CEP Regulatory Compliance & Standards 2 — Questions and Answers
Question 1: Under SEC Rule 10b-5, which of the following best describes a violation related to equity compensation?
- Granting options at a price above market value
- Backdating option grants to a date with a lower stock price without disclosure (Correct answer)
- Issuing restricted stock to all employees simultaneously
- Filing Form 4 within two business days of a transaction
Correct answer: Backdating option grants to a date with a lower stock price without disclosure
Backdating options to a lower price date without proper disclosure violates Rule 10b-5's prohibition on securities fraud and material misrepresentation.
Question 2: Which SEC form must Section 16 insiders file to report a change in beneficial ownership within two business days?
- Form 3
- Form 4 (Correct answer)
- Form 5
- Form 8-K
Correct answer: Form 4
Form 4 must be filed within two business days of any change in beneficial ownership by a Section 16 insider.
Question 3: ASC 718 requires that share-based compensation expense be recognized over the:
- Vesting period (Correct answer)
- Exercise period
- Holding period
- Blackout period
Correct answer: Vesting period
ASC 718 requires stock-based compensation expense to be recognized ratably over the requisite service period, which is generally the vesting period.
Question 4: A company's equity plan requires shareholder approval when it is first adopted. Under NYSE rules, shareholder re-approval is generally required when:
- The exercise price of outstanding options is reduced (Correct answer)
- New employees join the plan
- The vesting schedule is accelerated
- The plan administrator changes
Correct answer: The exercise price of outstanding options is reduced
NYSE listing rules require shareholder approval for any repricing or reduction of outstanding option exercise prices unless the plan explicitly permits it with prior shareholder approval.
Question 5: For US federal income tax purposes, when does a non-qualified stock option (NQSO) create a taxable event for the employee?
- At grant
- At vesting
- At exercise (Correct answer)
- At sale of shares
Correct answer: At exercise
NQSOs create ordinary income at exercise, measured by the spread between the fair market value on the exercise date and the exercise price.
Question 6: Under IRC Section 423, a tax-qualified ESPP must offer the purchase price discount at no more than:
- 10%
- 15% (Correct answer)
- 20%
- 25%
Correct answer: 15%
Section 423 ESPPs allow a maximum discount of 15% off the lesser of the stock price at the beginning or end of the offering period.
Question 7: Regulation S-K Item 402 requires public companies to disclose executive compensation in the proxy statement. Which document provides a narrative description of the company's compensation philosophy?
- Summary Compensation Table
- Compensation Discussion and Analysis (CD&A) (Correct answer)
- Beneficial Ownership Table
- Form 10-K footnote
Correct answer: Compensation Discussion and Analysis (CD&A)
The CD&A, required by Regulation S-K Item 402(b), provides a narrative explanation of the material factors underlying the company's compensation policies and decisions.
CEP Regulatory Compliance & Standards 2
Under SEC Rule 10b-5, which of the following best describes a violation related to equity compensation?