CIRO Regulatory Compliance & Governance 4 — Questions and Answers
Question 1: Under NYSE listing rules, which board committee must be composed entirely of independent directors?
- Executive Committee
- Finance Committee
- Audit, Compensation, and Nominating/Governance Committees (Correct answer)
- Risk Management Committee
Correct answer: Audit, Compensation, and Nominating/Governance Committees
NYSE rules require that the audit, compensation, and nominating/corporate governance committees consist entirely of independent directors.
Question 2: A material weakness in internal controls over financial reporting (ICFR) disclosed under SOX Section 404 typically requires the company to:
- Restate all financial statements for the prior three years
- Disclose the weakness in the annual report and describe remediation steps (Correct answer)
- Obtain shareholder approval before publishing the annual report
- Suspend dividend payments until the weakness is remediated
Correct answer: Disclose the weakness in the annual report and describe remediation steps
Companies must disclose material weaknesses in their 10-K and describe management's remediation plan; restatement is only required if financials were misstated.
Question 3: Under SEC Rule 144, which condition allows an affiliate to sell restricted or control securities without registration?
- Holding the securities for at least 30 days before sale
- Filing a Form 144 with the SEC for sales exceeding 5,000 shares or $50,000 (Correct answer)
- Obtaining prior approval from the company's board compensation committee
- Limiting sales to non-U.S. markets only
Correct answer: Filing a Form 144 with the SEC for sales exceeding 5,000 shares or $50,000
Affiliates must file Form 144 concurrently with sales exceeding 5,000 shares or $50,000 in value within a three-month period.
Question 4: A company adopts a shareholder rights plan (poison pill). From an IR governance perspective, best practice is to:
- Keep the plan confidential to avoid tipping off potential acquirers
- Submit the plan for shareholder ratification and disclose its terms clearly (Correct answer)
- Implement the plan for a 10-year term to deter long-term activists
- Limit the plan exclusively to foreign acquirers to satisfy domestic investors
Correct answer: Submit the plan for shareholder ratification and disclose its terms clearly
Governance best practice and investor expectations call for shareholder ratification and full transparent disclosure of poison pill terms.
Question 5: The SEC's Regulation S-K Item 303 requires companies to include in their annual and quarterly reports:
- A reconciliation of GAAP to non-GAAP financial measures
- Management's Discussion and Analysis (MD&A) of financial condition and results of operations (Correct answer)
- A CEO certification of revenue recognition policies
- Monthly sales data for the most recent fiscal year
Correct answer: Management's Discussion and Analysis (MD&A) of financial condition and results of operations
Item 303 of Regulation S-K mandates Management's Discussion and Analysis, providing narrative context around the financial statements.
Question 6: When presenting non-GAAP financial measures in press releases and investor materials, SEC rules require companies to:
- Obtain auditor sign-off on all non-GAAP figures before publication
- Provide a reconciliation to the most directly comparable GAAP measure (Correct answer)
- Limit non-GAAP presentations to earnings calls only, not written materials
- File an amended 10-K whenever non-GAAP metrics differ from prior guidance
Correct answer: Provide a reconciliation to the most directly comparable GAAP measure
SEC guidance requires that non-GAAP measures be reconciled to the most directly comparable GAAP measure with equal or greater prominence given to the GAAP figure.
Question 7: Under the SEC's clawback rules adopted pursuant to Dodd-Frank (effective 2023), listed companies must recover executive incentive compensation when:
- An executive voluntarily resigns within three years of a bonus payment
- A financial restatement reduces the metric on which the incentive compensation was based (Correct answer)
- The stock price drops more than 20% in the year compensation was paid
- An executive is named in an SEC investigation, regardless of outcome
Correct answer: A financial restatement reduces the metric on which the incentive compensation was based
The 2023 SEC clawback rules require recovery of excess incentive compensation received by current or former executives when a restatement reduces the financial metric used to calculate the award.
CIRO Regulatory Compliance & Governance 4
Under NYSE listing rules, which board committee must be composed entirely of independent directors?