Chapter 5 - Professional Responsibilities and Securities Regulations

Question 1

Under Section D, 1933 Securities Act how can you resale stock?

Answer 1

You may only resale securities as part of another transaction exempt from registration

Question 2

Anti Fraud provisions 1933 act (11, 12, 17)

Answer 2

Section 11 - civil liabilty for all misstatements
Section 12 - Civil AntiFraud
Section 17 - Criminal AntiFraud (prosecuted by Justice dept)

Question 3

when can liability be imposed under Anti Fraud provisions of 1933 act?

Answer 3

Where prospectus is issued and contains material misstatement liability can be imposed.

Question 4

What company does the 1934 securities act apply to?

Answer 4

1) Companies with 500 or more unaccredited shareholders
2) traded on a national exchange
3) > $10M in assets

Question 5

tombstone advertisement

Answer 5

makes known the availability of a prospectus

Question 6

what is required to be reported under 1934 securities act

Answer 6

1) insider trading
2) Tender offers
3) Proxy solicitations

Question 7

what transactions are exempt from full 1933 Sec. Act requirements?

Answer 7

All offerings made under Regulation A

Question 8

Offering made under Regulation A of 1933 Sec. Act requires that the issuer?

Answer 8

File an offering circular with the SEC

Question 9

Rule 504, 505, 506: Ask yourself

1) what is the issuance $ limitation
2) what is the investor # and type limitation
3) what are the required disclosure

Answer 9

504 - < $1M in 12 months and no required disclosures
505 - < $5M in 12 months, < 35 unaccredited, ANY amount of accredited, if any unacc. invest ALL investors get an annual report
506 - $UNLIMITED, < 35 unaccredited sophisticated investors, ANY accredited, if any unacc. invest ALL investors get an annual report

Question 10

Define a security under 1933 Sec. Act

Answer 10

Something you invest in for profit but don’t participate in management

Question 11

Which act (1934 or 1933) requires scienter and intention

Answer 11

1934

Question 12

what is constructive fraud (MIGAD) vs Actual Fraud in Common Law?

Answer 12

Constructive Fraud (MIGAD)
Actual Fraud requires intent to decieve.

Question 13

Circular 230 requirements and rules to know (PARP)

Answer 13

P - Prohibits practitioners from endorsing or negotiating refund checks issued to the client.

A - Addresses practice before the IRS of practitioners
R - Requires any compensation/referral agreement to be disclosed
P - Prohibits Practicioners UNCONSCIONABLE fee (unless for audit, refund of penalties, or judicial proceeding

Question 14

Under Circular 230, who are the practitioners? (CAAs and Enrolled AARps)

Answer 14

C - CPA
A - Attorneys
A - Appraisers

Enrolled A - Agents
Enrolled A - Actuaries
Enrolled Rp - Retirement Plan agents

Question 15

what is a covered opinion? (tax shelter opinion)

Answer 15

It is an opinion more likely than not to challenge IRS around Tax Avoidance.

Question 16

What SECURITIES are exempt from 1933 Act registration requirements? (BRINGS)

Answer 16

B - Bank and Savings
R - Railroad
I  - Insurance Policies (not securities)
N - Not for profit Orgs
G - Government municipalities
S  - Short term commercial paper

Question 17

what needs to be proved under section 11?

Answer 17

1) Acquired stock
2) Suffered Loss
3) Material Misstatement

Question 18

Who is liable under section 11?

Answer 18

Anyone who signs the FS

Question 19

Difference between Section 11 (1933) and Rule 10b-5 (1934)?

Answer 19

Rule 10b-5 must prove

1) Scienter (Intent to deceive)
2) Reliance

Question 20

Required reports to file with the SEC under 1934 Act?

Answer 20

10-K, 10-q, 8-k, and 5% TIP
5% or more shareholders
Tender Offers
Insider Trading
Proxy solicitations

Question 21

How are intrastate security offerings treated under 1933 Act?

Answer 21

They are exempt from 1933 requirements if doing > 80% of business in the exempt state. May not be sold for 9 months

Question 22

Which registration transaction is exempt from FULL requirements of 1933 act?

Answer 22

ALL Regulation A offerings
INTRAstate Sales(in one state)
Sales NOT with Issuer underwriter or dealer
Exchanges with existing holders or Corp Reorg
Private offering Regulation D

Question 23

Under Reg A, what must the issuer file?

Answer 23

Offering statement with OFFERING CIRCULAR

Question 24

Who can be an INSIDER for a corp?

Answer 24

An Attorney (Rule 10b)
Stockholder with > 10% of common stock
Officers and Directors

Question 25

Ultramares rule applies to what parties? (PI)

Answer 25

1) Parties in PRIVITY | 2) Parties INTENDING to use FS

Question 26

Beside fraud and constructive fraud, when is a CPA liable to a third party?

Answer 26

When the CPA knows the 3rd party will be relying on the report, CPA is liable for Negligence

Question 27

What needs to be proved for negligence? (DBCI)

Answer 27

Duty of care Breach of duty Cause Injury

Question 28

General conditions to Regulation D | NoAd, NoIm, 15, Unlim

Answer 28

1) No Advertising 2) No Immediate resell of securities (2 years) 3) Tell SEC < 15 days 4) Permits Unlimited "OFFERS" to sell

Question 29

What are the 8 steps of the Federal tax legislative process? (Full house and ottawa senators)

Answer 29

1) House Ways and Means Committee starts and approves 2) Voted on by FULL HOUSE 3) Senate Finance Committee approval 4) Approved by FULL SENATE 5) JOINT CONFERENCE COMMITTEE (JCC) resolves Differences between FULL HOUSE & SENATE 6) FULL HOUSE & SENATE approve resolved bill 7) President vetoes bill (or approves) 8) FULL HOUSE & SENATE override veto with 2/3 vote

Question 30

Who has burden of proof in Federal Tax judicial process?

Answer 30

Taxpayer unless they provide credible evidence and keep books in order

Question 31

What are the 5 types of tax courts?

Answer 31

1) US Tax Courts 2) US Districts Courts 3) US Court of Federal Claims 4) US Court of Appeals 5) US SUPREME COURT

Question 32

What 4 questions to ask about tax courts? (What-How-What-To)

Answer 32

What cases does this court hear? How many judges and jury does this court have? What is this court's geographic jurisdiction? To whom Can these cases be appealed?

Question 33

US Tax Courts (What-How-What-To)?

Answer 33

1) Only Federal tax cases; TP hasn't paid disputed amount in full; 2) 19 judges total; heard by 1 at a time. NO JURY 3) NATIONWIDE 4) Appealed to US Court of Appeals

Question 34

US District Courts (What-How-What-To)?

Answer 34

1) Criminal and Civil Trial (NOT JUST TAX CASES) 2) One Judge and One Jury 3) Location where TP lives and does business 4) Court of Appeals

Question 35

US Court of Federal Claims (What-How-What-To)?

Answer 35

1) Most claims for Money Damages against US govt (NOT JUST TAX); TP must pay then sue IRS/Govt 2) 16 judges, No Jury 3) NATIONWIDE 4) FEDERAL Court of Appeals not US Court of Appeals

Question 36

US Court of Appeals (What-How-What-To)?

Answer 36

1) Cases from US Tax Courts, and US District Courts 2) 3 Judge Panel; NO JURY (13 total courts)- (11 Geographic courts) 3) Geographic Courts handle cases (tax and non-tax) in that area 4) US SUPREME

Question 37

US Supreme Court (What-How-What-To)

Answer 37

1) Rarely hear tax (eva ra thang) 2) 9 Judge Panel For Life; No jury 3) NATIONWIDE 4) NO ONE- FINAL LEVEL

Question 38

What is the IRS Audit process (8 steps)

Answer 38

1) Examine return 2) Select returns for Audits (statistical models) 3) Timing (2 years most people; Every year for Corps) 4) Review of Mathematical Errors 5) Formal Examination (Local NOT DC) 6) After the Audit (Issues form 870 - no change report) 7) Unresolved Issues 8) Appeals Process

Question 39

To whom can a CPA give client information out without client permission?

Answer 39

Voluntary quality peer reviews Court Subpoena tax processing Administrative orders

Question 40

What are defined as securities under 1934 act?

Answer 40

ANY Investment contract (EXCEPT CODs and INTERESTS IN GENERAL PARTNERSHIPS)

Question 41

RUle 10b5 applies when?

Answer 41

INTERstate (US postal service, across multiple states) or traded on National securities exchange

Question 42

State BOARD of Accountancy Disciplinary power

Answer 42

May Conduct formal hearing for possible disciplinary action. ONLY BOARD May revoke and suspend licenses

Question 43

Five penalties state board of accountancy can impose

Answer 43

1) Suspension or revocation of license 2) Monetary fine 3) Censure (Formal disapproval) 4) Probation 5) CPE unit requirements

Question 44

3 types of misconduct for state BOARD

Answer 44

1) Misconduct while performing accounting services 2) Misconduct OUTSIDE of performing accounting services 3) Criminal Conviction

Question 45

What does AICPA and State CPA SOCIETIES have power over?

Answer 45

MEMBERSHIP TO THEM ONLY | NOT CPA licenses

Question 46

Which TPs are subject to most audits?

Answer 46

Self Employed Cash basis Individuals with AGIs > $150+ When information doesn't match W2 and 1099

Question 47

Who is not an insider?

Answer 47

Someone who has < 10% of ALL EQUITY (not just voting equity)