On-Line Test Bank for Miller & Jentz s3

Interactive Quiz for ALT-12e, Chapter 42

Chapter 42 – Securities Law and Corporate Governance

1. The reasons why the U.S. Congress passed securities legislation in the early 1930s was: a. to promote excessive speculation. b. to help investors make more informed buying and selling decisions. c. to promote manipulation by investment houses. d. to regulate interstate commerce in a more efficient manner.

Answers:

a. Incorrect. After the stock market crash of 1929, which was blamed at least in part on excessive speculation, Congress did not want to promote this kind of activity. b. Correct. The securities legislation was designed to provide investors with better and more extensive information when they buy and sell securities. c. Incorrect. The legislation was not designed to promote manipulation by investment houses. d. Incorrect. The securities legislation was not designed to regulate interstate commerce more efficiently.

2. Which of the following IS NOT one of the major responsibilities of the SEC? a. Supervising the activities of mutual funds. b. Issuing government bonds. c. Regulating trade in securities. d. Investigating securities fraud.

Answers:

a. Incorrect. This is one of the major responsibilities of the SEC. b. Correct. The SEC does not issue government bonds. The Treasury Department would do this. c. Incorrect. This is one of the major responsibilities of the SEC. d. Incorrect. Investigating securities fraud is one of the major responsibilities of the SEC.

3. Which of the following probably IS NOT a security? a. A bond. b. 1,000 shares of IBM stock. c. Mineral rights. d. A family home. 2

Answers:

a. Incorrect. A bond, a promise to pay in the future, is a security. b. Incorrect. Shares of stock are securities. c. Incorrect. A security may also include mineral rights. d. Correct. Because a family would probably not derive any profit they make on the sale of a home primarily or substantially from the managerial efforts or entrepreneurial efforts of someone else, it probably would not be a security.

4. 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? a. A marketing plan for the organization. b. A financial statement certified by a public accounting firm. c. A tombstone ad. d. A proxy statement applicable for all new shareholders.

Answers:

a. Incorrect. The registration statement need not contain a marketing plan. b. Correct. The registration must contain a certified financial statement. c. Incorrect. The registration does not need to contain a tombstone ad. d. Incorrect. The registration does not need to contain, and would not contain, a proxy statement.

5. Which of the following is most likely to be an accredited investor? a. An insurance company. b. A shipyard worker. c. A family farmer. d. A recent college graduate.

Answers:

a. Correct. Of this list, the insurance company is most likely to qualify as an accredited or “sophisticated” investor. b. 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. c. 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. d. 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. 3

6. Under Section 4(6) of the 1933 Securities Act, if an offer for the sale of securities is made solely to accredited investors, it may be exempt from registration if: a. it involves the use of public advertising of securities. b. it involves the use of proxy statements. c. it involves an amount not more than $5 million. d. it involves an amount not more than $1 million.

Answers:

a. Incorrect. This section does not allow public advertising of securities. b. Incorrect. This section does not address the use of proxy statements. c. Correct. This section may come into play only if the amount of securities involved is no more than $5 million. d. Incorrect. This section applies to transactions up to $5 million.

7. The most widely known provision of SEC Rule 10b-5 has to do with: a. the promotion of blue sky laws. b. the prohibition of insider trading. c. the prohibition of underwriting. d. the requirement that proxies be used when voting for directors.

Answers:

a. Incorrect. Blue sky laws are state laws, not federal rules. b. Correct. This rule prohibits insider trading of securities. c. Incorrect. This rule does not prohibit underwriting. d. Incorrect. This rule does not deal with proxies, which are dealt with in Section 14 of the 1934 act.

8. If an individual wrongfully obtains inside information and trades on it for his or her personal gain, the individual should be held liable because the person, in essence, stole information rightfully belonging to another. This is known as: a. the tipper/tippee theory. b. the accountability theory. c. the false consciousness theory. d. the misappropriation theory.

Answers:

a. Incorrect. The tipper/tippee theory states that anyone who acquires inside information as a result of a corporate insider’s breach of his or her fiduciary duty is liable under SEC Rule 10b-5. 4

b. Incorrect. There is no “accountability theory” associated with insider trading. c. Incorrect. False consciousness is a term associated with both Marxist and feminist theories of history and politics. d. Correct. This accurately describes the misappropriation theory.

9. Section 16(b) of the 1934 Securities Exchange Act provides for: a. the exemption of certain small companies from registration requirements. b. the exemption of accredited investors from registration requirements. c. the recapture by a corporation of short-swing profits realized by insider trading. d. the solicitation of proxies from shareholders of Section 12 companies.

Answers:

a. Incorrect. Such exemptions are covered by the 1933 Securities Act. b. Incorrect. Accredited investors do not have registration requirements. c. 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. d. Incorrect. Section 16(b) does not address proxies.

10. Basically, when the Internet is used for the delivery of a prospectus: a. the same rules apply that apply to the delivery of a paper prospectus. b. the rules that apply are different from the rules that apply to the delivery of a paper prospectus. c. the rules require that the delivery be certified, unlike the rules governing the delivery of a paper prospectus. d. there is, in effect, no legal delivery because the SEC has not yet developed rules to cover this situation.

Answers:

a. Correct. The rules that apply to the delivery of a prospectus via the Internet are the same as those that apply to the delivery of a paper prospectus. b. Incorrect. The same that apply to the delivery of a prospectus via the Internet are the same as those that apply to the delivery of a paper prospectus. c. Incorrect. The rules that apply to the delivery of a prospectus via the Internet are the same as those that apply to the delivery of a paper prospectus. d. Incorrect. The SEC has indicated that the rules that apply to the delivery of a prospectus via the Internet are the same as those that apply to the delivery of a paper prospectus. 5