Select Page

Securities Regulation
St. Thomas University, Minneapolis School of Law
Joyce, Thomas

Sec regulation meant to protect investors
Premise of regulation is mandatory disclosure which will provide investors & advisors w/ info to move capital to optimal use
Investor protection = healthy & vigorous capital markets = robust economy
Sec Market Participants
Sec firms: broker dealers that buy & sell sec for customers, investment advisers that provide investment info & advice to customers
Investment companies: pool together sec & sell interests in the pool
Investment banking firms: advise & assist companies issuing sec & raising capital
Interconnection among Financial Markets
Public sec markets: subject to full fledged sec regulation (mandatory disclosure, heightened fraud stds, regulation of participants
Private sec trans: not subject to mandatory disclosure, subject to modified fraud stds, state regulation & fed exemptive conditions
Sec Act 1933
Requires filing of registration statement
Mandates dissemination of prospectus
Has liab scheme for misinformation in regis statement, prosp or during distribution of new sec to investors
Failure to register carries crim penalties, admin sanctions, & private civil liab
Exchange Act 1934
Created SEC
Regulates stock exchange & sec firms
Regulates margin for purchase of sec
Prohibits manipulative stock market practices
Requires periodic disclosure by companies
Regulates proxy voting by shareholders in public companies
Regulates insider trading
Specialized Sec Laws
Public Utility Holding Co Act
Trust Indenture Act
Investment Co Act
Sarbanes Oxley
Response to accounting & corporate scandals
Trans involving sec subject to registration, mandatory disclosure & antifraud liab
Fed sec laws provide definitional list for what = sec & S Ct has developed test for when unorthodox item falls w/in boundary of sec
Look at §2 of 33 Act – what is a sec?
Testing for a Sec
Fed Sec Acts define sec by listing fin instruments (stock, bonds, debentures, notes) & generic catchall terms (evid of indebtedness, investment K, certificates of interest in profit sharing agreements) Sec Act §2(1); Exchange Act §3(a)(10)
In interpreting lists, cts have focused on two questions:
                                                               i.      When does an orthodox investment fall w/in catchall terms, principally investment K?
                                                              ii.      When are instruments that usually fall into specific category actually not sec?
The above 2 questions turn on whether investors have entrusted $ to another’s mgmt & whether they face difficulties in collectively supervising this mgmt
Investment K – the Howey Test §2(a)(1)
S Ct in Howey defined investment K as trans in which:
                                                               i.      Person invests $
                                                              ii.      In a common enterprise
                                                            iii.      Led to expect profits
                                                            iv.      Solely from efforts of others
Later cases helped add to test:
                                                               i.      Investment: can be cash or noncash consideration & should produce income or profit; investor NOT buying consumable commodity or service
                                                              ii.      Commonality: multiple investors must have interrelated interests in common scheme; according to some cts, it is enough if single investor has common interest w/ manager of investment (vertical commonality)
                                                            iii.      Expected profits: return must com

                                                               i.      Bank Instruments as Securities
1.        If sec issued by someone regulated by another fed agency won’t call pieces of paper they issue sec b/c controlling regulative agency will control they do the right thing (Marine Bank )
                                                              ii.      Sale of a Business Doctrine
1.        When corporate bus is sold thru sale of corp’s stock, stock isn’t a sec
2.        Sale of bus doctrine doesn’t apply when purchasing 85% of common stock of closely held co.
Promissory Notes
                                                               i.      Note shows a person’s promise to repay an extension of credit
                                                              ii.      Many notes should not be treated as sec b/c they don’t have typical attributes of investment; cts haven’t treated notes as sec b/c “context otherwise requires”
                                                           iii.      When is a note a security?
1.        Each Act excludes certain notes: those w/ maturity not exceeding 9 mo, Sec Act §3(a)(3) & Exchange Act §3(a)(10)
2.        Move to family resemblance test in Reves (good law – should focus on):
a.        Begin w/ presumption that every note is a sec unless it falls into category that isn’t a sec (notes in consumer lending, notes secured by mortgage, short term notes are in category of non-sec)
b.       4 factors to determine the family where note fits: