Securities Law & Regulatory Compliance Flashcards

In a securities class action, the lead plaintiff is selected based primarily on which criterion under the PSLRA?

Answer: The member with the largest financial interest in the relief sought

The PSLRA creates a rebuttable presumption that the plaintiff with the largest financial interest who satisfies Rule 23 requirements should be lead plaintiff.

The Securities Litigation Uniform Standards Act (SLUSA) preempts state law class actions that allege:

Answer: A misrepresentation or omission in connection with the purchase or sale of a covered security

SLUSA prevents plaintiffs from using state law class actions to evade the PSLRA's heightened standards by preempting state fraud claims tied to covered securities.

Under Section 20(a) of the Securities Exchange Act, a 'controlling person' can be jointly and severally liable for a controlled person's securities violation unless the controlling person proves:

Answer: Good faith and no direct or indirect inducement of the violation

Section 20(a) provides a good faith defense for controlling persons who acted in good faith and did not directly or indirectly induce the violating act.

An investment bank underwrites a public offering and fails to conduct adequate due diligence on the issuer's financial statements, which contain material misstatements. Under Section 11 of the Securities Act, the underwriter's primary defense is:

Answer: Due diligence—that it had reasonable grounds to believe the statements were accurate

Section 11 permits underwriters to escape liability by proving they conducted adequate due diligence and had reasonable grounds to believe the registration statement was accurate.

Which of the following is a key element distinguishing the misappropriation theory of insider trading from classical insider trading?

Answer: The trader breaches a duty owed to the source of the information, not to the company whose securities are traded

Under the misappropriation theory (U.S. v. O'Hagan), liability arises when a trader deceives the source of information—such as an employer—not the issuer company.

The SEC's whistleblower program under Dodd-Frank Section 922 entitles eligible whistleblowers to a monetary award of:

Answer: 10–30% of sanctions collected when the SEC obtains over $1 million in sanctions

Dodd-Frank Section 922 awards qualifying whistleblowers 10–30% of monetary sanctions in cases where the SEC collects more than $1 million.