I. Markets (Day #1-2: pg. 1-53: Notes pg.1-3)
a. Why do we have markets?
i. Markets have been the best mechanism to efficiently allocate capital and when capital is efficiently allocated, everyone in society’s standard of living is raised.
ii. Securities Regulation is meant to inform and bolster that process because when it runs smoothly it results in private ordering where people put their money into tasks and efforts that are most beneficial to the economy.
iii. Regulations add a financial stability and a predictability gloss that benefits all participants, both investors looking to allocate capital, and issuers looking to acquire capital and use it for its needs.
iv. Encourages economic growth, innovation and capital flow by attracting capital in an increasingly global competition through a robust market.
b. The financial market has three functions:
i. Match lenders and other investors with businesses seeking financing, enabling those with surplus funds to earn a favorable return while permitting those unable to finance their operations with internally generated funds to obtain capital.
ii. Permit investors to reduce their exposure to risk through various strategies such as portfolio diversification and hedging
iii. Provide “liquidity,” an important characteristic that means essentially that investors can anticipate that their decision to trade will not materially change the market price.
c. Types of Markets:
i. Capital: Markets that deal in longer-term financial instruments (common and preferred stock, bonds, mortgages, etc.)
ii. Money: markets in which shorter-term debt instruments typically having a maturity under one year are issued and traded.
iii. Sovereign Debt (Government Securities Market?): Securities issued by the U.S. Treasury to finance the national debt and all securities by government sponsored enterprises such as the Federal National Mortgage Association. This is the world’s largest security market.
1. solely for professionals and little public participation in trading. Treasury securities are sold by the Federal Reserve Bank of New York at regularly scheduled auctions.
2. Generally anyone can bid at the auctions, and bidders submit offers stating the yield at which they want to purchase securities, the bids are then ranked from the lowest to the highest yield.
iv. Corporate Debt: Donald Trump
v. Municipal Bond: Parallels government securities market, except the creditworthiness of local governmental units is often doubtful. SEC used to lack authority over Municipal Securities until Congress established the Municipal Securities Board , a self-regulatory organization authorized to adopt rules applicable to brokers and dealers. The SEC maintains oversight and looks at the proper disclosure of municipal issuers.
vi. Derivative Product Markets: contractual instruments deriving their value from the values of underlying instruments or commodities upon which they are based. These contracts include forward contracts, futures, options, and swaps, but only futures and options trade on organized exchanges, and only options normally constitute securities. Does not provide capital for issuers unlike debt or equity markets. They involve side bets on interest rates, currency rates, stock index levels, commodities prices, or similar market prices. Corporations engaging in these side bets are not doing so to raise money but to protect themselves against risk of adverse changes in the interest rates, currency values, or price levels.
d. Equity Markets: (equity = ownership)
i. Venture Capital Market:
1. constitutes a gift of money to the starting company in exchange for a large block of convertible stock, an ability to make some decisions and some level of control over the company. Goal is for the venture capitalist to gain money as the company gains money and grows. When the company reaches a point that it can file for an initial public offering (IPO)
n be charged.
1. Funds are either “Close-Ended,” (tradable only among investors) or “Open-Ended” (redeemable on a daily basis).
2. ex’s: S&P funds, Tech funds (intel, microsoft), Growth funds, Value stocks, large cap, mid cap, small cap, international)
iv. Hedge Funds: similar to a mutual fund, it holds a pool of securities and at times other assets. Hedge funds, however, are largely unregulated. Falls under the purview of the Investment Act of 1940. They lack constraints on leverage, investment policy, diversification, and allowed to charge an incentive fees and management fees. May avoid registration as an investment company so long as:
1. sells to less than 100 investors, or
2. sells only to investors who each own not less than $5million in investments, &
3. Sells only to accredited investors (AI)
v. Pension Funds: closely regulated, especially by the Employee Retirement Income Security Act of 1974 (ERISA).
II. Regulatory Framework:
a. There are six Main Securities Statutes:
i. Securities Exchange Act of 1933: prohibits the offer or sale of a security unless the security has been registered with the SEC and requires the delivery of a prospectus to a purchaser and to other persons to whom a written offer is made.
ii. Securities Exchange Act of 1934: Broader than the 33’ Act, Publicly held companies must enter the SEC continuous disclosure system and file annual and quarterly reports with the SEC, preclear proxy statements with SEC before soliciting shareholder proxies or votes, and sets up a self-regulatory body for broker-dealers.
