The Legal Environment of Business, 8e (Kubasek)
Chapter 23 Rules Governing the Issuance and Trading of Securities
1) Which of the following is true of securities?
A) They have no value in and of themselves.
B) Since they are paper, they can be produced in limited numbers only.
C) They are easily regulated in terms of hazards or merchantability.
D) Since they are paper, they cannot be easily manipulated by their issuers.
2) Which of the following factors resulted in the federal regulation of securities in Congress?
A) corporations playing off one state against another by limiting their securities sales to states
that had less stringent regulations
B) corporations’ ability to thwart state efforts at regulation rather easily
C) securities being easily manipulated by issuers
D) the collapse of the stock market in 1929
3) The Securities Act of 1933 regulates the ________.
A) prices on the New York Stock Exchange
B) initial offering of securities by public corporations
C) elections of boards of directors of closely held corporations
D) interest rates on bonds
4) The Public Utility Holding Company Act of 1935 requires that public utility and holding
companies ________.
A) set rates as low as possible without sacrificing a reasonable profit
B) register with the Securities and Exchange Commission and disclose information about their
finances and operations
C) notify the Environmental Protection Agency before building new power facilities
D) elect board members at annual elections
5) The Trust Indenture Act of 1939 regulates the public issuance of ________ in excess of $5
million.
A) commodity fixtures
B) preferred stock and other debt securities
C) bonds and other debt securities
D) stock dividends
6) The Investment Advisers Act of 1940 requires persons and firms giving investment advice to
clients to ________.
A) attend education seminars
B) demonstrate expertise in economics and finance
C) impose administrative sanctions on securities buyers
D) register with the Securities and Exchange Commission
7) Which of the following was established by the Securities Investor Protection Act of 1970?
A) the Securities and Exchange Commission (SEC)
B) the Securities Investor Protection Corporation (SIPC)
C) the Federal Deposit Insurance Corporation (FDIC)
D) the Federal Savings and Loan Insurance Corporation (FSLIC)
8) Which of the following is true of the Securities Investor Protection Corporation (SIPC)?
A) It protects investors from losses up to $750,000 due to the financial failure of a brokerage
firm.
B) It has the monitoring and bailout functions that the Federal Deposit Insurance Corporation
(FDIC) has in banking.
C) It does not use trustees in any of its functions.
D) It supervises the liquidation of brokerage firms that are in financial trouble.
9) Chapter 11 of the ________ gives the Securities and Exchange Commission the authority to
render advice when certain debtor corporations have filed for reorganization.
A) Private Securities Litigation Reform Act
B) Market Reform Act
C) Bankruptcy Abuse Prevention and Consumer Protection Act
D) Securities Enforcement Remedies and Penny Stock Reform Act
10) Which of the following acts requires all companies to set up a system of internal controls to
provide reasonable assurance that the company’s records accurately and fairly reflect its
transactions?
A) the Foreign Corrupt Practices Act of 1977
B) the Private Securities Litigation Reform Act of 1995
C) the Market Reform Act of 1990
D) the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
11) Which of the following acts exempts all documents given to the Securities and Exchange
Commission by foreign regulators from Freedom of Information Act disclosure requirements?
A) the Market Reform Act of 1990
B) the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
C) the Foreign Corrupt Practices Act of 1977
D) the International Securities Enforcement Cooperation Act of 1990
12) The Market Reform Act of 1990 authorizes the Securities and Exchange Commission to
regulate trading practices during ________.
A) issuance of new stock by existing corporations
B) periods in which stock prices have failed to fluctuate significantly for two consecutive
calendar quarters
C) periods of extreme market volatility
D) initial public offerings
13) The ________ gives the Securities and Exchange Commission cease-and-desist powers and
the power to impose substantial monetary penalties in administrative proceedings.
A) International Securities Enforcement Cooperation Act of 1990
B) Securities Enforcement Remedies and Penny Stock Reform Act of 1990
C) Private Securities Litigation Reform Act of 1995
D) Foreign Corrupt Practices Act of 1977
14) The Private Securities Litigation Reform Act of 1995 ________.
A) enables private investors to sue public corporations for securities violations
B) enables the Securities and Exchange Commission to sue private corporations for securities
violations
C) provides a safe harbor from liability for companies that make statements to the public about
future risk factors
D) provides payment of punitive damages and attorney fees to successful plaintiffs in cases of
securities litigation
15) Which of the following is true of the Securities Litigation Uniform Standards Act of 1998?
A) It is a safe harbor from liability for companies that make statements to the public about future
risk factors.
B) It gives the Securities and Exchange Commission cease-and-desist powers and the power to
impose substantial monetary penalties in administrative proceedings.
C) It is an amendment to the Private Securities Litigation Reform Act of 1995.
D) It sets national standards for securities class action lawsuits involving nationally traded
securities.
16) No more than three of the five commissioners of the Securities and Exchange Commission
can be ________.
A) male
B) over the age of 60
C) from the same political party
D) stockbrokers
17) The Division of ________ is responsible for setting and administering the disclosure
requirements prescribed by the 1933 and the 1934 Securities Acts, the Public Utility Holding
Company Act, and the Investment Company Act.
A) Market Regulation
B) Corporation Finance
C) Enforcement
D) Investment Management
18) Which of the following is true of the Division of Market Regulation?
A) Accountants, lawyers, financial officers, and underwriters all rely heavily on advice from this
division.
B) This division reviews all registration statements, prospectuses, and quarterly and annual
reports of corporations, as well as their proxy statements.
C) It can recommend to the full commission the suspension of an exchange for up to three years.
D) It seeks to discourage manipulation or fraud in the issuance, sale, or purchase of securities.
19) The Division of ________ supervises investigations and the initiation of injunctive actions.
A) Market Regulation
B) Corporation Finance
C) Enforcement
D) Investment Management
20) The Securities Act of 1933 regulates the initial offering of securities by public corporations
by prohibiting an offer or sale of securities not registered with the Securities and Exchange
Commission.
21) The Securities Investor Protection Act of 1970 gives the Securities and Exchange
Commission authority to regulate the finances of public investment companies that invest in and
trade in securities.
22) The Private Securities Litigation Reform Act of 1995 gives the Securities and Exchange
Commission cease-and-desist powers and the power to impose substantial monetary penalties in
administrative proceedings.
23) The 1990 Remedies Act allows the federal courts to bar anyone who has violated the fraud
provisions of the federal securities laws from ever serving as an officer or director of a publicly
held firm.
24) The Securities and Exchange Commission is not charged with evaluating the worth of a
public offering of securities by a corporation.
25) The Securities and Exchange Commission (SEC) was created under the Securities Investor
Protection Act (SIPA) of 1970.
26) The Division of Corporation Regulation administers the Public Utility Holding Company Act
of 1935.
27) Which of the following is true of the Financial Stability Oversight Council?
A) The council will identify banks or nonbanks that pose a threat to the financial system.
B) The council was to be subject to oversight by the Government Accountability Office for a
short period during 2008.
C) It does not include members of the Treasury and the Federal Reserve.
D) It was established by the Securities Exchange Act of 1934.
28) According to the Dodd-Frank legislation, Federal Deposit Insurance Corporation-insured
institutions are allowed to have only ________ percent of their capital invested in hedge funds
and private equity funds.
A) 2
B) 3
C) 4
D) 5
29) Which of the following is true of the Dodd-Frank legislation?
A) Federal Deposit Insurance Corporation-insured institutions are required to keep their interests
in hedge funds and private equity funds.
B) Investment banks have to set aside reserves to cover all forms of expenditure.
C) Originators of mortgage securities must hold 5 percent of the credit risk, thus retaining an
interest in the performance of the securities.
D) Banks will be allowed to trade in a proprietary manner but cannot continue to buy or sell from
their own accounts to hedge against other investments.
30) Which of the following is true of the Dodd-Frank Act with regard to regulating executive
compensation?
A) Shareholders were allowed a nonbinding vote on executive compensation, as directed by the
Federal Reserve.
B) Company executives received lower compensation when firms sold mortgage-backed
securities and derivatives.
C) Companies cannot take back compensation if it is based on inaccurate accounting statements.
D) Only independent directors of a company could sit on compensation committees of the board.
31) Which of the following is true of the Dodd-Frank Act with regard to derivatives?
A) The Dodd-Frank statute will standardize derivatives traded on exchanges to decrease
transparency.
B) Derivatives must be routed through a subsidiary to ensure that companies using them post
collateral.
C) Banks can continue to trade derivatives in-house based on interest rates and foreign
exchanges, and for purposes of hedging risk.
D) Banks will have to spin off their riskier derivatives and trade them through a clearing house.
32) Hedge funds larger than $250 million must register with the Securities and Exchange
Commission and provide some information as to trades and their individual portfolios.
33) The Dodd-Frank Act did not deal with executive compensation.
34) The Fed, with the approval of the Financial Stability Oversight Council, has the power to
break up large firms and require such firms to increase their reserves against future losses.
35) Derivatives cannot be used as hedges against risk.
36) Credit rating agencies evaluated and rated billions in mortgage securities, and both the
private sector and governments at all levels relied on these ratings.
37) Derivatives are synthetic securities that are dependent upon the movement of underlying
variables.
38) Discuss the risks taken by large banks and how the Dodd-Frank legislation restricts them.
39) Describe the Dodd-Frank legislation with regard to credit rating agencies.
40) Which of the following is true of the Sarbanes-Oxley Act of 2002?
A) It follows the traditional approach to corporate governance.
B) It established the Public Company Accounting Oversight Board.
C) It requires external auditors to certify financial reports.
D) It requires a separate team to be formed to certify financial reports.
41) The maximum penalty for securities fraud under the Sarbanes-Oxley Act is ________ years
in prison.
A) 10
B) 25
C) 35
D) 45
42) David, the chief executive officer of a bank in the United States, has been embezzling money
from the bank’s clients. In order to avoid being caught, David destroyed all the financial records.
Due to these actions, David can be prosecuted under the ________.
A) Securities Act of 1933
B) Sarbanes-Oxley Act of 2002
C) Foreign Corrupt Practices Act of 1977
D) International Securities Enforcement Corporation Act of 1990
43) Which of the following is a characteristic of the Public Company Accounting Oversight
Board?
A) It regulates all firms providing financial services.
B) It is a six-member board with legislative and disciplinary power.
C) A majority of the board is dependent on publicly held accounting companies.
D) The board is funded by publicly held companies overseen by the Securities and Exchange
Commission.
44) The Sarbanes-Oxley Act of 2002 requires CEOs and CFOs to certify financial reports.
45) The first element of the Howey test requires that the investor enter the transaction with a
clear expectation of making a profit on the money invested.
46) Describe the criminal penalties under the Sarbanes-Oxley Act of 2002.
47) Which of the following is true of registration of securities under the Securities Act of 1933?
A) The act authorizes the Securities and Exchange Commission to decide whether or not a public
offering of stock is meritorious and should be sold to the public.
B) The prospectus of a registration statement does not include pending lawsuits.
C) The registration statement provides the use to be made of the funds garnered by a public
offering of stock and the risks involved for investors.
D) Part II of a registration statement is given to prospective buyers, but it is not open for public
inspection at the Securities and Exchange Commission.
48) The Securities and Exchange Commission recognizes an issuer that has reported
continuously under the 1934 Securities Exchange Act for at least three years as a(n) ________
issuer.
A) unseasoned
B) seasoned
C) non-reporting
D) well-known seasoned
49) The Securities and Exchange Commission recognizes an issuer that is permitted to use Form
S-03, thus disclosing even less detail in the 1933 Act registration, as a(n) ________ issuer.
A) non-reporting
B) seasoned
C) unseasoned
D) well-known seasoned
50) Which of the following is true of a red herring prospectus?
A) It can be distributed to potential buyers during the pre-filing period, and limited sales can be
finalized during this period.
B) It can be distributed to potential buyers during the pre-filing period to finalize sales.
C) It can be distributed to potential buyers during the waiting period, but no sales can be
finalized during this period.
D) It can be distributed to potential buyers during the post-effective period to finalize any sales.
51) During the post-effective period, the registration statement usually becomes effective
________ days after it is filed.
A) 10
B) 20
C) 60
D) 90
52) Shelf registration under the Securities and Exchange Commission’s Rule 415 allows
________.
A) a quicker form of registration than would otherwise be permitted under the 1933 Act
B) a more thorough examination of a company’s registration statement than would otherwise
occur under the 1933 Act
C) the sale of a limited number of securities prior to registration
D) the sale of securities over a period of time rather than immediately
53) Under the Securities Act of 1933, Section ________ allows the Securities and Exchange
Commission to exempt offerings not exceeding $5 million.
A) 11(a)
B) 17(a)
C) 3(b)
D) 6(b)
54) A negotiable instrument is a stock, a bond, or any other instrument of interest that represents
an investment in a common enterprise with reasonable expectations of profits that are derived
solely from the efforts of those other than the investor.