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Securities Regulation
SUNY Buffalo Law School
Halpern, Phillip

· Goal of Securities Regulation
o To regulate the informational disadvantage facing outside investors
o Give incentives to provide information
§ Value of information depends on the number of interested traders
o Securities information comes into 2 categories
§ Inside Information
· Information from inside the corporations
§ Outside Information
· Information useful in valuing the corporation that comes from outside the corporation
o Why might company not want to release information
§ When company is not selling securities to the public markets
§ Antifraud liability may not ensure the veracity of disclosures
§ Managers may have a self interest in restricting disclosures
o Why regulate securities
§ There are lots of risk
§ Impacts the economy
· The credit bubble
o Prices are a lot higher than their actual value
· Promote capital market to help economy
§ They are central to the financial markets
· Provide engine for financial growth in the markets
§ They are important to shareholders
· Counterargument
o Collective action Problem
§ Shareholders don’t care about the press release and as such they don’t see an inventive to release information
§ Rebutted by the efficient capital market hypothesis
§ Agency Problem
· The Problem
o People are controlling companies on your behalf so you want as much disclosure as possible
§ Managers would be disciplined or terminated due to poor performance
§ May institute a bidding war for an executive services
· Agency considerations may lead executives to disclose less information than what is in the best interest of both investors and issuer
· Mandatory disclosure would enhance shareholder welfare
o Every time there is a superior over an individual, there is a problem (corruption issues)
o Superiors should always act in the interest of the shareholders
· Positive Externality
o Occurs when a company makes a specific disclosure to the public markets
§ More disclosure increases accuracy in securities prove
· Investors need information to have confidence in the market
o Without information, there is no efficient pricing nor will there be confidence in the markets
· Solutions
o Command And Control
o Create Incentives
§ Required disclosure
§ Financial statement
· How well is the company doing
§ Prevent the disparity of knowledge and information between institutional investors and ordinary investors
· Prevent asymmetry of information
o Those that have private information vs. those that do not have private information
§ Stir irrationality in the market
· Mandate of the SEC
o Disclosure
§ Disclosure Requirements
§ Investment Disclosure
o Enforcement
§ Of the rules for Disclosure
· Securitization
o deals with Equities rather than debts
§ the bundling of mortgage and credit card debts into one that is then sold into the capital markets by being broken down into pieces and sold to parties
o Two Markets
§ Primary Markets
· When firm is issuing securities through an !PO
§ Secondary markets
· Securities being sold to investors, who in return sell to each other
· Primary owners profit from transactions in the secondary market as it raises the value of the shares
o Types
§ Stocks
· Ownership to a company
· Common Stock
o Get voting rights
· Preferred Stock
o People who get dividends first
o Priority in getting money before common stockholders
§ Bonds
· Loans that are made out to companies
· Efficient Capital Market Hypothesis
o Securities market price of a security will incorporate inside information related to the information assumed to be incorporated into the stock market price whether semi-strong and strong
§ Weak
· Reflects information found in all past prices for that securities
· Weakness
o If there is to be a drastic change coming soon, this method wont reflect it
o If price fluctuates randomly
§ Semi-strong
· The price will reflect all publically available information
o It takes in any news or any other information and recalculates it to the price appropriately
· Has strong effect on the securities market
§ Strong
· Stock market price of a company incorporates all types of information
· Reflects any private information one attains
o Opponents to this theory
§ Noise trading
· A substantial segment does not trade based on information and instead engage in random noise trade
o Rid

§ The rule is if something is important, You must disclose it
o Prohibits Half Truths
o Forward Looking statement
§ General Standard of materiality when determining forward looking information
· Disclosures regarding events that may or may not come to pass
o Standard
§ There must be a substantial likelihood the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available
· Reasonable investors are to be the market
o the determination of materiality requires delicate assessments of the inference a reasonable shareholder would draw from a given set of facts and the significance of those inferences to him
· Information that is deemed to be relevant will be reflected in the stock price
o The materiality of disclosed information may be measured post hoc by looking to the movement in the period immediately following disclosure, of the price of the firm stack
o Absorption period of information is to occur in the period immediately following the disclosure
§ Total Mix of Information
· All information is incorporated into one pool; which would then subsequently reflect the share price
o Probability Magnitude Approach
§ Materiality is something to be determined on the basis of the particular facts of each case
§ Test
· To determine probability that an event will occur
o A fact finder will need to look to indicta of interest in the transaction at the highest corporate levels
· To assess the magnitude of the transaction to the issuer of the securities allegedly manipulated (change)
o A fact finder will need to consider such facts as the size of the two corporate entities and of the potential premiums over market value