Question

Use either the Securities Exchange Commission website or other source, locate Rule 10(b)(5) of the Securities Act of 1934 and SAB 99. What does rule 10(b)(5) discuss? What does SAB 99 discuss? Explain the importance of each.

Answer 1

Rule 10b-5-----

Rule 10b-5 is a regulation created under the Securities and Exchange Act of 1934. It was formally known as the Employment of Manipulative and Deceptive Practices. This rule makes it illegal for anybody to directly or indirectly use any measure to defraud, make false statements, omit relevant information, or otherwise conduct business operations that would deceive another person in the process of conducting transactions involving stock and other securities.

KEY TAKEAWAYS

• Rule 10b-5, enacted in 1934 by the Securities and Exchange Commission (SEC), is a rule targeting securities fraud.
• Two related rules— Rule10b5-1 and Rule10b5-2—were issued in 2000 in order to create more current legal perspectives regarding securities fraud.
• Rule 10b-5 covers instances of "insider trading," which is when confidential information is used to manipulate the stock market in one’s own favor—for example, when an executive issues false statements in order to artificially drive down the price of a company’s stock so that they can buy up a volume of shares at a discounted price.

How Rule 10b-5 Works

Rule 10b-5 is the Securities and Exchange Commission's (SEC) main basis for investigating possible security fraud claims. Violations of the rule include executives making false statements in order to drive up share prices, a company hiding huge losses or low revenues with creative accounting practices, or actions taken to grant current shareholders a better return on their investments (as long as the deception remains undiscovered). These schemes typically require ongoing, misleading statements in order to perpetuate the fraud.

SAB 99” refers to the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 99, “Materiality.” In SAB 99, the staff of the SEC provides guidance on legal and accounting considerations in the interpretation of materiality with respect to financial statement items.