CH 3 SEC 1934

Question 1

Can issuers selectively release insider information if the recipient promises not to act on it?

Answer 1

No. The selective release of insider information is prohibited.

Question 2

What does Regulation M-A apply to?

Answer 2

Regulation M-A applies to going-private transactions.

Question 3

How many minutes before trading ends may issuers of actively traded securities purchase their own shares?

Answer 3

Issuers of actively traded securities may not purchase their own shares during the last 10 minutes of trading.

Question 4

What form must a person file with the SEC within 10 days of becoming an insider?

Answer 4

Form 3.

Question 5

If a client is long 900 shares of ABC and short 4 ABC calls, what is his net long position for tendering?

Answer 5

500 shares. The 4 short calls (each representing 100 shares) reduce his net long position by 400 shares.

Question 6

What is considered equivalent to stock for participating in a tender offer?

Answer 6

Convertible securities, rights, or warrants of the issuer. Conversion/exercise is NOT required unless accepted.

Question 7

How many times is a quarterly Form 10-Q filed each year?

Answer 7

Three times per year since the fourth quarter is included in the annual report.

Question 8

Must the amount of compensation received by the party writing the fairness opinion be disclosed?

Answer 8

False. The fact that the writer will be compensated must be disclosed, but not the amount of compensation.

Question 9

Define a reporting company.

Answer 9

One that is SEC-registered, listed on an exchange, and has total assets exceeding $10 MM with 500 or more shareholders.

Question 10

What is the maximum bounty for reporting an insider trading violation?

Answer 10

A bounty of up to 30% may be offered to a person who reports an insider trading violation.

Question 11

If the terms of a tender offer are changed, how many additional days must the offer remain open?

Answer 11

For at least 10 business days from the change.

Question 12

What form must be filed if an insider purchases or sells stock?

Answer 12

Form 4 must be filed with the SEC within two business days of the trade.

Question 13

Name two prohibitions that relate to being an insider.

Answer 13

1. No shorting of the stock and 2. No keeping of short-swing profits.

Question 14

What is the maximum civil penalty that the SEC may impose under the Insider Trading Act?

Answer 14

Treble damages (three times the profit made/loss avoided) and disgorgement of any profit.

Question 15

Can Jim sell short the stock for which he is an insider?

Answer 15

No. Jim is prohibited from selling short the stock for which he is an insider.

Question 16

Can a supervisor of an individual who violated insider trading rules be penalized?

Answer 16

True.

Question 17

What is the primary purpose of Regulation FD?

Answer 17

To prevent the selective disclosure of material inside information to securities professionals.

Question 18

List some reasons for the filing of Form 8-K.

Answer 18

Change in company control, accountant, or fiscal year, or the resignation of a director.

Question 19

Does Regulation M-A apply to cash or stock tender offers?

Answer 19

True.

Question 20

Can a tender offer be placed by the issuer or a third party?

Answer 20

True.

Question 21

According to the Insider Trading Act, who may be held liable for a violation?

Answer 21

Both the tipper and tippee may be held liable.

Question 22

If an insider sells shares today that were acquired three months ago, can she keep the profit?

Answer 22

No. Under the short-swing profit rule, an insider may not keep a profit earned on stock held less than six months.

Question 23

What must be filed with the SEC within five business days of acquiring more than 5% of a company’s stock?

Answer 23

Schedule 13D.

Question 24

Who has the authority to initiate criminal action related to insider trading?

Answer 24

The U.S. Department of Justice.

Question 25

Is it a violation if a corporate officer informs his son of an upcoming earnings report and the son trades?

Answer 25

Yes. Both parties have violated the Insider Trading Act.

Question 26

What is short tendering?

Answer 26

The prohibited practice of tendering shares that are not owned.

Question 27

After filing notice of an impending M&A deal, how many days must elapse before it can be completed?

Answer 27

30 days.

Question 28

Can the person making a tender offer purchase the subject company's convertible bonds?

Answer 28

False. During the tender period, the subject company's nonconvertible bonds may be purchased, but not its convertibles.

Question 29

Define short-swing profit.

Answer 29

A profit earned on stock held less than six months.

Question 30

According to the HSR Act, how many days after notification may an M&A deal be completed?

Answer 30

30 days after notification.

Question 31

If a client is short 600 shares of the subject company involved in a tender offer, how many shares may he tender?

Answer 31

Zero. An investor is prohibited from using borrowed shares to respond to a tender offer.

Question 32

Is a person who owns 11% of a company's common stock defined as an insider?

Answer 32

True. Insider status is determined by having ownership greater than 10%.

Question 33

When must insiders report their transactions?

Answer 33

Within 2 business days of the trade.

Question 34

If nonpublic information is unintentionally disclosed to an analyst, when must it be disclosed to the public?

Answer 34

Within 24 hours of its disclosure.

Question 35

Can the person making a tender offer purchase the subject company's nonconvertible bonds?

Answer 35

True. Nonconvertible bonds of the subject company may be purchased during a tender period.

Question 36

How many shares is Jim net long if he owns 1,000 DEF shares, sells 5 DEF calls, and buys 2 DEF puts?

Answer 36

He is net long 500 shares.

Question 37

Is short tendering acceptable if the subject company stock is not on the threshold security list?

Answer 37

False. Short tendering of stock is prohibited.

Question 38

Define an insider.

Answer 38

Officers, directors, partners, greater than 10% owners, and immediate family members of all listed.

Question 39

Can the person making a tender offer engage in open market purchases of the subject company's stock?

Answer 39

True.

Question 40

What will a firm establish to restrict the flow of potential insider information?

Answer 40

Information barriers.

Question 41

When are companies planning a proposed M&A transaction required to file notice?

Answer 41

Before the deal is completed.

Question 42

What are treble damages?

Answer 42

The civil penalty for insider trading, which is three times the profit made or loss avoided.

Question 43

If a BD buys its own stock in after-hours trading, must it use the same BD it used during normal hours?

Answer 43

False. One BD may be used during normal hours, and a different BD may be used in after-hours trading.

Question 44

To participate in a tender offer, what must an investor be long?

Answer 44

The stock or its equivalent.

Question 45

Who certifies the accuracy of the information in a company's annual and quarterly financial reports?

Answer 45

The firm's Chief Executive Officer (CEO) and Chief Financial Officer (CFO).

Question 46

When must a company file a Form 10-K with the SEC?

Answer 46

Annually.

Question 47

Must a fairness opinion disclose any extra payment a BD will receive based on completion of an M&A deal?

Answer 47

Yes. Any material relationship that has existed within the last two years must be disclosed.

Question 48

What is the primary purpose of a fairness opinion?

Answer 48

To judge whether the transaction price is fair within a reasonable range of prices.

Question 49

Must a relationship between the BD writing the fairness opinion and a party subject to the opinion be disclosed?

Answer 49

Yes. Any material relationship that has existed within the last two years must be disclosed.

Question 50

True or False: A person who owns 11% of a company's common stock is defined as an insider.

Answer 50

True. Insider status is determined by having ownership greater than 10%.

Question 51

Under Regulation FD, an acceptable method of public disclosure would be the filing of Form ____ with the SEC.

Answer 51

Under Regulation FD, an acceptable method of public disclosure would be the filing of Form 8-K with the SEC.

Question 52

True or False: In a partial tender, a person may tender the subject company's convertible bond without converting it.

Answer 52

True. If the tender is accepted, he would then be required to convert.

Question 53

True or False: The person making a tender offer may purchase the subject company's nonconvertible bonds.

Answer 53

True. During a tender period, nonconvertible bonds of the subject company may be purchased, but not convertible bonds.

Question 54

What is the general purpose of Regulation M-A?

Answer 54

To relax the communication restrictions between BDs and investors prior to a company's filing of offering statements.

Question 55

Jim owns 1,000 DEF shares, sells 5 DEF calls, and buys 2 DEF puts. For tendering, how many shares is he net long?

Answer 55

He is net long 500 shares (The 1,000 share position is offset by the sale of 5 calls). The long puts have no effect.

Question 56

True or False: Under Regulation M-A, a prospectus, proxy, or tender offer statement must be provided to investors.

Answer 56

TRUE

Question 57

True or False: Short tendering is acceptable provided the subject company stock is not on the threshold security list.

Answer 57

False. Short tendering of stock is prohibited. An investor must be long the subject company's stock or its equivalent.

Question 58

Insiders must return short-swing profits, which are profits earned on stock that has been held for less than ___ months.

Answer 58

Insiders must return short-swing profits, which are profits earned on stock that has been held for less than six months.

Question 59

For insider trading violations, the SEC can sue for treble damages. What does that statement mean?

Answer 59

The SEC can sue for three times the damage (profit made or loss avoided).

Question 60

True or False: The person making a tender offer may NOT engage in open market purchases of the subject company's stock.

Answer 60

TRUE

Question 61

True or False: The primary purpose of a fairness opinion is to verify the credit rating of the newly merged entity.

Answer 61

FALSE

Question 62

What will a firm establish between departments to restrict the flow of potential insider information?

Answer 62

Information barriers.

Question 63

If a mutual fund owns 7.5% of a company's common stock, are all current fund shareholders required to file Schedule 13D?

Answer 63

No. The mutual fund must report its ownership, not the shareholder.

Question 64

Regarding a proposed M&A transaction, when are the companies planning the transaction required to file notice?

Answer 64

Before the deal is completed.

Question 65

According to Regulation M-A, what information (in plain English) must be provided in a summary term sheet?

Answer 65

Material features and a brief description of the transaction, as well as a summary of disclosures.

Question 66

True or False: Only individuals who acquire more than 5% of a company's stock are required to file Schedule 13D.

Answer 66

False. Any person, or group acting in concert, must file Schedule 13D.

Question 67

True or False: If a BD buys its own stock in after-hours trading, it must use the same BD it used during normal hours.

Answer 67

False. One BD may be used during normal hours, and a different BD may be used in after-hours trading.

Question 68

To what types of transactions do Regulation M-A provisions apply?

Answer 68

Cash or stock tender offers, mergers, acquisitions, or going-private transactions.

Question 69

To participate in a tender offer, an investor must be long ___________ or its ____________.

Answer 69

To participate in a tender offer, an investor must be long the stock or its equivalent.

Question 70

What is the maximum criminal penalty for an individual convicted of insider trading?

Answer 70

$5 million fine, and/or up to 20 years in prison.

Question 71

Who certifies the accuracy of the information contained in a company's annual and quarterly financial reports (10K/10Q)?

Answer 71

The firm's Chief Executive Officer (CEO) and Chief Financial Officer (CFO). The term principal officer may also be used.

Question 72

True or False: To promote balanced views, the fairness committee must include members from outside the deal team.

Answer 72

TRUE

Question 73

True or False: Regulation M-A applies to equity IPOs and new issues.

Answer 73

FALSE

Question 74

Individuals must register with the SEC within __________ of becoming an insider.

Answer 74

Individuals must register with the SEC within 10 days of becoming an insider.

Question 75

Where may investors obtain information regarding SEC filings made by reporting companies?

Answer 75

On the SEC's EDGAR website.

Question 76

When must a reporting company file a Form 10-Q with the SEC?

Answer 76

At the end of the first three fiscal quarters of each year (fourth quarter included in annual report).

Question 77

If a company announces that its CFO has resigned effective today, what form must be filed with the SEC?

Answer 77

Form 8-K. This form is filed for significant changes/events that may impact share price or financial condition.

Question 78

True or False: Schedule 13D must be filed with the issuer, SEC, and the exchange on which the stock trades.

Answer 78

TRUE

Question 79

The criminal penalty for insider trading by an individual is a maximum of $_________ and/or ___ years in prison.

Answer 79

The criminal penalty for insider trading by an individual is a maximum of $5 million and/or 20 years in prison.

Question 80

What does the Hart-Scott-Rodino Act require?

Answer 80

The filing of notification reports regarding large merger and acquisition (M&A) transactions.

Question 81

Issuers/affiliates repurchasing their own shares may not buy the shares in the last ____ minutes of the trading day.

Answer 81

Issuers/affiliates repurchasing their own shares may not buy the shares in the last 30 minutes of the trading day.

Question 82

If an investor acquires 6% of a reporting company's preferred stock, is Schedule 13D required to be filed?

Answer 82

Yes. Filing is required when a person acquires more than 5% of any class of equity security (including preferred stock).

Question 83

True or False: When an issuer repurchases its own shares, it may do so at the opening price during a trading day.

Answer 83

FALSE

Question 84

While waiting for her train, an RR overhears a rumor of an impending corporate takeover. What should she do?

Answer 84

Tips and unverified rumors must be reported to the firm's legal/compliance department.

Question 85

What are the four guidelines that must be followed for an issuer to be allowed to purchase its own common stock?

Answer 85

1) One BD used, 2) time of purchase, 3) volume of daily purchase, and 4) price of purchase.

Question 86

According to Rule 10b-18, at what price may an issuer purchase its own shares?

Answer 86

At a price not exceeding the higher of the independent bid or the last transaction price.

Question 87

According to Rule 10b-18, how many BDs may an issuer use to purchase its own common stock during normal market hours?

Answer 87

One.

Question 88

Issuers of nonactively traded securities may not purchase their own shares during the last ____ minutes of trading.

Answer 88

Issuers of nonactively traded securities may not purchase their own shares during the last 30 minutes of trading.

Question 89

When must the board of directors of the company, subject to a tender offer, advise its shareholders regarding the offer?

Answer 89

Within 10 days from the date the tender is made.

Question 90

Who is required to file Form 13F?

Answer 90

A mutual fund manager who exercises investment discretion over at least $100 million in equity securities.

Question 91

What is the purpose of the Sarbanes-Oxley Act of 2002?

Answer 91

To enhance corporate governance and strengthen corporate accountability.

Question 92

For tender purposes, is being long an ABC call option equivalent to a long ABC stock position?

Answer 92

No. Investors must exercise a long call to participate in a tender offer.

Question 93

What SEC form is used to report the restricted stock a corporate officer receives as compensation in his 401(k) plan?

Answer 93

Form 4.

Question 94

Under Sarbanes-Oxley, what must be included in senior management's annual report?

Answer 94

Its assessment of the effectiveness of internal controls and certification from the accounting firm auditing its records.

Question 95

According to Sarbanes-Oxley, who is responsible for attesting to corporate financial reports?

Answer 95

The Chief Executive Officer (CEO) and Chief Financial Officer (CFO).

Question 96

What other term may be used for a company's Chief Executive Officer (CEO) or Chief Financial Officer (CFO)?

Answer 96

Principal Executive Officer (PEO) or Principal Financial Officer (PFO).

Question 97

To participate in a tender offer, an investor may only tender shares that she is ____ long.

Answer 97

To participate in a tender offer, an investor may only tender shares that she is net long.

Question 98

True or False: A fairness opinion must disclose any extra payment a BD will receive based on completion of an M&A deal.

Answer 98

TRUE