Securities Regulation Flashcards

Question

# Securities Regulation **1934 Securities Exchange Act:** Anti-Fraud Provisions *Materiality (Forward Looking Statements)*

Answer 1

Certain forward-looking statements may be **immaterial** under: 1. Safe Harbor 2. Bespeaks Caution Doctrine ``` ``` **Safe Harbor** 1. Identified forward-looking statements 2. Sufficient cautionary language ``` ``` **Bespeaks Caution Doctrine** 1. Unidentified forward looking statements 2. Sufficient directly related cautionary language The **bespeaks caution doctrine** is used when a company *fails to properly utilize* the **safe harbor**

Answer 2

The plaintiff must prove reliance as a substantial factor. 1. Fraud on the Market Presumption 2. Securities Fraud Class Action Presumption **Fraud on the Market Presumption** The **market price** of shares *reflects* the **publicly available information**, including material misrepresentation **Securities Fraud Class Action Presumption** Requires the **plaintiff** to plead: 1. **Publicly Known** ***AND*** **Material** Misrepresentations 2. **Efficient Market** 3. Traded during **Relevant Period**

Answer 3

Loss was a **foreseeable consequence** of the misrepresentation or omission

Answer 4

Introduced more **event-driven reporting**, **internal controls**, and **certification requirements**.

Answer 5

Form 10-K . Requires **Reporting Companies** to include an **internal controls report** in their annual reports on Form 10-K 1. **Statement of Responsibility** of management in creating and maintaining adequate internal controls 2. **Assessment of Effectiveness** of the internal controls structure 3. **Auditor Attestation** . **Exceptions** Smaller reporting companies are **generally exempt** due to the **expensive cost of compliance**

Answer 6

**Senior officers** (certifiers) must certify that: 1. Each report is accurate and reliable 2. They are responsible for establishing and maintaining effective internal controls Certifiers **may** be held **personally liable**, including jail time and fines.

Answer 7

Occurs when a person *buys or sells* a security based on **material**, **non-public** **information**

Answer 8

Something is material if: 1. The investor considers it **important** in making the decision, and 2. It *alters* the **total mix of information** available to the public

Answer 9

1. Insiders (Actual or Constructive) 2. Tippers/Tippees 3. Misappropriators

Answer 10

Targets a corporate insider's **breach of duty** to shareholders with whom the insider transacts. **Actual Corporate Insiders:** Officers, Directors, Controlling Shareholders, Employees, etc. **Constructive Corporate Insiders:** Consultants, Attorneys, CPAs, etc.

Answer 11

**Tipper:** 1. Person **breaching** fiduciary duty 2. Must gain some **personal benefit**, directly or indirectly, from their disclosure. (Considered as **making a gift** of confidential information to the tippee.) **Tippee:** 1. Person who **receives tips** from insiders, 2. **Knows** the information was **disclosed in breach** of the tipper's duty

Answer 12

**Corporate Outsiders** Use of **material**, **nonpublic** **information** that is obtained in breach of duty ***to the source of the information*** (rather than the company/shareholders) . . **Considerations:** 1. Has the information subsequently been made public? 2. Has the information gone stale? 3. Is the information a sure thing? . . **Misappropriators:** 1. Persons who agree to keep information confidential 2. Persons with established history of keeping confidences 3. Relatives, Spouses, etc (barring countervailing proof)

Answer 13

**§ 16(b) of the 1934 Act** Only applies to **Reporting Companies** **Directors**, **Officers**, and **Beneficial Owners of *more than* 10%** must report their ownership in the corporation's stocks to the SEC Any **profits realized or losses avoided** from the purchase or sale of any stock **within a 6 month period** may be recaptured by the company, regardless of whether there was actually insider trading Any short swing profits are disgorged to the corporation

Answer 14

**Strict Liability** Assumes that insiders have access to material, nonpublic information so it imposes strict liability for the purchase or sale of any stock within a 6 month period

Answer 15

The ***more than 10% threshold*** must be met **immediately prior to** **_both_** the **sale and purchase** at issue. **At time of purchase** = immediately before the purchase, did they own 10%? **At time of sale** = immediately before sale, did they own 10%? ``` ``` **Examples:** 1/1/22 = obtained 11% 2/1/22 = sells 5% --> **no short swing** (did not own *more than* 10% before **both** purchase and sale) ``` ``` 1/1/22 = obtained 11% 2/1/22 = obtained additional 5% (16% total) 3/1/22 = sells 5% (11% total) --> **short swing** (owned *more than* 10% before **both** purchase and sale)

Answer 16

§ 16(a) Requires reporting with the SEC: 1. How much stock owned *at the time* the securities are **registered** 2. How much stock owned *within 10 days* of **becoming** a director, officer, or beneficial owner Details of a **change** in securities **ownerships** *within 2 days*

Answer 17

The **written authorizatio**n for another to vote on the shareholder's behalf ***AND*** The **person actually voting** on the shareholder's behalf.

Answer 18

Often, **management** will *offer to serve* as a shareholder's proxy (distributing a "proxy solicitation" Must include a **proxy statement** and **other pertinent items** (like annual reports) such that shareholders can make an informed decision Generally, management will also include their recommendation **§ 14 of the 1934 Act** regulates the proxy solicitation process for Reporting Companies to protect shareholders

Answer 19

*Either* **management** or **shareholders** can make proposals to vote on at the annual shareholder's meeting Eligible shareholder proposals are to be **included with the proxy statement** Shareholder proposals must satisfy certain **procedural** and **substantive requirements** before management is required to include the shareholder proposal in the proxy statement . **Procedural Requirements** 1. Ownership requirements--amount and continuity 2. Timing 3. Attendance of Meeting **Substantive Requirements** 1. Legality 2. No special/personal interest 3. Proxy rules 4. Direct management functions, such as ordinary business operations (unless substantial) 5. No Conflict with other Proposals Etc

Answer 20

In response to a shareholder proposal, management may **seek to exclude** it by: 1. Filing a **no action letter request** with the SEC *explaining* why the corporation believes the shareholder proposal is excludable 2. Seeking a **declaratory judgment**

Answer 21

Some states requires securities to be registered **with the state** before they are offered for sale 1. Coordination Scheme 2. Notice Filing 3. Qualification Scheme

Answer 22

Some states allow securities that have been registered under federal law to be issued in the state **without further requirements**, but may still require filing with the state the prospectus and other documents

Answer 23

Some states allow securities to be issued simply with notice where the securities: 1. Have been **filed** under the 1933 Act ***and*** 2. The issuer has a. Been engaged in business in the US for some period of time, and b. A certain net worth

Answer 24

Some states require the issuer to provide **comprehensive information**, similar to the requirements under the 1933 Act, **to the state** for review

Answer 25

The major securities exchanges have rules that companies **must comply** with in order for their shares to **be listed** and to **continue being listed** on the exchange **Common Listing Standards** 1. Corporate Characteristics 2. Share Price 3. Board Composition 4. Shareholder Protections 5. Etc.

Securities Regulation Flashcards

(49 cards)