Legal & Regulatory Compliance Flashcards

Under SEC Rule 10b-18, a company repurchasing its own shares receives a safe harbor from market manipulation charges when it satisfies conditions including:

Answer: Using a single broker per day, volume limits (25% of ADTV), price limits, and timing restrictions

Rule 10b-18 safe harbor conditions include using a single broker/dealer per day, price limits (no higher than the highest independent bid or last transaction price), timing restrictions, and volume not exceeding 25% of average daily trading volume.

When a company grants a nonqualified stock option (NQSO) with an exercise price below fair market value on the grant date, which tax penalty applies?

Answer: Section 409A imposes a 20% additional tax plus interest on the entire spread

Discounted NQSOs are treated as deferred compensation under IRC Section 409A, subjecting the option holder to immediate income inclusion, a 20% excise tax, and underpayment interest.

The Sarbanes-Oxley Act Section 306 prohibits corporate insiders from trading company securities during a pension fund 'blackout period' that lasts at least:

Answer: 3 consecutive days

SOX Section 306 prohibits insider trades of employer securities during a pension plan blackout period that prevents at least 50% of plan participants from trading for more than three consecutive days.

Which element is required for a stock option to qualify as an Incentive Stock Option (ISO) under IRC Section 422?

Answer: The exercise price must be at least 100% of the stock's fair market value on the grant date

IRC Section 422 requires that the ISO exercise price be at least 100% of the stock's FMV on the grant date (110% for 10%+ shareholders), ensuring no discount.

Under Dodd-Frank's say-on-pay requirement, how frequently must public companies hold an advisory shareholder vote on named executive officer compensation?

Answer: Every year, two years, or three years, as determined by a separate shareholder vote at least every six years

Dodd-Frank Section 951 requires companies to hold an advisory say-on-pay vote at least every three years, and separately allows shareholders to vote on the frequency (every one, two, or three years) at least once every six years.

A 'cooling-off period' required by SEC amendments to Rule 10b5-1 (effective 2023) applies to plans adopted by executive officers and directors and requires a minimum waiting period before trading of:

Answer: 90 days or the next open trading window (whichever is later), up to 120 days

The 2022 SEC amendments require a cooling-off period for officers and directors of the later of 90 days after plan adoption or the next open trading window, with a maximum of 120 days before any trading can commence.

Which tax withholding method allows an employee to satisfy income tax withholding on equity award vesting by having the company retain a portion of the vested shares?

Answer: Net share settlement (share withholding)

Net share settlement, or share withholding, involves the company retaining shares with a value equal to the tax withholding obligation, with the net shares delivered to the employee.