Question 1

The Securities and Exchange Commission is not charged with evaluating the worth of a public offering of securities by a corporation.

Accepted Answer

The Securities and Exchange Commission (SEC) is responsible for ensuring that public offerings are conducted in compliance with securities laws and regulations. The SEC does not evaluate the worth or value of the securities being offered, but instead focuses on disclosure and transparency requirements to protect investors.

Question 2

Which of the following is true of the Sarbanes-Oxley Act of 2002?
A) It follows the traditional approach to corporate governance.
B) It established the Public Company Accounting Oversight Board.
C) It requires external auditors to certify financial reports.
D) It requires a separate team to be formed to certify financial reports.

Accepted Answer

The Sarbanes-Oxley Act of 2002 established the Public Company Accounting Oversight Board (PCAOB) to oversee the audits of public companies in order to protect investors and the public interest by promoting informative, accurate, and independent audit reports.

Question 3

The 1990 Remedies Act allows the federal courts to bar anyone who has violated the fraud provisions of the federal securities laws from ever serving as an officer or director of a publicly held firm.

Accepted Answer

The 1990 Remedies Act does indeed allow federal courts to bar individuals who have violated the fraud provisions of federal securities laws from serving as officers or directors of publicly held firms.

Question 4

The Securities and Exchange Commission (SEC) was created under the Securities Investor Protection Act (SIPA) of 1970.

Accepted Answer

The Securities and Exchange Commission (SEC) was actually created under the Securities Exchange Act of 1934. The Securities Investor Protection Act of 1970 established the Securities Investor Protection Corporation (SIPC), which provides protection for customers of failed brokerage firms.

Question 5

Credit rating agencies evaluated and rated billions in mortgage securities, and both the private sector and governments at all levels relied on these ratings.

Accepted Answer

This is a factual statement. Credit rating agencies did evaluate and rate billions in mortgage securities and their ratings were relied upon by the private sector and governments at all levels.

Question 6

Hedge funds larger than $250 million must register with the Securities and Exchange Commission and provide some information as to trades and their individual portfolios.

Accepted Answer

The answer of Hedge funds larger than $250 million must...

Question 7

Which of the following is true of the Financial Stability Oversight Council?
A) The council will identify banks or nonbanks that pose a threat to the financial system.
B) The council was to be subject to oversight by the Government Accountability Office for a short period during 2008.
C) It does not include members of the Treasury and the Federal Reserve.
D) It was established by the Securities Exchange Act of 1934.

Accepted Answer

The Financial Stability Oversight Council was established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to identify and monitor risks to the financial stability of the United States, including from large banks or nonbank financial companies.

Question 8

Describe the Dodd-Frank legislation with regard to credit rating agencies.

Accepted Answer

The answer of Describe the Dodd-Frank legislation with regard to...

Question 9

The Fed, with the approval of the Financial Stability Oversight Council, has the power to break up large firms and require such firms to increase their reserves against future losses.

Accepted Answer

This statement is true. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 gave the Financial Stability Oversight Council and the Federal Reserve the power to regulate and monitor financial institutions deemed "too big to fail" and take action to prevent future economic crises. This includes the ability to break up large firms and require them to hold more reserves to prepare for potential losses.

Question 10

The Division of Corporation Regulation administers the Public Utility Holding Company Act of 1935.

Accepted Answer

The Division of Corporation Regulation does indeed administer the Public Utility Holding Company Act of 1935.

Question 11

According to the Dodd-Frank legislation, Federal Deposit Insurance Corporation-insured institutions are allowed to have only percent of their capital invested in hedge funds and private equity funds.
A) 2
B) 3
C) 4
D) 5

Accepted Answer

The Dodd-Frank Act limits FDIC-insured institutions to investing only up to 3% of their capital in hedge funds and private equity funds to reduce risk and prevent excessive exposure to these volatile investments.

Question 12

Which of the following is true of the Dodd-Frank Act with regard to regulating executive compensation?
A) Shareholders were allowed a nonbinding vote on executive compensation, as directed by the Federal Reserve.
B) Company executives received lower compensation when firms sold mortgage-backed securities and derivatives.
C) Companies cannot take back compensation if it is based on inaccurate accounting statements.
D) Only independent directors of a company could sit on compensation committees of the board.

Accepted Answer

The Dodd-Frank Act requires that only independent directors serve on the compensation committees of a company's board, ensuring that executive compensation decisions are made without conflicts of interest.

Question 13

Derivatives cannot be used as hedges against risk.

Accepted Answer

Derivatives can be used as hedges against risk by allowing investors to lock in the price of an asset or protect against potential losses. For example, a farmer might use futures contracts to lock in the price of a crop before harvest to protect against a price drop.

Question 14

The Private Securities Litigation Reform Act of 1995 gives the Securities and Exchange Commission cease-and-desist powers and the power to impose substantial monetary penalties in administrative proceedings.

Accepted Answer

The Private Securities Litigation Reform Act of 1995 primarily aimed to curb frivolous securities lawsuits and did not grant the SEC cease-and-desist powers or the authority to impose monetary penalties in administrative proceedings. These powers were granted by other legislation, such as the Securities Enforcement Remedies and Penny Stock Reform Act of 1990.

Question 15

Derivatives are synthetic securities that are dependent upon the movement of underlying variables.

Accepted Answer

Derivatives derive their value from underlying variables such as stocks, bonds, commodities, or currencies, making them synthetic securities. Their value is dependent upon the movement of these underlying variables.

Question 16

Discuss the risks taken by large banks and how the Dodd-Frank legislation restricts them.

Accepted Answer

The answer of Discuss the risks taken by large banks...

Question 17

The Securities Investor Protection Act of 1970 gives the Securities and Exchange Commission authority to regulate the finances of public investment companies that invest in and trade in securities.

Accepted Answer

The Securities Investor Protection Act of 1970 provides for the protection of customers of failed brokerage firms, but it does not give the SEC direct authority to regulate the finances of public investment companies. However, the Investment Company Act of 1940 does give the SEC significant regulatory authority over investment companies.

Question 18

Which of the following is true of the Dodd-Frank legislation?
A) Federal Deposit Insurance Corporation-insured institutions are required to keep their interests in hedge funds and private equity funds.
B) Investment banks have to set aside reserves to cover all forms of expenditure.
C) Originators of mortgage securities must hold 5 percent of the credit risk, thus retaining an interest in the performance of the securities.
D) Banks will be allowed to trade in a proprietary manner but cannot continue to buy or sell from their own accounts to hedge against other investments.

Accepted Answer

The Dodd-Frank legislation requires originators of mortgage securities to hold 5 percent of the credit risk, thus retaining an interest in the performance of the securities. This is aimed at incentivizing originators to ensure that the loans they put into the securities packages are of good quality. A, B, and D are incorrect as they do not accurately describe part of the Dodd-Frank legislation.

Question 19

Which of the following is true of the Dodd-Frank Act with regard to derivatives?
A) The Dodd-Frank statute will standardize derivatives traded on exchanges to decrease transparency.
B) Derivatives must be routed through a subsidiary to ensure that companies using them post collateral.
C) Banks can continue to trade derivatives in-house based on interest rates and foreign exchanges, and for purposes of hedging risk.
D) Banks will have to spin off their riskier derivatives and trade them through a clearing house.

Accepted Answer

The Dodd-Frank Act allows banks to continue trading derivatives in-house for interest rates and foreign exchanges, and for hedging purposes, but requires riskier derivatives to be traded through clearinghouses to reduce systemic risk.

Question 20

The Dodd-Frank Act did not deal with executive compensation.

Accepted Answer

The Dodd-Frank Act includes provisions related to executive compensation, such as requiring shareholder approval of executive pay and disclosure of the ratio of CEO compensation to the median employee compensation.

Quiz 23: Rules Governing the Issuance and Trading of Securities