Risk Assessment & Underwriting Flashcards
7 cards from real CEP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Assessment & Underwriting flashcards as text
Under SEC Rule 10b5-1, a trading plan primarily mitigates which risk for insiders who hold equity?
Answer: Insider trading liability risk
A properly adopted 10b5-1 plan provides an affirmative defense against insider trading liability by pre-scheduling trades when the insider is not aware of material nonpublic information.
Which factor would MOST likely INCREASE the fair value of a restricted stock unit (RSU) grant, all else equal?
Answer: Lengthening the vesting period by one year
Longer vesting periods increase risk for employees (more forfeiture exposure), but the grant-date fair value of RSUs is primarily the stock price on grant date; however, for dividend-paying stocks, a longer vesting period means more foregone dividends, which reduces value—so actually the key driver for plain RSUs is stock price.
A company's equity plan allows for net settlement of RSUs to cover tax withholding. The PRIMARY financial risk of net settlement compared to sell-to-cover is:
Answer: The company bears the cash cost of remitting taxes before receiving sale proceeds
With net settlement, the company retains shares and must remit withheld taxes from its own cash before any stock sale proceeds are received, creating a timing cash flow risk.
When a company grants performance share units (PSUs) with a market condition (e.g., relative TSR), the compensation expense recognized is:
Answer: Fixed at grant date regardless of whether the market condition is achieved
Under ASC 718, market conditions are incorporated into the grant-date fair value using a Monte Carlo simulation, and expense is not reversed if the condition is not achieved.
An equity plan administrator is assessing 'plan dilution risk.' Which metric directly measures this risk?
Answer: Overhang percentage (shares reserved divided by total shares outstanding)
Overhang percentage measures the potential dilutive impact of all outstanding and reserved equity awards relative to total shares outstanding.
Which of the following represents a 'clawback' risk for a CEP professional managing an executive equity plan?
Answer: The risk that previously paid compensation must be recouped due to a financial restatement
Under Dodd-Frank and SEC Rule 10D-1, listed companies must recover incentive-based compensation from executives if there is an accounting restatement that reduces the amount they would have received.
A company is going through an IPO and wants to assess underwriting risk for its equity compensation pool. Which is the MOST critical consideration?
Answer: The lock-up period for employee shares and its impact on post-IPO trading volume
Lock-up expirations create a known future event where large volumes of employee shares may enter the market, which underwriters must model as a risk to post-IPO price stability.