REG: Comm Paper, Contracts, Dodd, Env, Fed Sec Act, JOBS, Prof Resp, Property Law, Sales Law, Secured Transactions

Question 1

What is a promissory note?

Answer 1

A promise to pay a specific amount. There are two parties involved - maker and a payee. It can reference other transactions without harming the instruments negotiability. Example: Bank Certificate of Deposit (CD)

Question 2

What is a draft?

Answer 2

“A commercial paper involving three parties- a drawer; a payee and a drawee

A drawer orders a sum to be paid to a payee by the drawee

May be payable on demand or in the future”

Question 3

What is a check?

Answer 3

“A check is a type of draft that is payable ON DEMAND; payable to order of drawer or bearer

Drawer - person writing the check

Payee - person being paid

Drawee - the bank
“

Question 4

What is the difference between a post-dated check and a negotiable time draft?

Answer 4

“A check is payable on demand; even if post-dated.

A negotiable time draft is not payable until the date designated for payment.”

Question 5

What is a trade acceptance?

Answer 5

“Seller extends credit to Buyer

Buyer agrees to pay Seller - Buyer has primary liability

Seller is both Drawer and Payee - Seller has Secondary Liability”

Question 6

What is the purpose of the negotiation of commercial paper?

Answer 6

Transfers ownership to another party

Question 7

What is required to maintain the negotiability of a commercial paper?

Answer 7

“Must be in writing

Signed by drawer/maker

Be without conditions for payment (other than limitations on payment sources)

Amount of money must be stated

Payable to order or bearer”

Question 8

What characteristics will cancel the negotiability of a commercial paper?

Answer 8

“An additional promise is stated in addition to the promise to pay (like the option to purchase Real Estate)

The promise to pay occurs after some action by another party or an event; it cancels negotiability

Cannot allow for an alternative such as payment or some other action by the maker

Note: a stated amount of payment plus a stated % of interest is OK”

Question 9

What is required to negotiate Order Paper?

Answer 9

“Must have delivery and endorsement

If paper is exchanged for value; transferor must give an UNQUALIFIED endorsement”

Question 10

What are the major types of endorsements on commercial paper?

Answer 10

“Blank - Doesnt name a new payee; transforms into a bearer paper

Special - Names a new payee; transforms into an order paper

Restrictive - Adds restrictions; doesnt stop further negotiation

Qualified - Payment not guaranteed; without recourse added to endorsement”

Question 11

If endorsed; within what amount of time must a check be presented for payment in order to hold the ENDORSER liable?

Answer 11

Within 7 days

Question 12

On a commercial paper; which value will supersede - words or numerical dollar amount?

Answer 12

“Written amount supersedes the numerical dollar amount.

For example; if the words say One hundred dollars and the numerical amount states $1000.00; the value of the paper will be $100.00.”

Question 13

Define primary liability with respect to a contract.

Answer 13

“First in line to pay on the note/draft

Maker of a Promissory Note has primary liability and must pay according to terms of the note

With a Check; no party has Primary Liability

Exception: Drawee (your bank) is primarily liable to pay if they certify - i.e. promise to
pay”

Question 14

Define secondary liability with respect to contract liability

Answer 14

“Drawers are Secondarily Liable if Drawee fails to pay a Draft

Endorsers (the payee) are secondarily liable

Holder in due course can hold Endorser liable

Exception: Endorsed Without Recourse”

Question 15

Define contract liability.

Answer 15

Guarantees payment of a liability

Question 16

When does warranty liability occur?

Answer 16

“Occurs when you negotiate commercial paper

By signing; you warrant to all future parties

By not signing; you warrant to current party only”

Question 17

What five warranties occur with every commercial paper transfer?

Answer 17

“Warranty of Title

No defense will stand against it

No material alteration

No knowledge of bankruptcy proceedings

All signatures are legitimate”

Question 18

What are the requirements for a holder to be a holder in due course?

Answer 18

“Holding a negotiable instrument

Taking instrument in Good Faith - Even if you buy a stolen note and you dont know that its stolen; youre still an HDC

Having no knowledge of defenses again instrument; i.e. problems with the instrument

Giving a present value for the instrument (a future value doesnt count)”

Question 19

What are the personal defenses against a holder in due course (HDC) which will LOSE?

Answer 19

“An HDC takes an instrument free of Personal Defenses (LOSE vs. HDC)

Lack of consideration/value given
Breach of contract/warranty
Duplicate payments
Fraud (in the inducement only)
Voidable contracts"

Question 20

What are the REAL defenses against a holder in due course (HDC); which will WIN?

Answer 20

“A holder in due course takes an instrument subject to Real Defenses (WIN vs. HDC)

Material alterations to the instrument
Forgery
Bankruptcy
Maker not competent to Contract
Fraud in the execution"

Question 21

What must a contract contain?

Answer 21

Offer, Acceptance, Consideration, Proper form (oral or written), Legal subject matter, 2 Competent parties

Question 22

What forms may acceptance of a contract take?

Answer 22

“Can be written or oral

Must be in the form/method required by offeror

Must be mirror image - i.e. no changes in terms”

Question 23

Who can accept an offer?

Answer 23

“Must be accepted by intended party (offeree)

Acceptance can only be made by a party who knows an offer has been made and has all of the facts - AKA a meeting of the minds

They must intend to accept”

Question 24

What happens if an offeree accepts a contract but puts added stipulations?

Answer 24

It is not acceptance; but instead becomes a counter-offer and the original offeror is now the offeree

Question 25

What will void an offer?

Answer 25

"If offeror dies or becomes insane before acceptance; offer is void. Contract is binding if acceptance occurs before death/insanity."

Question 26

What actions or circumstances will revoke a contract?

Answer 26

"Offeror revokes and offeree receives revocation Offeree finds out prior to acceptance that offeror has sold the item In the case of an Option; offeror cannot revoke until the time of the option has elapsed Initial rejection by offeree doesn't void the option."

Question 27

What is an Option?

Answer 27

"Some amount of consideration (like money) is put forth by offeror to keep the offer open for a stated period of time"

Question 28

What is a Requirements Contract? How are they limited?

Answer 28

"These are contracts where someone becomes the exclusive provider of something in exchange for consideration Companies can't get locked in to one and then have market conditions force them to sell something at what has become an unreasonable price"

Question 29

What is promissory estoppel?

Answer 29

"Promises to donate are legally enforceable Basically; you can't tell a charity; Hey; if you buy this $100;000 piece of land; I'll pay for the building that will go on it; and then renege on your promise"

Question 30

What can make a contract VOID?

Answer 30

"Fraud in the execution Formed under extreme duress - extreme Illegal "

Question 31

What can make a contract VOIDABLE?

Answer 31

"Fraud in the inducement Party not competent to contract Formed under SIMPLE duress Undue influence"

Question 32

What is the result of a clerical error in a contract?

Answer 32

"The contract is unenforceable. Example: Person signs a contract to pay $500.00 to have their lawn re-seeded but due to clerical error; it actually reads $5000.00"

Question 33

Contracts under the Statute of Frauds must be in what form to be valid?

Answer 33

They must be in writing.

Question 34

What makes a contract subject to the Statute of Frauds?

Answer 34

"o Cannot be completed within one year o Involves the purchase of real estate o $500+ Sale of Goods o Co-signing and guaranteeing the debt of another"

Question 35

What is the parol evidence rule?

Answer 35

"Prevents one party to a written contract from coming in after the fact and claiming that a certain conversation took place that conflicts with what is agreed upon in the written contract It also prevents using an oral argument to read into the meaning of what is written on paper If it's on paper; it trumps what was agreed-upon orally prior to the written contract Note: does not negate oral agreements made AFTER the contract or disallow oral words from clarifying ambiguous contract language."

Question 36

What are the requirements for the assignment of a contract?

Answer 36

"Contracts are assignable to a third party beneficiary; but must be done so in good faith Obligations may be assignable- Assignor is still liable Assignor may be released from liability if other party grants a novation"

Question 37

When can contracts be discharged by law?

Answer 37

"Party under contract is bankrupt Party under contract dies or is incapacitated Party cannot physically complete the contract (i.e. They are in prison so can't finish building your house)"

Question 38

What is considered the biggest change to financial regulation since the Great Depression of the 1930s?

Answer 38

The Dodd-Frank Wall Street Reform Act of 2010

Question 39

What is the goal of the Volcker Rule?

Answer 39

Banking Institutions maintain healthy capitalization ratios

Question 40

How does the Volcker Rule limit banking institutions?

Answer 40

"Limits banking institutions from owning more than 3% of a hedge fund's total ownership interest Limits banking institutions from owning interests in hedge funds that exceed 3% of their Tier 1 Capital (Common Stock + Retained Earnings + non-redeemable; non-cumulative Preferred Stock) "

Question 41

What does the Volcker Rule require banking institutions to disclose?

Answer 41

Relationships with hedge funds must be fully disclosed to regulators

Question 42

Describe the Federal Unemployment Tax Act

Answer 42

An employer-paid tax. Must file return and pay even if only one employee works there. Deductible to company - Not deductible by the employee. Allows employers to credit the FUTA liability by the amount of State Unemployment Tax (SUTA) they pay.

Question 43

When is an employee covered by Workman's Compensation?

Answer 43

"Employees injured on the job get protection; even if they messed up and caused the injury themselves Exception: If the employee intentionally harmed themselves; there is no Workman's Compensation"

Question 44

What age group is protected under Age Discrimination Laws?

Answer 44

They protect people ages 40 and above at companies where at least 20 people are employed

Question 45

What are the tenets of the Occupational Safety and Health Act (OSHA)?

Answer 45

"Employers should promote a safe workplace and environment for their employees to work in Injury records must be kept Penalties can be both o Civil - $1;000 fine per day o Criminal - Could include imprisonment Employer can require a search warrant for OSHA to investigate their facilities"

Question 46

What types of discrimination are prohibited for employers based on civil rights laws?

Answer 46

"Sex Race Religion National Origin"

Question 47

What are the powers granted under the Environmental Protection Act?

Answer 47

"EPA has the power to assess civil penalties for violating environmental laws like the Clean Air Act The EPA can sue violators Citizens can sue violators States can sue violators Citizens can even sue the EPA to force enforcement For hazardous waste sites: owners; operators; transporters; and lenders associated with the site can be held liable"

Question 48

What are the key points of the 1933 Securities Act?

Answer 48

Governs Initial Public Offerings (not subsequent sales). Covers registration statements and accompanying information filed with SEC. Information must include audited financial statements & a prospectus. Note: Even if a company is exempt from registering under the 1934 Act; they still must adhere to the anti-fraud provisions of the Act

Question 49

What entities are exempt from filing registration statements under the 1933 Securities Act?

Answer 49

"Banks; Commercial Paper; Farmers; Co-ops; Charities; Governments Also exempt: Securities sold in ONE state; where investors are residents; 80% of business done in one state; and resales can't occur within 9 months to interstate parties."

Question 50

What are the key points of the 1933 Securities Act; Regulation A?

Answer 50

"Issuer can issue $50M of securities per year and be exempt if they file a notice with the SEC Non-issuers (AKA a private individual) can sell $1.5M per year and be exempt"

Question 51

Under the 1933 Securities Act; Regulation D; what are Rules 504; 505 and 506?

Answer 51

"Rule 504- Max Amount per year: $1M; Max Investors: Unlimited Rule 505 - Max Amount per year: $5M; Max Investors: 35 Unaccredited or Unlimited Accredited Rule 506 - Max Amount per year: Unlimited; Same as 505; but Unaccredited investors must be sophisticated"

Question 52

"What are the registration form options under the 1933 Securities Act? "

Answer 52

"S-1 - Long Form or S-2 and S-3 - Less Detailed and preferred by issuers "

Question 53

Name the securities registered under the Securities Act of 1933.

Answer 53

``` "Stocks Stock Options Stock Warrants Limited Partnership Interests - General Partnerships not allowed Bonds" ```

Question 54

Who can sue under the Securities Act of 1933?

Answer 54

Purchasers of securities only

Question 55

Name the Requirements for Accountant to be liable under the Securities Act of 1933.

Answer 55

"Damages & Material Misstatements Only o Reliance on financial statements are not a requirement unless purchased more than a year after the security is registered Proving negligence is not a requirement"

Question 56

Name the Defenses of an Accountant under the Securities Act of 1933.

Answer 56

"Accountant used Due Diligence Accountant followed GAAS Damages weren't caused by accountant's work Plaintiff knew of the material misstatements"

Question 57

What does the Securities Act of 1934 govern?

Answer 57

"The trading/selling of securities after the IPO "

Question 58

What reports must be filed under the Securities Act of 1934?

Answer 58

"Form 10-K Annual Report - Must be audited Form 10-Q Quarterly Report - Must be reviewed; but not audited Form 8-K - A notice of a material event; Must be filed within 4 days of event"

Question 59

Who can sue under the Securities Act of 1934?

Answer 59

Purchases and Sellers of Securities

Question 60

Name the Requirements for an Accountant to be liable for fraud under the Securities Act of 1934.

Answer 60

"Damages Material Misstatements Reliance on financial statements Scienter or reckless disregard for the truth"

Question 61

What procedures must an Accountant have in place under the Securities Act of 1934?

Answer 61

"Accountant must have procedures in place to: Determine if Going Concern is an issue Determine if any material related party transactions occurred Determine if material illegal acts occurred"

Question 62

Insider trading rules under the Securities Act of 1934 apply to which individuals?

Answer 62

Officers; Directors and 10% Owners

Question 63

What are the Proxy Solicitation Requirements under the Securities Act of 1934?

Answer 63

"Proxy must give shareholders audited balance sheets from 2 most recent years o Requirement holds true even if one class of stock"

Question 64

What is the revenue limit for an Emerging Growth Company IPO?

Answer 64

$1 Billion

Question 65

For an Emerging Growth Company IPO, how many years of audited financial statements are required?

Answer 65

2 years

Question 66

How did Reg D, Rule 506 change under the JOBS Act?

Answer 66

General Solicitation and Advertising now allowed

Question 67

Under the JOBS Act, what is the capital ceiling under Regulation A?

Answer 67

Reg. A Capital ceiling raised from $5M to $50M

Question 68

Under the JOBS Act Title V - Private Company Flexibility and Growth, what is the shareholder limit if there are less than 500 non-accredited shareholders?

Answer 68

2,000

Question 69

What is the purpose of a Consulting Engagement?

Answer 69

This engagement helps the client be more efficient with personnel and resources in order to accomplish their goals.

Question 70

"What is required by the Statements on Standards for Consulting Services (SSCS)? "

Answer 70

"Competence; Due Professional Care; Planning; Supervision; Obtain Sufficient Data; Serve Client Interest; Agreement: Written or Oral; Communicate w/ Client; Objectivity NOT REQUIRED: Independence "

Question 71

What is the difference between Express versus Implied duties of an accountant under contract?

Answer 71

"Express: Contract specifies what accountant will do Implied: Accountant performs without negligence"

Question 72

Accountant's liability for negligence - What are the requirements?

Answer 72

"DUTY - DAMAGES - RESULT Duty - Accountant must have had duty to perform with due care exercised by an average accountant. Damages - The client experienced actual damages. Result/Causation - The damages were as a result of the negligence. "

Question 73

"What is an Accountant's Liability for Detecting Fraud | (Under Normal Circumstances)?"

Answer 73

It is not the accountant's job to find fraud and they are not normally liable for not detecting it

Question 74

When can a client be sued for failing to detect fraud?

Answer 74

"When a normal audit following GAAS would have detected the fraud. When an accountant agrees to take on more responsibility than what is required under a normal audit. When accountant words the audit report to indicate this greater responsibility."

Question 75

When has an accountant committed fraud?

Answer 75

"Misrepresentation - Accountant misrepresents MATERIAL fact(s) Scienter - Accountant commits scienter Damages - Client has actual damages. Reasonable Reliance - Client reasonably relied on the misinformation."

Question 76

What is Scienter?

Answer 76

"To report something knowing it is false. Characterized by reckless disregard for truth Intentionally conceal facts"

Question 77

What is the Accountant's Liability to Third Parties - Privity Defense?

Answer 77

"Lack of privity defends against contract breach and negligence. NOT a defense against fraud. "

Question 78

The definition of Ultramares Decision:

Answer 78

"Accountants are not liable to third parties unless the third party was an intended beneficiary of the engagement AND the accountant knew they would be relying on the financial statements."

Question 79

What is Common Law Fraud?

Answer 79

"Regular fraud Misrepresentation of Material Fact Scienter Damages Reasonable Reliance"

Question 80

What is Constructive Fraud?

Answer 80

"Gross Negligence - reckless disregard for truth CPAs usually not liable for simple negligence; but Gross Negligence (aka Constructive Fraud) opens the CPA up to be liable to third parties."

Question 81

What are the required actions with Discovery of Illegal Activity?

Answer 81

"Accountant must report discovered illegal activity to Audit Committee or Board of Directors If material in public company; BOD has *1 DAY* to notify SEC."

Question 82

What is the Accountant-Client Privilege?

Answer 82

"NO Federal Accountant-Client privilege for non-disclosure of private conversations to a court unless a particular state recognizes such a privilege. If your client tells you Yeah; I cheated on my taxes; a court could force an accountant to testify about that conversation."

Question 83

Accountant's Workpapers - Confidentiality Requirements

Answer 83

"1. Can be subpoenaed 2. Can be looked at by another CPA doing peer review 3. Property of the accountant who created them Note: Source documents supplied by client must be returned to client if they request them back; even if there is a billing dispute."

Question 84

True or False: Accountants are responsible for knowing the personal finances of tax preparation clients.

Answer 84

Accountants have no way of auditing individual's personal finances and are not required to do so when preparing a return

Question 85

When a past error is found in a client's tax return; what should an accountant do?

Answer 85

"If a past error is found; accountant should inform client of this error. Contacting the IRS is NOT required. If client won't fix it; then the accountant should reconsider whether they want to do business with the client"

Question 86

Name the key responsibilities of an accountant when preparing a tax return.

Answer 86

"Accountant must prepare the return in good faith and ask for more information if something is missing When recommending a tax position; the accountant should realistically believe that it would stand up under the scrutiny of a court"

Question 87

What does Real Property include?

Answer 87

Land, Buildings fixed to the land, and Property under/above the land.

Question 88

What are the characteristics of a deed?

Answer 88

``` "Must be in writing Signed Description of Property Delivered Recorded" ```

Question 89

What are the characteristics of a Mortgage?

Answer 89

"Must be in writing Signed Description of property Delivered"

Question 90

What are the characteristics of a lease?

Answer 90

"No writing required if

Question 91

What is personal property?

Answer 91

"Tangible property; such as cars; equipment; etc. Intangible property such as patents; trademarks; copyrights; etc."

Question 92

What are the three requirements for a gift?

Answer 92

"Intent for it to be a gift Delivery of the gift Acceptance of the gift"

Question 93

What are the rights of found property?

Answer 93

"Lost property - Finder's rights to property are less than Owner's Abandoned property - Finder's rights to property are greater than Owner's"

Question 94

What is tenancy in common?

Answer 94

"Undivided interest in a portion of the property Upon death; property goes to decedent's heirs"

Question 95

What is joint tenancy?

Answer 95

"Undivided interest in entire property Upon death; property goes to other joint tenants"

Question 96

What sales are covered under the Uniform Commercial Code (UCC)?

Answer 96

Only sales of goods are covered under the UCC.

Question 97

What elements are needed for a sale covered under the Uniform Commercial Code (UCC)?

Answer 97

"Offer - You offer to sell something at a price Acceptance - the other party accepts Consideration - Something of value has been exchanged for the goods Note: The UCC only covers sales of goods. "

Question 98

What are the elements of a Firm Offer?

Answer 98

"You offer to sell something at a price and keep that offer open for a set period of time 3 months max Only merchants can make firm offers Must be in writing and signed"

Question 99

Under what situations are sales of goods covered by the Statute of Frauds? What are the exceptions?

Answer 99

"If value of goods sold is > $500; sales contract must be in writing Exceptions: Merchants can enter into oral contracts for > $500 items. Oral contracts are binding for special or uniquely-made items (i.e. custom cabinets or custom furniture that could not be sold if buyer reneged)"

Question 100

When does title and risk of loss transfer on a sale of goods?

Answer 100

"If terms are: FOB shipping point: Title transfers at point of shipment (i.e. when loaded on truck) FOB destination: Title and risk transfers once item is delivered"

Question 101

What is a Warranty of Title?

Answer 101

"The seller has the right to sell the good and no one else can stake claim to that good "

Question 102

What is Warranty of Merchantability?

Answer 102

"This good will do its intended purpose Can be disclaimed "

Question 103

What is Warranty of Fitness?

Answer 103

"This good is the right choice for you based on the seller's expert opinion Can be disclaimed"

Question 104

What is strict liability with respect to buyer protection?

Answer 104

"Manufacturers of goods cannot disclaim that their products will be safe Can be liable if negligent"

Question 105

What are non-conforming goods with respect to buyer protection?

Answer 105

"Buyer can reject some or all of the shipment if the seller didn't perform as agreed and ship what was expected Must give notice Must give seller a chance to remedy the situation"

Question 106

What is the statute of limitations with respect to buyer protection?

Answer 106

Buyer must sue to recover damages within 4 years.

Question 107

When does a security interest attach; or become legally enforceable?

Answer 107

Secured interest must be supported by consideration given. Debtor must actually own the rights to the collateral or have possession. Secured interest much be recorded

Question 108

What are the characteristics of perfection of interest in a secured transaction?

Answer 108

"Gets higher priority over others claiming rights to collateral after the perfection takes place Attachment must take place BEFORE perfection "

Question 109

How does perfection occur in a secured transaction?

Answer 109

"By filing a financing statement By possessing the collateral"

Question 110

When does automatic perfection occur in a secured transaction?

Answer 110

"Store sells a consumer good on credit - Store retains security interest A bank finances the purchase of a consumer good - Bank retains security interest"

Question 111

What are the priority rules for payment in a secured transaction?

Answer 111

"If two parties are perfected; then the first one to file wins If neither party is perfected; then the first one to attach wins"

Question 112

What are the advantages of a creditor holding a lien in a secured transaction?

Answer 112

"Creditor holds priority over claims to collateral vs. unperfected security interests Beats perfected security interests filed after lien attachment Exceptions: Purchase money security interest; which has a 20 day grace period to be filed Buyers purchasing in the ordinary course of business are immune from security interests held by merchants"