CFL Securities Law & Regulatory Compliance 1 — Questions and Answers
Question 1: Under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, a private plaintiff must prove scienter, which means:
- Intent to deceive or reckless disregard for the truth (Correct answer)
- Negligent misrepresentation only
- Knowledge of materiality at time of sale
- Willful violation of SEC disclosure rules
Correct answer: Intent to deceive or reckless disregard for the truth
Scienter under Rule 10b-5 requires proof of fraudulent intent or at minimum reckless disregard for the truth of statements.
Question 2: The Private Securities Litigation Reform Act (PSLRA) of 1995 requires plaintiffs alleging securities fraud to:
- Plead with particularity the facts giving rise to a strong inference of scienter (Correct answer)
- File within 90 days of the alleged misstatement
- Obtain SEC approval before filing suit
- Post a bond equal to estimated defense costs
Correct answer: Plead with particularity the facts giving rise to a strong inference of scienter
The PSLRA's heightened pleading standard requires plaintiffs to plead specific facts creating a strong inference of fraudulent intent.
Question 3: In a securities class action, the 'fraud on the market' theory presumes reliance because:
- Material misstatements are reflected in the stock's market price (Correct answer)
- All investors read SEC filings before trading
- Institutional investors dominate all public markets
- The SEC has certified the market as efficient
Correct answer: Material misstatements are reflected in the stock's market price
Basic Inc. v. Levinson established that in efficient markets, public misstatements affect the price, so investors who trade at market price are presumed to have relied on the misstatement.
Question 4: The statute of limitations for a private Section 10(b) securities fraud claim under 28 U.S.C. § 1658(b) is:
- 2 years from discovery, no more than 5 years from violation (Correct answer)
- 1 year from discovery, no more than 3 years from violation
- 4 years from the date of purchase or sale
- 3 years from the date of the alleged misstatement
Correct answer: 2 years from discovery, no more than 5 years from violation
Section 1658(b) sets a 2-year discovery limitations period with a 5-year outer repose period for private securities fraud claims.
Question 5: Under the Securities Act of 1933, Section 11 imposes liability on issuers and underwriters for material misstatements in a registration statement. Unlike Rule 10b-5 claims, Section 11 does NOT require plaintiffs to prove:
- Scienter or reliance (Correct answer)
- Materiality of the misstatement
- That the security was purchased pursuant to the registration statement
- That the defendant was named in the registration statement
Correct answer: Scienter or reliance
Section 11 is a strict liability provision for issuers; plaintiffs need not prove scienter or reliance, only that there was a material misstatement in the registration statement.
Question 6: A company's CFO selectively discloses material non-public information to a hedge fund before a public announcement. This most likely violates:
- SEC Regulation FD (Fair Disclosure) (Correct answer)
- Section 16(b) short-swing profit rules
- FINRA Rule 4512 customer account requirements
- SOX Section 302 certification requirements
Correct answer: SEC Regulation FD (Fair Disclosure)
Regulation FD prohibits issuers from selectively disclosing material non-public information to certain market participants without simultaneous public disclosure.
CFL Securities Law & Regulatory Compliance 1
Under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, a private plaintiff must prove scienter, which means: