CIRO Regulatory Compliance & Governance 5 — Questions and Answers
Question 1: A company's insider trading policy typically establishes 'blackout periods' primarily around which events?
- Board of directors meeting dates
- Earnings announcements and other predictable material disclosure events (Correct answer)
- Annual shareholder meeting dates
- Dates when institutional investors are scheduled to visit management
Correct answer: Earnings announcements and other predictable material disclosure events
Blackout periods are imposed around earnings releases and other foreseeable material events to prevent trading while insiders possess MNPI.
Question 2: A 10b5-1 trading plan allows insiders to trade company securities while aware of MNPI, provided the plan is:
- Approved by the SEC before the first trade is executed
- Established in good faith when the insider is not aware of MNPI and specifies amount, price, and timing in advance (Correct answer)
- Limited to sales of no more than 1% of outstanding shares per quarter
- Filed with the stock exchange within five business days of adoption
Correct answer: Established in good faith when the insider is not aware of MNPI and specifies amount, price, and timing in advance
A valid 10b5-1 plan must be adopted when the insider lacks MNPI and must specify trade parameters or delegate discretion to a third party without future influence.
Question 3: Under the Sarbanes-Oxley Act Section 906, the penalties for a CEO or CFO who knowingly certifies a false financial report include:
- Civil fines up to $1 million and disgorgement of profits
- Criminal fines up to $5 million and imprisonment up to 20 years (Correct answer)
- Automatic SEC bar from serving as an officer or director
- Mandatory restatement and forfeiture of all compensation for the year
Correct answer: Criminal fines up to $5 million and imprisonment up to 20 years
SOX Section 906 imposes criminal penalties of up to $5 million in fines and 20 years in prison for knowingly certifying false financial statements.
Question 4: An IR officer is preparing the company's annual meeting proxy statement. The record date for determining which shareholders may vote is set by:
- The SEC upon receipt of the preliminary proxy filing
- The company's board of directors, typically 10 to 60 days before the meeting (Correct answer)
- The exchange on which the company's shares are listed
- The company's transfer agent based on its own administrative schedule
Correct answer: The company's board of directors, typically 10 to 60 days before the meeting
Under state corporate law and SEC rules, the board sets the record date, which must fall between 10 and 60 days before the shareholder meeting.
Question 5: The concept of 'materiality' in securities law is most accurately defined as information that:
- Causes a stock price movement of more than 2% upon disclosure
- A reasonable investor would consider important in making an investment decision (Correct answer)
- Is required to be disclosed under Regulation S-K or S-X
- Relates to earnings, dividends, or mergers only
Correct answer: A reasonable investor would consider important in making an investment decision
The Supreme Court's 'reasonable investor' standard defines material information as information that a reasonable investor would consider significant when making investment decisions.
Question 6: When a company announces a merger, Rule 14a-9 under the Securities Exchange Act prohibits:
- Filing the merger proxy statement fewer than 20 days before the shareholder vote
- Making false or misleading statements or omitting material facts in proxy solicitation materials (Correct answer)
- Compensating proxy solicitation firms on a per-vote basis
- Providing merger fairness opinions from investment banks with advisory roles
Correct answer: Making false or misleading statements or omitting material facts in proxy solicitation materials
Rule 14a-9 prohibits materially false or misleading statements or material omissions in any proxy solicitation materials, including merger proxies.
Question 7: A company discovers it must file a restatement due to a revenue recognition error. Which disclosure obligation is triggered FIRST?
- Filing a Form 8-K disclosing that previously issued financial statements should no longer be relied upon (Correct answer)
- Filing an amended 10-K with restated financials within 15 business days
- Notifying the PCAOB before any public announcement
- Holding an emergency board meeting and issuing a press release within 24 hours
Correct answer: Filing a Form 8-K disclosing that previously issued financial statements should no longer be relied upon
SEC guidance requires companies to file a Form 8-K (Item 4.02) promptly when the board or management concludes that prior financials are no longer reliable.
CIRO Regulatory Compliance & Governance 5
A company's insider trading policy typically establishes 'blackout periods' primarily around which events?