Topic 8 – Consumer Protection and Investor Protection

Bait & Switch

ad advertises a price, switches it for another

Half Truth

o   Half Truth – Truth in the end, but leads to false confusion.

Ex. Campbells soup claiming ALL soups were heart healthy.

Puffery

oSubjective, exaggeration in advertising that no reasonable consumer Ex. Best coffee in the wrold

Telemarketing and Consumer Fraud and Abuse Prevention ACT

§  Identify seller’s name

§  Describe the products being sold

§  Disclosure material facts including total cost.

Fair and Accurate Credit transaction act (FACTA) (ON TEST)

Prevent Identify theft by getting free credit report once a year.

Fair credit reporting act

·         If denied, get a free copy of credit report to determine accuracy.

Truth in Lending Act

The Truth in Lending Act (TILA) is a 1968 federal law, part of the Consumer Credit Protection Act, designed to protect consumers in credit transactions by requiring clear disclosure of key loan terms, such as the Annual Percentage Rate (APR), finance charges, and total payments. It applies to consumer loans like mortgages and credit cards.

Regulation Z

that enforces the Truth in Lending Act (TILA) of 1968. It requires lenders to clearly disclose credit terms, such as APR, finance charges, and loan terms, to consumers, enabling them to compare credit options and avoid predatory lending practices.

Under truth in lending in act, what must be disclosed?

§  APR

§  Finance Charge

§  Amount Financed (total payments)

Corporate Governance

·         Rules that ensure a company operates in the best interest of all stakeholders. (shareholders, employees, customer, community)

Shareholders

·         their only jobs are to elect the board of directors.

Board of Directors

Oversees the company and hires the CEO. Could be the ceo,

Inside Directs

Work for the company and on the board.

CEO

·         Runs the company but still an employee of the company. Could also be on the board of directors – inside director, can also be a stockholders, and does face personal liability if they a reporting company under SOX and has to certify the truthfulness of anything filed with the SEC.

Investor Protection

·         The rules, regulations, and mechanisms in place to safeguard investors from fraud, marker manipulation, and unethical practices, and to ensure the integrity of financial markets.

Security ACT of 1933

Deals with initial purchase/ sale of stock.

What is the goal of the Security Act of 1933?

o   Goal to prohibit fraud and require investors to receive financial information about what they are trying to buy.

What are the 3 phases of the securites act of 1933 and what can you do during them?

PreFiling - no selling stock can’t do anything

Waiting period - no selling stock, apply to be registered, give prospectus

Post - give final prospectus and sell stocks

Who doesn’t have to register under the sect of 1933?

Government securities

Insurance Companies

Annuities

Endowments

Modification on registration

o   Well known seasoned issuers: has 1 billon in securities and 500 or more shareholders, so they can register with the SEC and sell the same day.

Securities Exchange Act of 1934

Applies to Section 12 companies for continuous reporting – assets in excess of 10 million or 500 or more shareholders. Basically let’s get big companies to continuously report so we know they aren’t ripping off the shareholders.

Insider Trading -

o   You have knowledge the public doesn’t have. Can not buy or sell stock based on information what is known to the public.

Scienter

Intent to defraud or knowledge of her/his misconduct.

Sarbanes – Oxley Act

Goal to increase corporate accountability. Companies were lying.

o Internal controls must be established by most senior officers and system effectiveness must be checked quarterly or annually?

Annually

Public Account Oversite Board

Created by Sox to regulate and oversee public accounting firm.

Can companies give personal loans to director and executives?

NO

Audit Committee

subcommittee of the board of directors who review the finances of the corporation. MUST be outside directors (someone who does not work for the company), Need at least one financial expert.