STU2 Flashcards
Which issuer may use a free writing prospectus?
SEC regulations regarding communications prior to and during a registered securities offering define a free-writing prospectus as a written offer, including one in an electronic format, that is not a statutory prospectus. Any issuer, under certain conditions, may use a free-writing prospectus after the registration statement is filed.
Under the Security Exchange Act of 1934, short-swing profits arise from the sale and purchase of the issuer’s stock within?
180 days (6 months)
The SEC permits the use of Form S-3 by firms that have filed with the SEC for at least 1 year and?
Have a market capitalization of at least $75 million for seasoned issuer’s.
How does a plaintiff recover under Rule 10b-5?
The plaintiff must have relied on the misstatement or omission of a material fact with regard to the purchase or sale of a security. Rule 10b-5 is an antifraud provision that requires proof of scienter, that is, of an intent to deceive, manipulate, or defraud. In this context, even gross negligence probably does not satisfy the scienter requirement, although some courts have held that it does if the accountants had a fiduciary duty (such as that owed to a client) to the plaintiff.
What would support a finding of constructive fraud on the part of a CPA?
Whether an accountant is liable for fraud depends on whether (s)he acted with scienter. Scienter means that the person making a representation knew that it was false at the time of making it or acted with a reckless disregard for the truth. The difference between actual and constructive fraud is that the scienter requirement for the latter is met by gross negligence (reckless disregard). Hence, the following four elements are necessary to prove constructive fraud: (1) misrepresentation of a material fact, (2) reckless disregard for the truth, (3) reasonable reliance by the injured party, and (4) injury. Thus, the presence of reckless disregard for the truth would support a finding of constructive fraud on the part of a CPA.
The 1933 act exempts which certain types of securities and transactions from the registration requirements?
The 1933 act exempts certain types of securities and transactions from the registration requirements. These include securities issuances by not-for-profit organizations, domestic governments, banks, savings and loans associations, companies as part of an approved reorganization, common carriers regulated by the ICC, receivers or trustees in bankruptcy, and companies in exchange for existing securities if no commission is paid. Intrastate offerings, negotiable instruments (due within 9 months), and securities sold under Regulations A and D (small or limited offerings and private placements, respectively) are also exempt. Insurance policies and annuity contracts are regulated by the states, not by the federal government. However, other securities issued by insurance companies are regulated by the 1933 act.
Describe when a Form 8- K should be filed.
Current reports must be promptly filed on Form 8-K. It describes certain material events that must be disclosed within 4 calendar days. They include (1) changes in control of the registrant, (2) the acquisition or disposition of a significant amount of assets other than in the ordinary course of business, (3) bankruptcy or receivership, (4) resignation of a director, and (5) a change in the registrant’s certifying accountant. Reporting of material other events involving changes in financial condition or operations is optional. Thus, no mandatory time for filing is established for these events. Nevertheless, registrants are encouraged to file promptly and with due regard for the accuracy, completeness, and currency of the information.
The Sarbanes-Oxley Act of 2002 requires management of publicly traded corporations to do all of the following
The Sarbanes-Oxley Act of 2002 imposes many requirements on management, boards of directors, and auditors. Section 404 applies to internal controls and reports thereon. Section 404 requires management to establish and document internal control procedures and to include in their annual reports a report on the company’s internal control over financial reporting. The report is to include (1) a statement of management’s responsibility for internal control, (2) management’s assessment of the effectiveness of internal control as of the end of the most recent fiscal year, (3) identification of the framework used to evaluate the effectiveness of internal control (such as the COSO report), and (4) a statement that the external auditor has issued an attestation report on management’s assessment. (But PCAOB AS No. 5 requires a registered auditor merely to express an opinion, or disclaim an opinion, on internal control, not management’s assessment.) Section 301 does address activities of the board, but it does not require the board to approve the choice of accounting methods and policies. Rather, it may assist in the choices of methods and policies.
Describe what procedures auditors must employ in regard to working papers.
Auditors must retain their audit working papers for at least 7 years. Under Title VIII of the act (also known as the Corporate and Criminal Fraud Accountability Act of 2002), it is a crime for auditors to fail to maintain all audit or review working papers for 5 years. Furthermore, tampering with records, for example, altering, destroying, or concealing audit working papers, for the purpose of impairing their integrity or availability for use in an official proceeding or to obstruct such a proceeding is a crime punishable by up to 20 years in prison.
An offering made under the provisions of Regulation A of the Securities Act of 1933 requires that the issuer
Under Regulation A, a small public issue of securities is exempt from full registration with the SEC if certain requirements are met. Regulation A applies to issuances not exceeding $5 million if the issuer files an offering circular with the SEC, provides it to each offeree and purchaser, and observes the 20-day waiting period.
The Securities and Exchange Commission requires public companies to disclose
Accountants often confer with clients, underwriters, and their respective counsel about the accounting and auditing requirements of the Securities Act of 1933 and of the SEC. A service often requested is the issuance of letters for underwriters and certain other requesting parties, commonly called comfort letters. What constitutes a reasonable investigation of unaudited financial information sufficient for this purpose has never been authoritatively established. Consequently, the underwriter or other party should establish those procedures necessary for his or her purposes. However, the accountants cannot provide any assurance about the sufficiency of those procedures and should avoid any implication that they are carrying out such procedures as they consider necessary. Furthermore, the SEC does not require the disclosure of an auditor’s comfort letter for underwriters.
A CPA has a responsibility to clients and third parties for financial reporting under state law and federal securities statutes. Accountants are frequently sued. The basis for a finding of accountant liability
Accountants may incur civil liability to third parties under Section 18 of the 1934 act. Section 18 imposes liability for making or causing to be made false or misleading statements of material fact in any report, application, document, or registration statement filed with the SEC under the act. To recover, a purchaser or seller must prove (1) the existence of a material misstatement or omission of a fact, (2) reliance on the misstatement in buying or selling the security, and (3) damages (losses). The plaintiff’s proof of these elements (the prima facie case) shifts the burden of proof to the accountant. An accountant’s defense to a suit based on Section 18 is to prove that (s)he acted in good faith and had no knowledge that the statement was false or misleading. This defense is less burdensome than proof of due diligence. Good faith is an absence of an intent to deceive, that is, an absence of scienter. Lack of good faith may therefore be shown by proof of scienter or of the accountant’s gross negligence or reckless disregard for the truth.
Under the liability provisions of Section 11 of the Securities Act of 1933, which of the following must a plaintiff prove to hold a CPA liable?
Section 11 is the most frequently invoked basis for suit under the Securities Act of 1933. Under Section 11, the investor need only prove that (1) (s)he suffered losses in a transaction involving the particular securities covered by the registration statement and (2) the registration statement contained a false statement or an omission of a material fact for which the CPAs were responsible, e.g., in the audited financial statements. The plaintiff need not prove reliance, but the defendant can plead the plaintiff’s knowledge of the misstatement or omission as a defense.
