for the filing of Form 8-K.
Change in company control, accountant, or fiscal year, or the resignation of a director.
Does Regulation M-A apply to cash or stock tender offers?
True.
Can a tender offer be placed by the issuer or a third party?
True.
According to the Insider Trading Act, who may be held liable for a violation?
Both the tipper and tippee may be held liable.
If an insider sells shares today that were acquired three months ago, can she keep the profit?
No. Under the short-swing profit rule, an insider may not keep a profit earned on stock held less than six months.
What must be filed with the SEC within five business days of acquiring more than 5% of a company’s stock?
Schedule 13D.
Who has the authority to initiate criminal action related to insider trading?
The U.S. Department of Justice.
Is it a violation if a corporate officer informs his son of an upcoming earnings report and the son trades?
Yes. Both parties have violated the Insider Trading Act.
What is short tendering?
The prohibited practice of tendering shares that are not owned.
After filing notice of an impending M&A deal, how many days must elapse before it can be completed?
30 days.
Can the person making a tender offer purchase the subject company’s convertible bonds?
False. During the tender period, the subject company’s nonconvertible bonds may be purchased, but not its convertibles.
Define short-swing profit.
A profit earned on stock held less than six months.
According to the HSR Act, how many days after notification may an M&A deal be completed?
30 days after notification.
If a client is short 600 shares of the subject company involved in a tender offer, how many shares may he tender?
Zero. An investor is prohibited from using borrowed shares to respond to a tender offer.
Is a person who owns 11% of a company’s common stock defined as an insider?
True. Insider status is determined by having ownership greater than 10%.
When must insiders report their transactions?
Within 2 business days of the trade.
If nonpublic information is unintentionally disclosed to an analyst, when must it be disclosed to the public?
Within 24 hours of its disclosure.
Can the person making a tender offer purchase the subject company’s nonconvertible bonds?
True. Nonconvertible bonds of the subject company may be purchased during a tender period.
How many shares is Jim net long if he owns 1,000 DEF shares, sells 5 DEF calls, and buys 2 DEF puts?
He is net long 500 shares.
Is short tendering acceptable if the subject company stock is not on the threshold security list?
False. Short tendering of stock is prohibited.
Define an insider.
Officers, directors, partners, greater than 10% owners, and immediate family members of all listed.
Can the person making a tender offer engage in open market purchases of the subject company’s stock?
True.
What will a firm establish to restrict the flow of potential insider information?
Information barriers.
When are companies planning a proposed M&A transaction required to file notice?
Before the deal is completed.
What are treble damages?
The civil penalty for insider trading, which is three times the profit made or loss avoided.
If a BD buys its own stock in after-hours trading, must it use the same BD it used during normal hours?
False. One BD may be used during normal hours, and a different BD may be used in after-hours trading.
To participate in a tender offer, what must an investor be long?
The stock or its equivalent.
Who certifies the accuracy of the information in a company’s annual and quarterly financial reports?
The firm’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO).
When must a company file a Form 10-K with the SEC?
Annually.
Must a fairness opinion disclose any extra payment a BD will receive based on completion of an M&A deal?
Yes. Any material relationship that has existed within the last two years must be disclosed.
What is the primary purpose of a fairness opinion?
To judge whether the transaction price is fair within a reasonable range of prices.
Must a relationship between the BD writing the fairness opinion and a party subject to the opinion be disclosed?
Yes. Any material relationship that has existed within the last two years must be disclosed.
True or False: A person who owns 11% of a company’s common stock is defined as an insider.
True. Insider status is determined by having ownership greater than 10%.
Under Regulation FD, an acceptable method of public disclosure would be the filing of Form ____ with the SEC.
Under Regulation FD, an acceptable method of public disclosure would be the filing of Form 8-K with the SEC.
True or False: In a partial tender, a person may tender the subject company’s convertible bond without converting it.
True. If the tender is accepted, he would then be required to convert.
True or False: The person making a tender offer may purchase the subject company’s nonconvertible bonds.
True. During a tender period, nonconvertible bonds of the subject company may be purchased, but not convertible bonds.
What is the general purpose of Regulation M-A?
To relax the communication restrictions between BDs and investors prior to a company’s filing of offering statements.
Jim owns 1,000 DEF shares, sells 5 DEF calls, and buys 2 DEF puts. For tendering, how many shares is he net long?
He is net long 500 shares (The 1,000 share position is offset by the sale of 5 calls). The long puts have no effect.
True or False: Under Regulation M-A, a prospectus, proxy, or tender offer statement must be provided to investors.
TRUE
True or False: Short tendering is acceptable provided the subject company stock is not on the threshold security list.
False. Short tendering of stock is prohibited. An investor must be long the subject company’s stock or its equivalent.
Insiders must return short-swing profits, which are profits earned on stock that has been held for less than ___ months.
Insiders must return short-swing profits, which are profits earned on stock that has been held for less than six months.
For insider trading violations, the SEC can sue for treble damages. What does that statement mean?
The SEC can sue for three times the damage (profit made or loss avoided).
True or False: The person making a tender offer may NOT engage in open market purchases of the subject company’s stock.
TRUE
True or False: The primary purpose of a fairness opinion is to verify the credit rating of the newly merged entity.
FALSE
What will a firm establish between departments to restrict the flow of potential insider information?
Information barriers.
If a mutual fund owns 7.5% of a company’s common stock, are all current fund shareholders required to file Schedule 13D?
No. The mutual fund must report its ownership, not the shareholder.
Regarding a proposed M&A transaction, when are the companies planning the transaction required to file notice?
Before the deal is completed.
According to Regulation M-A, what information (in plain English) must be provided in a summary term sheet?
Material features and a brief description of the transaction, as well as a summary of disclosures.
True or False: Only individuals who acquire more than 5% of a company’s stock are required to file Schedule 13D.
False. Any person, or group acting in concert, must file Schedule 13D.
True or False: If a BD buys its own stock in after-hours trading, it must use the same BD it used during normal hours.
False. One BD may be used during normal hours, and a different BD may be used in after-hours trading.
To what types of transactions do Regulation M-A provisions apply?
Cash or stock tender offers, mergers, acquisitions, or going-private transactions.
To participate in a tender offer, an investor must be long ___________ or its ____________.
To participate in a tender offer, an investor must be long the stock or its equivalent.
What is the maximum criminal penalty for an individual convicted of insider trading?
$5 million fine, and/or up to 20 years in prison.
Who certifies the accuracy of the information contained in a company’s annual and quarterly financial reports (10K/10Q)?
The firm’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO). The term principal officer may also be used.
True or False: To promote balanced views, the fairness committee must include members from outside the deal team.
TRUE
True or False: Regulation M-A applies to equity IPOs and new issues.
FALSE
Individuals must register with the SEC within __________ of becoming an insider.
Individuals must register with the SEC within 10 days of becoming an insider.
Where may investors obtain information regarding SEC filings made by reporting companies?
On the SEC’s EDGAR website.
When must a reporting company file a Form 10-Q with the SEC?
At the end of the first three fiscal quarters of each year (fourth quarter included in annual report).
If a company announces that its CFO has resigned effective today, what form must be filed with the SEC?
Form 8-K. This form is filed for significant changes/events that may impact share price or financial condition.
True or False: Schedule 13D must be filed with the issuer, SEC, and the exchange on which the stock trades.
TRUE
The criminal penalty for insider trading by an individual is a maximum of $_________ and/or ___ years in prison.
The criminal penalty for insider trading by an individual is a maximum of $5 million and/or 20 years in prison.
What does the Hart-Scott-Rodino Act require?
The filing of notification reports regarding large merger and acquisition (M&A) transactions.
Issuers/affiliates repurchasing their own shares may not buy the shares in the last ____ minutes of the trading day.
Issuers/affiliates repurchasing their own shares may not buy the shares in the last 30 minutes of the trading day.
If an investor acquires 6% of a reporting company’s preferred stock, is Schedule 13D required to be filed?
Yes. Filing is required when a person acquires more than 5% of any class of equity security (including preferred stock).
True or False: When an issuer repurchases its own shares, it may do so at the opening price during a trading day.
FALSE
While waiting for her train, an RR overhears a rumor of an impending corporate takeover. What should she do?
Tips and unverified rumors must be reported to the firm’s legal/compliance department.
What are the four guidelines that must be followed for an issuer to be allowed to purchase its own common stock?
1) One BD used, 2) time of purchase, 3) volume of daily purchase, and 4) price of purchase.
According to Rule 10b-18, at what price may an issuer purchase its own shares?
At a price not exceeding the higher of the independent bid or the last transaction price.
According to Rule 10b-18, how many BDs may an issuer use to purchase its own common stock during normal market hours?
One.
Issuers of nonactively traded securities may not purchase their own shares during the last ____ minutes of trading.
Issuers of nonactively traded securities may not purchase their own shares during the last 30 minutes of trading.
When must the board of directors of the company, subject to a tender offer, advise its shareholders regarding the offer?
Within 10 days from the date the tender is made.
Who is required to file Form 13F?
A mutual fund manager who exercises investment discretion over at least $100 million in equity securities.
What is the purpose of the Sarbanes-Oxley Act of 2002?
To enhance corporate governance and strengthen corporate accountability.
For tender purposes, is being long an ABC call option equivalent to a long ABC stock position?
No. Investors must exercise a long call to participate in a tender offer.
What SEC form is used to report the restricted stock a corporate officer receives as compensation in his 401(k) plan?
Form 4.
Under Sarbanes-Oxley, what must be included in senior management’s annual report?
Its assessment of the effectiveness of internal controls and certification from the accounting firm auditing its records.
According to Sarbanes-Oxley, who is responsible for attesting to corporate financial reports?
The Chief Executive Officer (CEO) and Chief Financial Officer (CFO).
What other term may be used for a company’s Chief Executive Officer (CEO) or Chief Financial Officer (CFO)?
Principal Executive Officer (PEO) or Principal Financial Officer (PFO).
To participate in a tender offer, an investor may only tender shares that she is ____ long.
To participate in a tender offer, an investor may only tender shares that she is net long.
True or False: A fairness opinion must disclose any extra payment a BD will receive based on completion of an M&A deal.
TRUE
