 Hello, and welcome to this session in which we would look at the Securities Act of 1934. In the prior session, we looked at the Securities Act of 1933. In this session, we would look at the 1934. The first thing I want you to think of when you think of the Securities Act of 1934 is this picture here, the stock market. People who are trading stocks, stocks that already exist. So we're looking at the secondary market when we are dealing with the 1934, which is different than the 1933 when we are dealing with an IPO initial public offering. It's important to differentiate the two. And the reason we learned about the 1933 and the 1934 is to determine the CPA liability when it comes under those two acts. So it's very important to understand what 1933 is about, to understand what 34 is about. So once we move into the next session when we talk about the CPA or the auditor's liability or the tax preparer's liability, then it will be easier for you to understand how all this picture fits together. Now before I start, if you are a CPA candidate, most likely you are a CPA candidate, I strongly suggest you check out my website, farhatlectures.com. I don't replace your backer, Roger, Gleam, or Wiley. I can do so. I wish I can, but I cannot. But what I can do is I can be a useful addition to your CPA review course. I can add 10 to 15 points to your CPA exam score by help you understand the material differently. How so? I can explain the material in a different fashion. I can explain the material from a different perspective, and that will help you understand the material, which will make those courses more effective for you. Your risk is one monthly subscription. Your return is actually passing the exam. If you don't like the subscription, cancel too bad, you lost one month. If it works for you, you could potentially pass the exam. If not for anything, check out my website to find out whether your college is doing well or not well, or university doing well or not well on the CPA exam. I do have resources for other CPA sections and accounting or the tax courses. Please connect with me on LinkedIn and check out what other people, what other CPA candidate says in my recommendation about passing the exam. Like this recording, connect with me on Instagram and Facebook. So those are the major provisions that we need to talk about when it comes to the SEC 1934. Well they created the SEC, the Securities and Exchange Commission. They require continuing disclosure. We need to talk a little bit about this. Some anti-fraud provision and cyber trading and proxy rules. Not much, but you need to know this information. They should be easy, easy points on your exam day. We're going to start by looking at the SEC or the Securities and Exchange Commission. So what is the SEC? Simply put, the SEC is an administrative agency. It's a federal, to be more specific, created by the 1934 Act to enforce federal securities laws. When you think of the SEC, think of securities laws. When you think of securities laws, think of stocks. Think of companies that issue stocks to the public. So what is the SEC role and what it can do? So you need to have an idea, what's their capabilities in one sense or another? Well, for one thing, they can impose civil penalties, no criminal prosecution, and they can refer those cases to the Department of Justice if they want to, and they do so often times. They can investigate securities violation, obviously. They can conduct hearing, of course. And by doing so, doing so, they can subpoena witnesses and records, and they can issue rules for securities. They may deny suspend or revoke your registration, which is a serious commitment, if that happens to you. Although they cannot criminally prosecute you, but they do have a lot of leverage in their hand. They can order a suspension of trading your securities. Simply put, you can no longer trade your stocks. And that's a problem for you, for the shareholders, for the company, for your image. They can prohibit what's called bad actors, people that commit securities fraud from serving as an officer or director in public companies. Well, if you commit securities fraud, they don't want you to be a member of a publicly traded company. A member means an officer or a director that's making a decision because you're already a bad actor. They don't want to associate with people like this. They also oversee the PCAOB, the public company accounting oversight board, and you would learn about this more in your auditing, auditing section of the exam. And obviously the SEC accept whatever FASB state, whatever FASB state as setting standard for US GAAP. And if they disagree with something, obviously they would let FASB know for sure. Otherwise, whatever FASB said, if it's not, if the SEC does not object, it becomes your GAAP, your US GAAP, generally accepted accounting principle. So who should register under the 1934 act? Simply put, who's under that act? Well, let's look. All publicly traded companies. That's very simple. Who are publicly traded companies? PepsiCo, Amazon, Apple, their stock is traded. Or any stock that's traded on a national exchange. You don't have to be publicly traded, but as long as you are on a national exchange, you are under the Securities Act of 1934. Also, you don't have to be public. You can be private, large private companies that have more than 500 shareholders. And they end, they have assets of greater than 10 million. Now the rules changed a little bit. Now you could have up to 2,000 as long as the 500 are not accredited. But it's just something you need to be aware of. And anyone that's registered under the 1933 is also need to be registered under the 1934. So if you issue stocks to the public, you need to continuously publish reports. Therefore, you will have to be under the Securities Act of 1934. Now, how do you report? This is important. How do you report information? So how do companies communicate this information under the Securities Act of 1934? Well, they can use a 10K. You should all know what 10K is. We're going to discuss this. Thank you for 8K. What is 10K? I hope you know what this is. It's an annual report. When do you have to publish it? Well, depending on how large you are, whether you're accelerated or non-accelerated. But 60 to 90 days after your year end, it need to be certified by your CEO and CFO. It gives you audited financial statement. The first last two years for balance sheet income statement, cash flow and stockholders equity for the past three years, it included MD&A. Basically, what's included in an annual report? I hope you are familiar with an annual report. Right? You should be familiar with annual report. Your business profile, information about management, officers and directors, any disagreement about accounting disclosure, any lawsuits, pending, so on and so forth that's showing in the note. 10KQ. Remember, the Q is for quarterly. Quarterly report. And you have to publish this 40 to 45 days after the quarter end, depending on if you're a large or small filer. It's also certified by the CEO and the CFO. However, this is an important difference is it's only reviewed versus the annual report is audited. So this is an important distinction. Reviewed, remember, in a review, you only use analytical procedures and inquiries. In other thing, you have to go through all the substantive procedures for testing the account. So the quarterly report has to be more timely. It's by independent auditor, but it's only reviewed. We also have 8K. And what does 8K? How does the 8K help in this reporting? It's called the current report. And any material event or corporate changes that could be of importance to either the shareholders or the SEC, you must disclose this. You will issue a form 8K. So you don't wait until the quarter end or till the end of the year. You have four days to issue that 8K. What would be included in that 8K? In other words, what type of events will be listed? For example, acquisitions. If you are buying another company, if you're going through a bankruptcy, the resignation of a major director or the CEO or changes in the physical year, anything that you think it's important, then you have to disclose it on a timely basis and form 8K. Also, the SEC will have rules about 5% owner or tender offers or tendering. It should be tender offer, but that's the point. Simply put, there are certain individuals, activists, investors that they might own. For example, Carl Icahn or Bill Aikman, they might own more than 5%. If that's the case, if you own more than 5% of the company, then you have to file with the SEC under the Securities Act of 1934. The report must include the source of the funds, the purpose of the transaction, background information about the buyer. So if you are 5% owner, usually those are activist investors. You don't even have to buy as long as you make tender offers to buy 5%. So tender offer, simply put, before they buy, they will make a tender offer to all the shareholders of the target corporation that look, we would like to buy your stock at a certain price. If that's going to amount to 5% or more, you have to also file with the SEC. So if the tender offer is more than 5%, you must file disclosure statement. Again, what do you have to also say, same as you are an owner? The purpose of the transaction, why are you buying them, the source of the funds, and a little bit of background information about you as the investors. Also, the SEC deals with insiders. First of all, who are insiders? Who are the insiders of the company? Well, who's considered an insider? 10% or more owner. If you own more than 10% of the company, you are considered insider. Officers of the company, directors, accountant and lawyers of the company. Now, why is this important? Because insiders know more about the company than the general public. Not in general, of course they do know. If you're an officer or a director or an accountant or a lawyer, you're going to know details about what's going on in the company way before anybody else knows about it. Therefore, what you have to do, you have to make an initial filing about your ownership, how many shares do you own? If you sold any, and you have to have a file annually, and that information is available to the public. So the public wants to know if you are buying, selling your stock. And a lot of people use this information to trade stocks. I don't suggest you do that. But the point is, if somebody's selling or if somebody's buying, we need to know why, if that individual is insider, the assumption is insiders know more about the company than anyone else. Now, the 1934 also imposed strict liability rules on insiders who make a profit on the purchase or sale of a reporting company within six-month period of reporting. Now, it doesn't matter whether this individual used inside information, which we'll talk about shortly or not. Inside information means non-public information, information that they know, but other people, like outside the company, are not aware of. So any short-term swing profit, the SEC will come after you. Also, the SEC, the Securities Act of 1934, will regulate proxy. What is a proxy? Simply put, it's a power of attorney. What is a power of attorney? For example, to whom it may concern, I hereby authorize this individual to act on my behalf. That's all what a proxy is. But what we're saying here is the proxy to vote. So what you do, for example, I'm a shareholder of XYZ company, Amazon or Apple or any other company. So what happened is, they send me this report. They say, look, you have five shares of Amazon, okay? We have the annual meeting on such and such date. If you'd like to attend, here are the details and you can vote. Now, also you could receive a letter from Bill Aikman, for example, and saying, look, I know you have five votes. Would you be interested in giving me the right to vote on your behalf? Why those activist investors, maybe they may not have a lot of shares, but if they can get five shares here, 10 shares there, 50 shares over there, so on and so forth, they can collect more shares and they have more power because when you own stocks, each share is a vote. So what happened if you have proxy vote? Well, it's a request by someone to vote with your shares on your behalf. Basically, you're giving them the right to vote on your behalf. Now they can vote for whoever they want to. Those proxy requests, they get reviewed by the SEC. So before you mail them to the shareholders, you have to give them to the SEC. They would review them, make sure you're not giving anything misleading. It's unlawful for any person to solicit proxy with respect to any registered security if you are violating any rules and regulations. Therefore, they have to review them. So the issuant company must file copies of the proxy statement and proxy form within 10 days of mailing them to the shareholders. This is what proxy is all about. Also, the 1934 will have anti-fraud provisions and I hope you know this person. This is Martha Stewart and here we are talking about insider trading. Insider trading is fraud under rule 10B-5 and we'll talk about this rule in the next session and we'll talk about the liability section. Is the purchase or sale of any security by individual who has access to material non-public information? What does that mean? Insider information, in quote, private information, okay? And did not disclose it before trading and nobody knows about it and they trade on that information. And they have the duty or the obligation to the issuer, the shareholder or any other source of information. It's not really yours, you cannot act upon it. Now, for example, Martha Stewart, she was not an insider, but somebody gave her the information or she was not convicted for insider trading. She was convicted for lying to the FBI, but that's a different story. The point is it all started with an insider trading investigation where she sold her share based on a tip. The tip was received from her broker. Her broker had the inside information from somewhere at the company. So she wasn't, but she's also known to have been involved in insider trading. But this is what insider trading is. The 1934 will come after you if you participate in insider trading. So simply put, this is all what I'm gonna talk about the 1934. Again, we're gonna revisit this topic, 33 and 34 in terms of the accountant or the auditor or the tax preparer's liability. At the end of this recording, I would like to remind you if you're a CPA candidate and most likely you are, please take a look at my website. It, look, try me for a month, okay? It might help you. I have all my recording aligned with your CPA review course with your major CPA review courses. So it's easy for you to switch between my material and the CPA review course. This is what I do. I'll try to help you pass. If you think it's helpful, please go ahead and subscribe, study hard, good luck and stay safe.