CEP Risk Assessment & Underwriting 3

Question 1

Under SEC Rule 10b5-1, a trading plan primarily mitigates which risk for insiders who hold equity?

Accepted Answer

Insider trading liability risk

Answer

A properly adopted 10b5-1 plan provides an affirmative defense against insider trading liability by pre-scheduling trades when the insider is not aware of material nonpublic information.

Question 2

Which factor would MOST likely INCREASE the fair value of a restricted stock unit (RSU) grant, all else equal?

Accepted Answer

Lengthening the vesting period by one year

Answer

Longer vesting periods increase risk for employees (more forfeiture exposure), but the grant-date fair value of RSUs is primarily the stock price on grant date; however, for dividend-paying stocks, a longer vesting period means more foregone dividends, which reduces value—so actually the key driver for plain RSUs is stock price.

Question 3

A company's equity plan allows for net settlement of RSUs to cover tax withholding. The PRIMARY financial risk of net settlement compared to sell-to-cover is:

Accepted Answer

The company bears the cash cost of remitting taxes before receiving sale proceeds

Answer

With net settlement, the company retains shares and must remit withheld taxes from its own cash before any stock sale proceeds are received, creating a timing cash flow risk.

Question 4

When a company grants performance share units (PSUs) with a market condition (e.g., relative TSR), the compensation expense recognized is:

Accepted Answer

Fixed at grant date regardless of whether the market condition is achieved

Answer

Under ASC 718, market conditions are incorporated into the grant-date fair value using a Monte Carlo simulation, and expense is not reversed if the condition is not achieved.

Question 5

An equity plan administrator is assessing 'plan dilution risk.' Which metric directly measures this risk?

Accepted Answer

Overhang percentage (shares reserved divided by total shares outstanding)

Answer

Overhang percentage measures the potential dilutive impact of all outstanding and reserved equity awards relative to total shares outstanding.

(CEP) Certified Equity Professional Practice Test

(CEP) Certified Equity Professional Practice Test

CEP Risk Assessment & Underwriting 3