Securities Regulation
Overview
Relevant Statutes:
Public Utility Holding Company Act
Trust Indenture Act
Securities Act of 1933*
The Securities Act of 1933 regulates public offerings of securities. It prohibits offers and sales of securities which are not registered with the Securities and Exchange Commission (SEC), subject to exemptions for enumerated kinds of securities and transactions. It also prohibits fraudulent or deceptive practices in any offer or sale of securities.
Securities Exchange Act of 1934*
The Securities Exchange Act of 1934 extended federal regulation to trading in securities which are already issued and outstanding. The 1934 Act established the SEC and transferred to it the responsibility for administration of the 1933 Act.
Investment Company Act of 1940
Investment Advisors Act of 1940
Securities Investor Protection Act of 1970
Sarbanes Oxley
Securities Acts generally are a product of their time and a response to a particular crisis.
Securities act requires that all securities to be placed in the hands of the public, subject to numerous exemptions, must be registered with the commission prior to being sold.
Applies to primary and secondary distributions.
Applies to sales by original and controlling shareholders.
Describes what must be disclosed in the registration statement.
Describes the mechanics of the registration process and the limitations of the disclosure requirement.
Provides for liability for failure to comply with the Act and fraudulent sales.
Securities Exchange Act of 1934 applies to secondary sales markets.
Mandates periodic disclosure of certain types of information in the form of quarterly and annually filings, known as the 10-Q and 10-K.
Mandates disclosure of certain extraordinary events.
Registration of broker dealers.
Covers the regulation of securities exchanges.
Broad anti-fraud provisions in connection with purchase or sale of securities, also covers insider trading.
1933 and 1934 encompass the Federal Regulation of Securities. There are some State regulations. Every state has anti-fraud provisions. New York has a particularly powerful provision, known as the Morton Act (no scienter requirement).
If an offering is done completely instate, it is exempt from the disclosure and registration requirements.
Goals of Sec. Reg.:
Protection of Investors
Costly
Creation and Promotions of Efficient Markets
The goal behind “disclosure” is transparency, but only on certain terms.
Limitations of dissemination of entirely truthful information.
The SEC
Act of 1934 created SEC, an independent agency composed of 5 commissioners. These commissioners are appointed by the president with the advice and consent of the senate for a five-year term. The commission is non-partisan, this is accomplished by the requirement that no more than 3 of the 5 commissioners can be in the same party.
The SEC is empowered to make three categories of rules:
Procedural and Technical Rules (e.g., how many copies to be filed);
Definitions of terms used in the law (e.g., Rule 147, defining what constitutes an intrastate offer);
Substantive Rules (e.g., the proxy solicitation rules under 1934 Act §14).
Beyond the rules and forms, the SEC engages in informal law-making. The SEC accomplish this by:
Releases, which set forth the view of the Commission without stating them in the form of legal requirements, sent to the media, firms or interested parties;
responding to private inquiries as to whether a transaction could be carried out in a specified manner. These responses are known as “no-action” letters, because the staff will recommend no action to the Commission if the transaction is done in the specified manner.
The SEC also has the general authority to exempt any class of persons, securities or transaction from any provisions of the 1933 or 1934 Act.
Divisions of the SEC:
Corporate Finance: Reviews the Disclosures
Market Regulation: Regulates Market Participants
Investment Management: Oversee and Regulation the Investment Management Industry (i.e. mutual funds, advisors, etc.)
Enforcement: Investigates Possible Violations of Federal Securities Laws and Makes Recommendations to the Commission to Bring Proceeding (administrative or court room)
Commissions has the power to:
Review;[1]
Proxy statement, 10K, 10Q, Filings of Public Companies, Tender Offer Filings.
Make Rules;
Formal process because must perform legislative task, which carries the force of law.[2]
Congress delegates to the commission the right to make rules.
Administrative Procedure Act requires that the commission give:
Notice, and
The right to comment on prospective rules.
Violation of the rule may subject violator to civil or criminal liability.
Interpret;
Can interpret their own rules and regulations.
Sometimes staff itself may issue a formal response in the form of:
bulletin regarding the applicability of a rule, or
may issue a “no-action” letter, which permits an individual to perform a transaction and then recommend to the enforcement board not to seek any action.
Other times may be an informal response, obviously this is not as reliable as a formal response.
Enforce; and
Enforce statutes and its rules.
Civil[3] and
Must be in furtherance of an investigation, not to help another agency to prosecute.
State agency can bring a claim against individual the same way SEC can if activity is a violation of both Federal and State Law.
May be private enforcement of the Securities Law, these are explicitly granted rights of action.[4]
SEC files a complaint, the same as a private party.
The SEC is the Plaintiff AND the violator is the Defendant.
Right to trial, appeal, jury.
Looks a lot like a law suit brought by a private party.
Injunctions may be granted, where remedies include:
Injunction for violation and future violations of securities law.[5]
Equitable remedies (e.g. disgorgement[6]).
Civil Penalties.
Officer/Director Bar.
ement.
Under §8(b), the Commission may refuse to permit the statement to become effective if “on its face [the statement is] incomplete or inaccurate in any material respect.
Under §8(d), the Commission may issue such a stop-order to suspend the effectiveness of a statement.
In the past, the Commission required that only securities that were to be sold immediately could be registered.
However, Rule 415, was later adopted, broadening the securities which could be registered to include “shelf registration.”
Under this rule, an issuer can register securities for sale over a period of not more than two years. This rule however is only available for:
Offerings by persons other than the issuer;
Traditional types of continuing offerings, such as employee purchase plans; and
Any debt or equity offerings by the very large companies qualified to register their securities on form S-3. (WKSIs qualify for automatic shelf registration).
In 1987, the Commission adopted Rule 430A, under which information relating to the price of the securities and terms of the underwriting need not appear in the registration statement at the time it becomes effective, provided the information is contained in a final prospectus filed pursuant to Rule 424 within five days after the effective date.
[1] Ensures mandatory disclosures, not the merits of the disclosure.
[2] Hedge fund rule was struck down as being beyond the power granted to the commission.
[3] Exclusive jurisdiction over violations of Federal Securities Laws. Does not have the power to bring criminal cases. However, a violation of almost every provision of the Securities Law is also a criminal violation. Department of Justice handles the criminal aspect, not the SEC.
[4] Courts have implied private rights of action where it seems the statutory construct can only work if there is a private right of action. SEC does not take part in these actions.
[5] Violation of injunction order is contempt of court.
[6] Surrender unlawful profits, as opposed to restitution which is not within the SEC’s power.
[7] Not self-executing, must go to court to enforce before becomes contempt.
[8] As opposed to private action which requires instatement of an action before discovery may begin.
[9] Must be voted on by the commission, who may grant a formal order.
[10] An presumption may be recognized that testimony would have been adverse.
[11] Not an official term.
