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My CPA-REGmodule24
Notecards I made from Wiley's 2012 CPA Exam Review
| Question | Answer |
|---|---|
| What is the purpose of the Securities act of 1933? What does it apply to? | 1.provide investors with full fair disclosures of material information relating to issuance of securities and prevent fraud/misrepresentation 2. IPO's |
| What does the SEC do? And what abilities does it have? | 1.interprets acts, conducts investigations, adjudicates violations, performs rule-making function to implement acts 2.can subpoena witnesses, obtain injunction preventing sale of securities (cant asses $ penalties w/o court proceedings) |
| What does the Securities act of 1933 require? | file registration act with SEC before public sale, provide prospectuses to investors with or before sale of securities to public |
| What are the primary functions of the SEC? | regulate securities markets, maintain fair markets, protect investors, review corporate financial statements, enforce securities laws, provide guidance for accounting rules |
| Is treasury stock included in the definition of a security? | Yes |
| What is the definition of an insider? What is beneficial ownership? | 1.officers/directors AND owners of >10% any class of issuer's equity securities (debenture not an equity security), include beneficial ownership 2.stock owned by owners spouse, minor children,relative in same house, stock held in trust&owner beneficiar |
| In beneficial ownership can both spouses be considered insiders? | Yes if both own stock and net amount is >10% of entity's common stock |
| What is the definition of an underwriter? | person who purchased security with a view to public distribution or participates in such an undertaking (not include someone who sells on commission for underwriter i.e dealers) |
| Are issuance of securities as part of business reorganization covered by the securities act of 1933? issuance of stock warrants? the employee stock purchase plan? stock dividends? Stock splits? | 1. Yes 2. Yes 3. Yes and company must provide a prospectus to each employ to whom stock is offered 4. No 5. No |
| What is included in the registration statement? Does it ever become public? What is the effective date of registration statement? | 1.financial statements and all other relevant information about the entities property, business, directors, principal officers, and the prospectus 2. Yes along with the prospectus once its been filed 3.the 20th day after filing |
| When can securities be offered to be sold? When can they be sold? | 1. Once the registration statement has ben filed 2. Once the effective date is reached (20th day after filing) |
| What is the definition of a prospectus? If its after the effective date, when is communication not considered a prospectus? | 1. Any notice/communication offering any security for sale. May be written/tv/radio 2.written prospectus sent before/same time of communication, or only states from whom written prospectus available, identifies security, states price, & who execute order |
| When is registration of securities required? Does interstate commerce transactions include only sales between state lines? | 1.if offered, sold, delivered in interstate commerce or through the mail 2. no includes trade, commerce, transportation, communication or transaction within one state but merely impacts commerce of another state |
| Who has the primary duty of registration? Can it be disclaimed in writing or orally? Can anyone but the issuer by liable for selling unregistered securities? | 1.the issuer 2.No 3.Yes, anyone who sells unregistered securities may be liable to a purchaser |
| What general information is required in registration statements? | audited financial statements; names of issuer, directors, officers, general partners, underwriters, large stockholders, counsel; risks associated w/securities; description property, business, capitalization; mgmt info; description security/use of proceeds |
| How does the prospectus statement filed as part of the registration statement differ? | same info but may be condensed or summarized |
| If a company decides to have a second distribution of securities, must a registration statement be submitted again? What is a shelf registration? | 1.Yes 2.allows issuers to register securities once and then sell them on a delayed or continuous basis "off the shelf" w/o having to register again. Allows entity to respond better to market changes |
| What is an S-1 form? S-2 and S-3? SB-1 and SB-2? | 1. basic long-form registration statement 2.ease burden of disclosures, require less detail than S-1. Firm on file under 1934 act may just reference much of the info 3.For small business (Rev<25mill) reduce financial/nonfinancial info required |
| What security issues are exempt from registration? | -Note/draft/check maturity <9months for commercial purpose -Intrastate issues (issuer is resident of state, do 80% business in state, use 80% proceeds in state, all offerees/purchasers state residents,9 months after last sale resales only instate) |
| What other security issues are exempt from registration? | -Issues up to 5mil 1yr period, file notice with SEC, offering circular provided to offeree (unaudited financial info, describe security) nonissuers sell 1.5mil 1yr -govt,bank,farmer,co-op,ICC common carriers, nonprofit religious,ed,charity org securities |
| What still other sescuirty issues are exempt from registration? | -security issued exclusively to existing shareholders, no commission -certificates issued by receiver or trustee in bankruptcy -insurance/annuity contracts |
| What are the exempt transactions in the act of 33? May be subject to reporting requirements of 34 tho | -sale/offer by person other than issuer,underwriter,dealer (controlling person considered underwriter/issuer) -Regulation D Rules 504, 505,506 -Postregistration trans by dealer if >90 days since IPO or >40 days of issuance (nor part of leftover issuance |
| Under Regulation D, what transactions does Rule 504 exempt from registration? | issuance securities up to 1 mil in 1 year -restricted to accredited investors (banks, insurance companies, high-worth individuals) -no resell restrictions -no disclosure required -send notice to SEC within 15 days of first sale |
| Under Regulation D, what transactions does Rule 505 exempt from registration? | issuance up to 5mil in 1yr -No general offering within 1yr -limit to 35unaccredited investors(accredited unlimited) in 1yr -resell held two yrs -nonaccredited investors provided audited financial statements |
| What are examples of an accredited investor? | banks, savings and loans, credit unions, insurance companies, broker dealers, trusts, partnerships, corporations -Ppl joint/individual worth >1mil or income 200,000 each past two years |
| Under Regulation D, what transactions does Rule 506 exempt from registration? | private placement of unlimited securities -generally same rules 505 -35 unaccredited investors must be sophisticated(knowledge/experience in finance) or rep. by one |
| A controlling person selling restricted stock normally is thought of as an underwriter and normally must register the sale. What are the requirements of rule 144 when the person is selling through a broker that allows the sale to be unregistered? | -broker performs no service beyond typical (execute order, receive customary fee) -owned (include beneficial) for at least 2 yrs -limited amts sold based on formula -public have available adequate disclosure of entity -notice filed with SEC |
| Do antifraud provisions still apply if securities and transactions are exempt from registration, any requirements necessary? Is scienter needed to prove? | 1.Yes, as long as interstate commerce is used to sell or offer 2.No, negligence is sufficient |
| Can a purchaser recover losses through civil liability? What must be established? | Yes -purchased security under misleading registration statement (need not rely on tho) or a nonexempt unregistered security -suffered economic loss -NO need for privity of contract, NOR prove intent to deceive |
| Under a civil liability, who may the purchaser recover from? Who has the burden of proof? | 1.-issuer -directors, partners, underwriters -signers of registration statement -experts of authorized statements (attorney, accountants, engineers, appraisers) 2.Defendant |
| Under a civil liability suit, how much may the purchaser recover? What is the statues of limitations? | 1.amount paid plus interest less income received or can ask for rescission of sale instead of damages 2. earlier of 2yrs after fraud discovered or 5yrs after fraud occurred |
| What potential defendant cannot use the due diligence defense? How would it be used? | 1. the issuer 2. expert conduct reasonable investigation no reason to believe there was misstatement or relied on expert for part and no reason to believe misstatement occurred or after reasonable investigation no reason believe nonexpert statement untru |
| Under the act of 1933, when would a person face criminal liability? What is the punishment? If securities or transactions are exempt could you still be criminally liable? | 1.intentionally/willfully make untrue statement, omits fact or violates act/regulation. Reckless disregard of truth may qualify. Tampering of documents and use interstate commerce/mail to fraudulently sell do qualify. 2.fine/imprisonment up to 20yrs 3.y |
| What is the preliminary prospectus under SEC regulations known as? | the red herring prospectus |
| What is a tombstone advertisement? | notifies potential investors that a prospectus is available. Cannot be constructed to offer the security for sale |
| What are the purposes of the SEC act of 34? | federally regulate security exchanges, require periodic disclosure, require adequate info provided in various transactions, prevent unfair use of info by insiders, prevent fraud and deception |
| What securities must be registered with the SEC under the act of 34? | -over the counter/other equity securities(include convertible) traded in interstate commerce & entity has assets >10mill or >500 shareholders -securities traded on national exchange (exempt 33, 34 may regulate) -securities required to register under 33 |
| What disclosures are required in registration done under SEC act of 34? | names of officers/directors, nature of business, financial structure, bonus and profit sharing provisions |
| Under the SEC act of 34, what disciplinary powers does the SEC have? | -revoke/suspend registration -deny registration -permanent/temporary suspension of trading securities -accounting and disgorgement (repayment) of illegal gains -sanction individuals violating foreign laws -identification of large traders |
| Under the SEC act of 34, what securities are exempt? | -securities guaranteed by US gov or US gov has interest -securities of federally chartered bank or savings and loan -securities of common carrier regulated by ICC -industrial development bonds |
| What are the reports that must be filed with the SEC if a issuer of securities is registered under the act of 34? | -annual 10-k -quarterly 10-q(reviewed not reported on by CPA) -8-k event reports for material events (change in corporate control, sig revalue assets, change in amt securities issued) filed w/in 4 days of event -similar reports to shareholders |
| What is a proxy? | grant of authority by a shareholder to someone else to vote his/her shares at a meeting |
| What is contained in a proxy statement that must be sent with proxy solicitation? | disclosure of all material (likely affect vote of average shareholder) facts concerning matters to be voted on -misstatements or omissions of material facts are violations of proxy rules |
| What is required on the proxy itself? What else is sometimes included in the proxy material? | 1.whose behalf solicitation made, identify clearly/impartially each matter to be acted on 2.shareholders proposals that are proper subject to be voted on, Independent CPA certify financials last 2yrs if solicit behalf mgmt OR annual mtg directors elected |
| Who has a right to the list of shareholders for lawful purpose? | own at least 5% of stock, or have held stock for six months or more |
| Does the proxy statement have to be filed with the SEC? the proxy itself? How about any other soliciting material? | Yes, yes, and yes |
| If shareholders request the proxy materials of insurgents do they have to send them? who would send them? what about the cost to sell? | 1. Yes 2. incumbent management 3. paid by the insurgents |
| What are the remedies available for the violation of proxy solicitation rules? | -civil action by shareholder for damages caused by material fact misinformation or omission -injunctions -vote may be set aside and court require new proxy solicitation with full and fair disclosure |
| What is a tender offer? Do reporting and disclosure offers apply? | 1.invitation of buyer to shareholders to tender shares owned for sale for price specified over time 2.yes to provide shareholders full disclosure by bidder and targeted company |
| What is a company entitled to in a short swing profit? How is it calculated? Can losses offset profits? | 1.recover profits from insider who sells stock of company within six months of purchase 2.matching highest sale price with lowest purchase price found within 6 month period 3.No |
| What do the antifraud provisions set out in the act of 34 apply to? | all securities registered or not as long as mail,interstate commerce or national stock exchange is used -very broad, includes any act practice or scheme which is deceptive or manipulative |
| Under the act of 34, what must a plaintiff prove in a fraud case? | -defendant made material(would reasonable person use to make decision)fact false statement/omission -defendant act w/scienter(knowledge falsity/reckless disregard truth) -plaintiff relied on false statements plaintiff may sue for $damages or rescind tr |
| Under the act of 34, does fraud apply to brokers, How? Who can sue brokers? apply to person who lends name to statements used in buying/selling? Insider who use inside info? | 1.Yes if intend to never deliver securities or intend to misappropriate proceeds of sales 2.SEC b/c supreme court 3.yes 33 act only applies to sellers/offerers 4.yes, insider is any person owing fiduciary duty to company |
| If an insider (tipper) gives inside info to another person (tippee), what is the tipper liable? when is the tippee liable? | 1. illegal profits of tippee 2. if acts on inside information before known by public |
| Under the act of 34, in a civil liability case, is anyone protected from liability if the intentionally manipulates a security? Can a buyer recover? A seller? | 1.No 2.Yes 3.Yes |
| Under the act of 34, in a civil liability case, is there a requirement on the plaintiff side if the person made a misleading statement about any material fact in a document? Is privity necessary? How can the defendant avoid liability? | 1. yes only liable if is plaintiff relied on statement and didnt know it was false or misleading 2. No 3. if defendant prove s/he acted in good faith and had no knowledge the statements were materially misleading |
| Is there any reward available to people who provide information leading to prosecution of insider trading violators? | Yes, the SEC can give these awards |
| What must insiders report to the SEC under the act of 34? When must this be filed? | 1. amount of equity securities -must report changes in ownership within 10 days 2. when securities registered, when registration statement becomes effecting, within ten days of person attaining insider status |
| What is the foreign corrupt practices act (34)? | unlawful for domestic co or employees/agents to give foreign officials something of value to influence decisions -co's must maintain internal control/accurate accounting &protect integrity of audits -covers foreign citizen/co actions w/in US too |
| What is the regulation fair disclosure (34)? | require corporation to disseminate data equally amount investors and analysts (avoid conflicts of interest) -mistakenly gives out info, must disclose publicly once practicable, always w/in 24hrs |
| How much stock must you own to be considered an insider? | at least 10% -must file a report with the SEC under act of 34 |
| Who is covered by the S-Ox act of 02? Whats required by section 906 of the act? | 1.All public companies 2.each periodic report containing financial reports must be accompanied with written statement of CEO or CFO certifying reports comply fully with security laws and fairly present financial condition of company |
| Whats the punishment for an officer who makes certifications while knowing it does not comply with SEC requirements? what about willful violation? | 1.Fined 1 mil, prison 10 yrs 2.5 mil, 20 yrs -SEC can freeze payments to officers/directors during investigation, prevent unfit individuals from serving as officer/director -CEO/CFO give up bonuses/profit on stock sale/incentive-based pay prior 12month |
| Under the S-Ox act, what is section 302 certification? | officers responsible for maintaining internal controls, principal executive/officers disclose significant internal control deficiencies to issuers auditors/audit committee |
| Does the CEO CFO still have to give up bonuses if wrongdoings not by them? If an officer does some wrongdoing, what profits would they need to give up? | 1.Yes 2.profits from stock sales or bonuses received due to stock being overpriced thanks to false info |
| Under S-Ox, what is an attorney required to report to chief legal counsel or the CEO? | material violations of securities laws/ breach of fiduciary duties -report to audit committee or BOD if counsel/CEO doesnt take action |
| What must Pro forma information be reconciled with under S-Ox? | financial statements prepared in accordance with GAAP |
| In what form does the SEC require security holdings to be reported in? | electronically so reach public faster and more easily available |
| What is the purpose of the financial oversight board that was created under the Wall Street Reform and Consumer Protection (Dodd-Frank) Act of 10? | identify threats to the financial stability of the us, promote market discipline, and respond to emerging risks -also identify significant nonbank financial institutions and regulate them, prescribe risk mgmt standards for payment, clearing,and settlemen |
| What companies did the Wall Street Reform act add to the ones that the FDIC could seize and liquidate? What office did the act eliminate? created? | 1.insurance companies and non bank financial companies 2.office of thrift supervision 3.federal insurance office (regulate insurance co's), bureau of consumer financial protection (regulate offering of consumer products) |
| What did the wall street reform act prohibit banking entities from engaging in? Authority given to the Commodity Futures Trading Commission and SEC? | 1. proprietary trading or sponsoring/investing in a hedge or private equity fund 2. regulate derivatives (swaps) markets |
| How did the Wall Street act affect credit rating agencies? Executive compensation policies for public companies? | 1increase transparency, prevent conflict of interests 2co's develop compensation recover arrangements(clawbacks), compensation committee BOD independent, shareholder vote 3yrs on prior exec compensation(6yrs on vote held more 3yrs), vote golden parachute |
| What does the Wall Street act now require mortgage securitizers or originators to retain? | an economic interest, at least 5%, in a portion of the credit risk of any securitized asset that they create and sell |
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Bsantoro
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