CIRO Regulatory Compliance & Governance 3 — Questions and Answers
Question 1: A company issues a press release containing a forward-looking earnings projection. Under the Private Securities Litigation Reform Act (PSLRA), which protection may apply?
- The Absolute Immunity Doctrine for all forward-looking statements
- The Safe Harbor provision for forward-looking statements accompanied by meaningful cautionary language (Correct answer)
- The Materiality Exemption for projections under $10 million
- The Regulation S-K blanket exclusion for voluntary guidance
Correct answer: The Safe Harbor provision for forward-looking statements accompanied by meaningful cautionary language
The PSLRA safe harbor protects forward-looking statements that are accompanied by meaningful cautionary language identifying risk factors.
Question 2: When a public company is conducting a stock buyback program, Rule 10b-18 provides a safe harbor from manipulation charges if the company:
- Files a Form 4 within two business days of each repurchase
- Uses a single broker-dealer per day and buys at or below the market bid price with volume limits (Correct answer)
- Notifies institutional shareholders 48 hours in advance of each repurchase session
- Limits buybacks to 5% of outstanding shares per calendar quarter
Correct answer: Uses a single broker-dealer per day and buys at or below the market bid price with volume limits
Rule 10b-18 safe harbor conditions include using one broker per day, price restrictions tied to the prevailing bid, and daily volume limits.
Question 3: Which governance practice is specifically required by Dodd-Frank for U.S. public companies?
- Annual election of all board directors
- Shareholder advisory vote on executive compensation (say-on-pay) (Correct answer)
- Board risk committee with at least two independent members
- CEO pay ratio capped at 250:1 versus median employee
Correct answer: Shareholder advisory vote on executive compensation (say-on-pay)
Dodd-Frank mandated say-on-pay votes, giving shareholders a nonbinding voice on named executive officer compensation at least every three years.
Question 4: Under SEC rules, an investor who beneficially owns more than 5% of a company's voting securities must file which form within 10 days of crossing that threshold?
- Schedule 13D or 13G (Correct answer)
- Form 4
- Form 13F
- Form S-3
Correct answer: Schedule 13D or 13G
Section 13(d) and 13(g) of the Exchange Act require disclosure on Schedule 13D (or 13G for passive investors) when beneficial ownership exceeds 5%.
Question 5: An IR officer learns that an activist hedge fund has built a 4.9% stake and intends to cross 5% next week. The company's best immediate compliance step is to:
- Issue a press release preemptively disclosing the stake
- Alert legal counsel and prepare for a potential Schedule 13D filing and board notification (Correct answer)
- File a Form 8-K reporting the investor's intentions
- Contact the investor directly and request they pause accumulation
Correct answer: Alert legal counsel and prepare for a potential Schedule 13D filing and board notification
Legal counsel should be engaged to prepare the board and management for potential 13D disclosure and the governance response strategy.
Question 6: The SEC's whistleblower program established under Dodd-Frank allows eligible whistleblowers to receive awards ranging from:
- 1% to 5% of sanctions collected
- 10% to 30% of sanctions collected in actions exceeding $1 million (Correct answer)
- 5% to 25% of sanctions in any enforcement action
- 15% to 35% of sanctions collected regardless of amount
Correct answer: 10% to 30% of sanctions collected in actions exceeding $1 million
Dodd-Frank whistleblowers can receive 10% to 30% of monetary sanctions collected when the SEC action results in sanctions exceeding $1 million.
Question 7: A company's IR team must ensure that earnings call scripts and presentations are reviewed for compliance primarily to avoid violations of:
- The Sarbanes-Oxley internal controls provisions
- Regulation FD and Rule 10b-5 anti-fraud provisions (Correct answer)
- FINRA Rule 2210 communications standards
- GAAP non-GAAP reconciliation requirements only
Correct answer: Regulation FD and Rule 10b-5 anti-fraud provisions
Earnings call materials must comply with Reg FD (no selective disclosure) and Rule 10b-5 (no materially false or misleading statements).
CIRO Regulatory Compliance & Governance 3
A company issues a press release containing a forward-looking earnings projection.
Under the Private Securities Litigation Reform Act (PSLRA), which protection may apply?