Govt. Regulation of Bus: Fed. Securities Regulation

Question 1

Affirmative defenses to actions under the bribery provisions of the Foreign Corrupt Practices Act include:

Answer 1

(1) the payments or gifts which were lawful under foreign laws
(2) the payments were a reasonable and bona fide expenditure, and was directly related to the promotion, demonstration, or explanation of products or services; or the execution or performance of a contract with a foreign government or agency thereof

Question 2

Regulation FD (Full Disclosure)

Answer 2

1. requires that if a company intentionally discloses material non-public information to one person, it must simultaneously disclose that information to the public at large.
2. In the case of an unintentional disclosure of material non-public information to one person, the company must make a public disclosure (in the form of an 8-K filed w/SEC) “promptly.”

Question 3

Section 401 of the Sarbanes-Oxley Act requires that:

Answer 3

1. F/S published by issuers does not contain incorrect statements or omit material information.
2. Each annual and quarterly financial report must disclose all material off-balance sheet transactions and “other relationships” with “unconsolidated entities” .

Question 4

Section 302 of SOX requires that:

Answer 4

1. A CEO or CFO must disclose internal audit deficiencies to the company’s auditors or audit committee;
2. Mgmt. must evaluate any changes in internal control methods;
3. AND the company’s attorneys must report securities laws violations and breaches of fiduciary duties to the CEO, not the SEC.

Question 5

Whoever certifies any statement knowing that the periodic report accompanying the statement does not comport with all the requirements as set forth in Sarbanes-Oxley may be fined up to _________ or imprisoned up to _______ years, or both.

Answer 5

$1,000,000 or 10 years.

Question 6

Willful violations of SOX may result in fines of up to __________ and imprisonment up to ____ years, or both.

Answer 6

1. $5,000,000 or 20 years
2. The CEO and CFO may also be required to return bonuses or share-based compensation received int he twelve-month period before any restatement due to material omissions in the financials takes place.

Question 7

Does SOX Section 404 require that the auditor’s evaluation may not be the basis for increased charges or fees?

Answer 7

No.

Question 8

Under SOX, each periodic report must be accompanied w/statement from…

Answer 8

1. CFO or CEO, not of all officers, that the reports fairly represent the financial condition of the company.
2. This is referred to as Section 906 certification.

Question 9

Does SOX require the mailing of CEO/CFO report to shareholders?

Answer 9

No.

Question 10

Can willful violations of SOX result in civil or criminal penalties?

Answer 10

Can result in both.

Question 11

SOX Section 409- Real Time Information Disclosure- requires that…

Answer 11

1. issuers disclose to the public, on an urgent basis, information on material changes in their financial condition or operations.
2. These disclosures are to be presented in terms that are easy to understand, and may include graphic presentations if appropriate.
3. Real time disclosures might also be supported by disclosures of trends and by qualitative information.

Question 12

For liability to be incurred under the 1933 Securities Act three things must be established:

Answer 12

1. misstatement or omission of a fact,

2. materiality of the fact, 3. and damages resulted.

Question 13

The majority of securities regulations including both federal securities regulations and so-called State “blue sky” laws, are aimed at:

Answer 13

1. the fair and full disclosure of all material information relating to the markets and to specific securities transactions,
2. F/R by public companies.

Question 14

Rule 10b-5, and Section 10b

Answer 14

anti-fraud provisions of the Securities Exchange Act of 1934.

Question 15

Rules adopted pursuant to Section 10b of the ‘34 Act

Answer 15

insider trading and market manipulation rules.

Question 16

Rule 506 of Regulation D

Answer 16

1. Under this particular rule an unlimited amount of money can be raised by a company.
2. The company may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchasers.
3. Considered a “safe harbor” for the private offering exemption of Section 4(2) of the Securities Act.

Question 17

Rule 505 of Regulation D

Answer 17

all non-accredited investors, either alone or with a purchaser representative, must be sophisticated

Question 18

sophisticated investors

Answer 18

have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.

Question 19

insider

Answer 19

officer or director of an issuer, or an individual with at least 10% “beneficial” ownership of the issuers equity securities (so debt securities are not relevant here).

Question 20

Beneficial ownership includes…

Answer 20

equity securities owned by an individual; the individual’s spouse, minor children, and in-residence relatives; and any trust that benefits the individual are included.

Question 21

Asides from officers/directors, insiders can also include the following…

Answer 21

The anti-fraud provisions of the act expand the definition of an insider to include:

1. lawyers,
2. accountants,
3. certain employees of an issuer,
4. agents,
5. or any other individuals or entities with a fiduciary duty to the issuer.

Question 22

statute of limitations under the 1933 Act

Answer 22

1. The statute of limitations under the 1933 Act is the earlier of two years after discovery of the fraud or five years after the initial violation occurred.
2. The statute of limitations for securities fraud was established by
   SOX.

Question 23

Rule 504 of Regulation D

Answer 23

A sale of securities of up to $1,000,000 in a twelve-month period is eligible for exemption under Rule 504 of Regulation D if:

1) General offerings to an unlimited number of investors are permitted the investors are “accredited” (such as investment firms, financial institutions, and knowledgeable high net worth individuals)
2) AND, the issuer sends notice within the first fifteen days of the sale to the SEC. There are no specific disclosure requirements for such offerings, nor are there limitations on resale of the securities. Such offerings are also known as “seed capital”, and the exemption is called the seed capital exemption.

Question 24

When can the SEC bar an individual from practice?

Answer 24

The SEC may bar an individual from practice before that body for any conviction that involves moral turpitude (conduct against society’s standards of conduct or morals).

Question 25

moral turpitude

Answer 25

conduct against society’s standards of conduct or morals

Question 26

What constitutes a pattern of racketeering under RICO (Racketeer Influenced and Corrupt Organizations) Act?

Answer 26

1. Two acts of racketeering (i.e., involvement in organized crime, including various types of fraud) in a ten-year period constitute a pattern under RICO, and individuals affiliated with businesses with such a pattern are covered under the law.
2. Civil penalties are allowed regardless of criminal conviction..

Question 27

Do Securities Acts provide for only for willful violations or also for accidental violations?

Answer 27

Willful violations.

Question 28

What civil penalties are allowed under the Securities Acts?

Answer 28

Treble civil penalties are allowed, which encourages civil action.

Question 29

What does the Private Securities Litigation Reform Act require of auditors?

Answer 29

It requires auditors to have procedures in place to:

1) detect illegal acts,
2) identify any material related-party transactions,
3) AND, evaluate the entity’s ability to carry on as a going concern

Question 30

Under Private Securities Litigation Reform Act, if the auditor informs the board of illegal activity, and no action is taken by mgmt..

Answer 30

1. additional reporting requirements are triggered. 2. However, the Act itself does not require specific changes to the auditors’ report.
2. While it adds responsibilities, another purpose of the Act was to reduce the number of lawsuits against publicly traded companies and their auditors, by providing certain safe harbors.

Question 31

Are auditors protected from private litigation?

Answer 31

1. If auditors follow the reporting guidelines in the Private Securities Litigation Reform Act, they are protected from private litigation.
2. The Act also provides for changes to the requirements for civil suits and the structure of any awarded damages, which are designed to discourage frivolous lawsuits.

Question 32

If a CPA firm is found 10% at fault, how much can its maximum liability be if the firm is solvent? If the firm is insolvent?

Answer 32

1. If an audit firm (or other party) unknowingly contributes to damages to investors, their liability is limited to their proportionate share (10%) if the primary defendant is solvent, as determined by the court.
2. If the primary defendant is not solvent, an additional 50% is added. This eliminates joint and several liability in these cases, although it is still in place for willful violations of securities laws.

Question 33

prospectus

Answer 33

1. formal legal document required by and filed with the Securities and Exchange Commission.
2. It provides a range of information and details about an investment offering for sale to the public.
3. A prospectus is intended to contain the facts that a potential investor needs to know in order to make informed investment decisions.