CEP Regulatory Compliance & Standards 3 — Questions and Answers
Question 1: Under Section 16(b) of the Securities Exchange Act, a 'short-swing profit' is recoverable if a purchase and sale occur within:
- 30 days
- 60 days
- 6 months (Correct answer)
- 12 months
Correct answer: 6 months
Section 16(b) requires insiders to disgorge any profits from matching purchases and sales (or sales and purchases) within any six-month period.
Question 2: A company grants performance share units (PSUs) that vest based on TSR relative to peers. Under ASC 718, the fair value of these PSUs should be measured using:
- The closing stock price on the grant date
- A Monte Carlo simulation (Correct answer)
- The Black-Scholes model only
- The intrinsic value at each reporting date
Correct answer: A Monte Carlo simulation
Market conditions like relative TSR require a Monte Carlo simulation to capture the probability-weighted distribution of outcomes when measuring fair value under ASC 718.
Question 3: The Sarbanes-Oxley Act Section 304 allows the SEC to require a CEO or CFO to reimburse the company for incentive compensation if the company is required to restate financials due to:
- Any accounting error
- Material noncompliance with financial reporting requirements resulting from misconduct (Correct answer)
- A voluntary restatement
- A change in accounting principle
Correct answer: Material noncompliance with financial reporting requirements resulting from misconduct
SOX Section 304 clawback applies when financial restatement results from material noncompliance with reporting requirements due to misconduct.
Question 4: Under the SEC's 2022 clawback rules (implementing Dodd-Frank Section 954), listed companies must recover erroneously awarded incentive compensation from covered executives within:
- 1 year of the restatement
- 2 years of the restatement
- The three fiscal years preceding the restatement (Correct answer)
- Five years preceding the restatement
Correct answer: The three fiscal years preceding the restatement
The Dodd-Frank clawback rule requires recovery of excess compensation paid during the three fiscal years preceding the date the company is required to prepare the restatement.
Question 5: A 10b5-1 trading plan must be established when the insider:
- Is aware of material nonpublic information
- Does not possess material nonpublic information (Correct answer)
- Has filed their most recent Form 4
- Has received board approval for the trades
Correct answer: Does not possess material nonpublic information
A valid 10b5-1 plan must be adopted at a time when the person is not aware of material nonpublic information to provide an affirmative defense against insider trading claims.
Question 6: Which IRS code section governs the $1 million deductibility limit on compensation paid to covered employees of public companies?
- IRC Section 162(m) (Correct answer)
- IRC Section 409A
- IRC Section 83(b)
- IRC Section 422
Correct answer: IRC Section 162(m)
IRC Section 162(m) limits the corporate tax deduction for compensation paid to covered employees (CEO, CFO, and three other highest-paid officers) to $1 million per year.
Question 7: Under IRC Section 409A, deferred compensation that fails to meet documentary or operational requirements is subject to immediate income inclusion plus an additional penalty tax of:
- 10%
- 15%
- 20% (Correct answer)
- 25%
Correct answer: 20%
Section 409A imposes ordinary income tax plus a 20% additional penalty tax (plus interest) on deferred compensation that fails to comply with its requirements.
CEP Regulatory Compliance & Standards 3
Under Section 16(b) of the Securities Exchange Act, a 'short-swing profit' is recoverable if a purchase and sale occur within: