Client Advisory Services Flashcards

Under Section 16 of the Securities Exchange Act, who is classified as a 'reporting person' required to file ownership reports?

Answer: Officers, directors, and beneficial owners of more than 10% of a registered equity class

Section 16 applies to officers, directors, and greater-than-10% beneficial owners, who must file Forms 3, 4, and 5 to report their ownership and transactions.

A client exercises NQSOs and holds the shares for 14 months before selling. The gain from exercise to sale is taxed as:

Answer: Long-term capital gain because the shares were held more than 12 months after exercise

For NQSOs, the holding period for capital gain purposes begins at exercise; shares held more than 12 months post-exercise qualify for long-term capital gain rates on appreciation above the exercise-date FMV.

Which of the following is a primary benefit of a 'stock swap' exercise compared to a cash exercise?

Answer: It allows the participant to exercise options without requiring additional cash, using already-owned shares as currency

A stock swap exercise lets participants tender already-owned shares valued at the exercise price to acquire new shares, eliminating the need for out-of-pocket cash.

A company's equity plan includes a 'clawback' provision triggered by a financial restatement. Under the SEC's final clawback rules (Rule 10D-1), which condition activates a mandatory clawback?

Answer: A restatement of previously issued financial statements that would have resulted in lower incentive compensation being paid

Under Rule 10D-1, a mandatory clawback is triggered when a listed company must restate financials due to material noncompliance, and the restatement would have resulted in lower incentive-based compensation being awarded.

When a merger is structured as a stock-for-stock exchange, what typically happens to outstanding unvested RSUs of the target company?

Answer: They are assumed or converted into equivalent awards of the acquirer based on the exchange ratio, subject to original or new vesting schedules

In a stock-for-stock merger, unvested RSUs of the target are commonly assumed or converted into acquirer RSUs at the exchange ratio, continuing on original or modified vesting schedules.

Which document typically governs the specific terms of an individual's equity award, including vesting schedule, exercise price, and post-termination exercise period?

Answer: The award agreement (also called a grant agreement or notice of grant)

The award agreement (grant agreement) is the individual-level document that specifies the particular terms of each equity grant, including price, vesting, and expiration provisions.

For tax withholding on NQSO exercises, the IRS requires withholding at which minimum rate for supplemental wages up to the annual threshold?

Answer: 22%

The IRS mandates a 22% flat withholding rate on supplemental wages (including NQSO exercise income) up to the annual supplemental wage threshold, though employers may withhold at higher rates.