Final Exam Business Law

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Securities Act of 1933

Back 1

Governs the issuance and sale of securities, by focusing on the transactions. Investors are to receive proper and legitimate financial information about such securities for investments.

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Securities Act of 1934

Back 2

This was created to govern securities transactions on the secondary market, after issue, ensuring greater financial transparency and accuracy and less fraud or manipulation.

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Sarbanes Oxley Act

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The Act is used to protect investors from the possibility of fraudulent accounting activities by corporations. Improves financial disclosures from corporations and prevents fraud.

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Foreign Corrupt Practices Act 1977

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Enacted to stop bribery of foreign officials and restore confidence in the integrity of American business. Applies to companies with securities listed in the US.

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Security

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Any instrument that can be sold as an investment. Ex; stocks and bonds

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Security Offering

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Initial public offering, a registration with the SEC to create an opportunity to purchase stock.

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Initial Public Offering

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Stock market launch of a public offering which involves shares of a public company. The selling of securities on the market governed by the SEC.

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SEC Form S-1

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Used for ipo's, allows incorporation by reference from other filings under the Exchange Act if company has filed at least one annual report

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SEC Form S-3

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Available for large, seasoned companies that have been filing reports for at least one year and generally whose aggregate market value of common equity held by non-affiliates is $75 million or greater

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SEC Form S-4

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used in connection with exchange offers and acquisitions

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Rule 144A (QIB)

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Limits sales to qualified institutional buyers, certain institutions that own and invest at least $100 million in securities of non-affiliated entities

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Regulation S

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Limits the offering to offshore transactions only, no directed selling efforts made in US and no sales to US persons

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Comfort Letter

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Letter issued by an accounting firm assuring the financial soundness or backing of a company

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Section 11 of Securities Act

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Holds registrant, everyone who signed the registration statement, all directors, experts, and underwriters liable if any registration statement contains untrue information or misleading for investors.

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SEC Rule 10b-5

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It is unlawful to directly and indirectly by the use of any means or instrumentality of interstate commerce to employ any device or scheme of fraud, make any untrue statement of a material fact, or to engage in any acts that can defraud a person

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Insider Trading

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buying or selling a security while aware of information that is nonpublic and material that is acquired through a relationship of trust or confidence with a mental state showing intent to deceive or to manipulate. Also, sharing this material to someone else.

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Temporary Insiders

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Accountants, Bankers or other advisers, consultants, and lawyers

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Nonpublic information

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information that has not been disseminated broadly to the general public

ex: undisclosed financial results, projections of future earnings and losses

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Regulation F(D)

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Fair disclosure, after sox, requires every analyst and public finds out at the same time. No advanced knowledge to analysts

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Malpractice

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Tort and negligence, when an accountant doesn't exercise proper care and skill for the accounting profession.

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Generally Accepted Accounting Principles

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Standards for the preparation and presentation of financial statements

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Generally Accepted Auditing Standards

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Methods and procedures that are used by CPAs when conducting external audits of company financial statements

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Public Company Accounting Oversight Board

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Nonprofit organization established by congress to oversee the audits of public companies in order to protect the interest of investors and further the public interest in the preparation of informative, accurate and independent audit reports.

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Duty of Care

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Duty owed in which the accountant has the duty to exercise the degree of care, skill and competence that reasonably competent members of the

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Breach of contract

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action for malpractice, and accountant can be sued for this. If accountant failed to complete agreed work or made errors that didn't match malpractice, this would apply.

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Misrepresentation

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If the accountant had knowledge to know something is untrue, a disclaimer that is made is of no value. False statement of fact made innocently without any intent to deceive.

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Exculpatory clause

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Disclaimer made in misrepresentation

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Pivity Rule

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Only the client and no one else can recover from an accountant since the client is the only one in privity of contract with the accountant

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Contact Rule

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A third party may recover from an accountant if there was sufficient contact directly between the third party and the accountant /

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Known User Rule

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Requires the accountant to know the third party would be using the accountant's work product

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Foreseeable User Rule

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The possible third parties are in a group that the accountant can see as a likely group of users. Ex: class of lenders if the accountant is preparing a financial statement for a loan

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Intended User Rule

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Party not only must have been a foreseeable to the accountant, but also was expected or intended to rely on the work of the accountant

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Unknown user rule

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if there is no reason for the accountant to know of any third parties recovering from the accountant's work, the third party is unable to recover

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Contributory negligence

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negligence on the part of the plantiff that contributes to the injury

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Comparative negligence

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apportionment of loss doctrine that reduces the amount the plantiff can recover by the degree of negligence done by the plantiff

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Intestate

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Dying without a valid will, or failing to dispose of certain items of property in a will

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Decendent

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Person who died and the estate is being administered

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Testate

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Dying with a valid will in place

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Will

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written document executed with certain formalities which disposes decedent's property upon his or her death

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Testator

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Man who makes will

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Testratix

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Woman who makes will

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Testamentary Capacity

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Requirements of being legal age and having sufficient mental capacity to understand they are making the will and have reasonable understanding of the effect of making the will

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Legacy

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Gift being money

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Bequest

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Gift is personal property

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Legatee

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The recipient of the legacy

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Devise

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Gift is real property

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Devisee

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Recipient of the devise

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Beneficiary

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Someone receiving something under the will. Recipient of a life insurance policy

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Per stirpes

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Routes, through the root. The distribution follows from top down.

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Per Capita

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Per head. Equal splitting of the estate

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Holographic Will

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Will is handwritten by the testator.

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Self-Proving Will

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signatures of the testator and the witnesses are notorized

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Confidential relationship

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Elderly people who become dependent on someone, a friend or relative, for daily existence and then executes a will giving the person all of the estate with exclusion to relatives.

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Living Will

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Document that states the wishes of the testator to be taken off artificial life-support systems when there is no reasonable prospect of recovery.

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Advance Directive

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Testator indicates his/her wishes.

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Living Trust

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Certain assets of a person are placed into a trust, and the instruments are to be very specific and sometimes exotic to work around tax laws

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Codicill

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Addition to a will

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Probate

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Proceedings that establish the validity of the will and then administration of the estate of the decendent

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Executor or executrix

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Someone appointed to administer the estate

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Trust

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Legal device in which property is held by one person for the benefit of another

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Settlor

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Owner of the property who creates the trust ( sometimes donor or trustor)

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Trustee

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Person to whom the property is transferred to

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Corpus

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Property held in trust (latin of body)

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Inter Vivos Trust

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A trust created to become effective either during the lifetime of the settlor, or upon death (i dont trust someone until their 25, then they get the money i saved after death)

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Testamentary Trust

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Trust that takes effect upon death

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Legal title

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Trustee becomes the owner of the property

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Equitable Title

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Beneficiary gains this to trust the assets. THey can transfer or assign the interests in the trust

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Spendthrift Trust

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If the settlor doesn't want the beneficiary to transfer the their beneficial interest

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Insurance

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Protection from financial loss, risk management

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Insured

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Person who buys the insurance and is known as the policyholder

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Insurer

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Entity which provides the insurance

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Insurable Interest

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Loss may or may not be financial, has to be converted to financial terms. Owning the insurable interest or a contractual relationship

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Premium

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Amount of money charged by insurer to the insured for coverage set forth in the insurance policy

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Deductible

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Amount of risk retained by the insured policy holder

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Policy holder

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insurance contract written for a specific length and time

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Indemnity

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Insurance company compensates the insured in the case of certain losses only up to the insured interests

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Defense Costs

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Provision requires the insurance company to pay, in advance, the legal and investigation costs of the insured in the defense of a lawsuit

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Reservation of Rights Letter

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if there is a disagreement between the insured and the insurance company over whether the loss is a covered loss, the insurance company may agree to provide defense for the claim, but not commit to provide the indemnity.

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Property Insurance

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Provides coverage for losses sustained to property by the insured

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Liability Insurance

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Provides insurance for claims brought against by third parties against company for losses caused by company

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Commercial General Liability

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Provides liability insurance for the company against third party claims

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Auto Insurance

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Provides both property damage coverage to the automobiles owned by a company as well as third party claims brought by others against the company

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Workers Compensation

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Provides coverage for workers injured during employment, these employees can't sue their employer

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Business interruption

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Coverage pays money to a business that is unable to operate due to an unforeseen incident

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Directors and Officers Insurance

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Provides indemnity and defense costs to directors and officers of a company if they are sued for their actions as director or officer

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Excess or Umbrella Coverage

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Once policy limits are reached, then excess coverage applies