Chapter 31: Investor Protection, Insider Trading, and Corporate Governance




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BLTS-10e Practice Quiz

Chapter 31:

Investor Protection, Insider Trading,

and Corporate Governance
1. Which of the following is not one of the major responsibilities of the SEC?


  1. Supervising the activities of mutual funds.

  2. Issuing government bonds.

  3. Regulating trade in securities.

  4. Investigating securities fraud.

ANS:


  1. Incorrect. This is one of the major responsibilities of the SEC.

  2. Correct. The SEC does not issue government bonds. The Treasury Department would do this.

  3. Incorrect. This is one of the major responsibilities of the SEC.

  4. Incorrect. Investigating securities fraud is one of the major responsibilities of the SEC.

2. The Securities Act of 1933 was designed to do which of the following?




  1. Regulate the operations of national stock exchanges.

  2. Oversee and regulate the work of national securities associations.

  3. Prohibit various forms of fraud and stabilize the securities industry by requiring disclosure of all relevant information concerning the issuance of securities to the public.

  4. Promote the effective, efficient, and non-fraudulent use of proxies by shareholders.

ANS:


  1. Incorrect. The 1934 Securities Exchange Act was designed to do this.

  2. Incorrect. This is also one of the tasks given the SEC by the 1934 Act.

  3. Correct. The 1933 Act focuses on reporting requirements.

  4. Incorrect. The 1933 Act does not deal with proxies.

3. The 1933 Securities Act requires that nonexempt organizations must file a registration statement with the SEC. Which of the following items must the statement contain?




  1. A marketing plan for the organization.

  2. A financial statement certified by an independent public accounting firm.

  3. A tombstone ad.

  4. A proxy statement applicable for all new shareholders.

ANS:


  1. Incorrect. The registration statement need not contain a marketing plan.

  2. Correct. The registration must contain a certified financial statement.

  3. Incorrect. The registration does not need to contain a tombstone ad.

  4. Incorrect. The registration does not need to contain, and would not contain, a proxy statement.

4. Which of the following is most likely to be an accredited investor?




  1. An insurance company.

  2. A shipyard workers.

  3. A family farmer.

  4. A recent college graduate.

ANS:


  1. Correct. Of this list, the insurance company is most likely to qualify as an accredited or "sophisticated" investor.

  2. Incorrect. Of this list, a shipyard worker is less likely than an insurance company to be a sophisticated investor with a large income or net worth.

  3. Incorrect. Although a family farmer might have a large net worth, in this group, a family farmer is less likely than an insurance company to be a sophisticated investor.

  4. Incorrect. Someone just out of college is unlikely to have a large net worth or to have the kinds of experience necessary to make him or her an accredited investor.

5. One of the major goals of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 is:




  1. To promote blue sky laws.

  2. To prevent insider trading.

  3. To prohibit underwriting.

  4. To ensure that proxies be used when voting for directors.

ANS:


  1. Incorrect. Blue sky laws are state laws, not federal rules.

  2. Correct. This rule prohibits insider trading of securities.

  3. Incorrect. This rule does not prohibit underwriting.

  4. Incorrect. This rule does not deal with proxies, which are dealt with in Section 14 of the 1934 act.

6. In response to problems created by SEC Rule 10b-5, especially concerning companies that issue optimistic financial forecasts, Congress enacted:




  1. The Overseas Investment Act.

  2. The Private Securities Litigation Reform Act.

  3. The Efficient Capital Market Act.

  4. The Misappropriation and Condemnation Act.

ANS:


  1. Incorrect. This is not the correct name of the litigation at issue.

  2. Correct. In 1995, Congress passed this legislation to provide a "safe harbor" for publicly held companies that make forward-looking statements.

  3. Incorrect. This is not the correct name of the litigation mentioned here.

  4. Incorrect. There is no Misappropriation and Condemnation Act.

7. SEC Rule 10b-5 is applicable:




  1. Only when securities are traded in over-the-counter markets.

  2. Only when securities are traded in organized exchanges.

  3. Only to private securities transactions.

  4. In virtually all cases concerning the trading of securities.

ANS:


  1. Incorrect. SEC Rule 10b-5 is applicable in virtually all cases concerning the trading of securities, whether on organized exchanges, in over-the-counter markets, or in private transactions.

  2. Incorrect. SEC Rule 10b-5 is applicable in virtually all cases concerning the trading of securities, whether on organized exchanges, in over-the-counter markets, or in private transactions.

  3. Incorrect. SEC Rule 10b-5 is applicable in virtually all cases concerning the trading of securities, whether on organized exchanges, in over-the-counter markets, or in private transactions.

  4. Correct. SEC Rule 10b-5 is applicable in virtually all cases concerning the trading of securities, whether on organized exchanges, in over-the-counter markets, or in private transactions.

8. Section 16(b) of the 1934 Securities Exchange Act provides for:




  1. The exemption of certain small companies from registration requirements.

  2. The exemption of accredited investors from registration requirements.

  3. The recapture by a corporation of short-swing profits realized by insider trading.

  4. The solicitation of proxies from shareholders of Section 12 companies.

ANS:


  1. Incorrect. Such exemptions are covered by the 1933 Securities Act.

  2. Incorrect. Accredited investors do not have registration requirements.

  3. Correct. If an insider profits from the purchase or sale of the company’s stock within a six-month period, Section 16(b) of the 1934 Act allows the corporation to recapture the profits.

  4. Incorrect. Section 16(b) does not address proxies.

9. In order for a prosecutor to successfully litigate a criminal case under Section 10 (b) of the 1934 Securities Exchange Act, what must the prosecutor prove?




  1. That the insider was a corporate officer.

  2. That the company involved was an investment company.

  3. That the insider made reasonable forward-looking forecasts.

  4. That the insider trader had scienter.

ANS:


  1. Incorrect. Some insider traders are not corporate officers.

  2. Incorrect. This is not a requirement because insider trading often will not involve investment companies.

  3. Incorrect. This refers to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

  4. Correct. The prosecutor must prove that the trader had the intent to defraud, or had knowledge of his misconduct.

10. Blue sky laws:




  1. Are state laws regulating intrastate sales of securities.

  2. Are federal laws regulating mutual funds.

  3. Are municipal ordinances outlawing commercial activity on Sabbath days.

  4. Are interstate laws governing bond sales.

ANS:


  1. Correct. This is a definition of blue sky laws.

  2. Incorrect. Blue sky laws are state, not federal, laws.

  3. Incorrect. Blue sky laws do not outlaw commercial activity on Sabbaths.

  4. Incorrect. Blue sky laws are not interstate laws.


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