The Investment Company Act Requires That at Least 40% of the Board

question 284

Multiple Choice

The Investment Company Act requires that at least 40% of the board of directors of an investment company must be outsiders to:

• A) reduce possible conflicts of interest
• B) prevent insider trading
• C) reduce the possibility of insider trading
• D) make sure the board is very diverse
• E) none of the other choices are correct

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Definitions:

Moral-Hazard Problem

The moral-hazard problem arises in situations where one party's willingness to take risks is increased because the negative consequences of those risks will be borne by another party.

Principal-Agent Problem

A dilemma in economics where one party (agent) is supposed to act in the best interest of another (principal) but may have a tendency to act in their own interest.

Asymmetric Information

A situation in which one party in a transaction has more or superior information compared to the other.

Informational Asymmetry

A situation where one party in a transaction has more or better information compared to another, potentially leading to an imbalance in power or unfair transactions.