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Securities Exchange Act of 1934
University of California, Davis School of Law
Malloy, Michael P.

Securities Regulation


Summer 2016


Talking about reporting requirements and extraterritorial application, BNP case can be considered a material event of change of circumstances for securities. Although it is a criminal proceeding related to money laundering (criminal) and sanctions, it can affect the ability of BNP to participate in the securities market in the US, even though it is a French bank. So, it became a compliance issue for securities.

Introduction – Policies and Goals – Structure

On this course we will only dedicate time to the tip of the iceberg. One regulation could take a whole LLM to be studied. So, it is worth the warning that this is only an introduction of 20 hours. The aim is to have sufficient knowledge to be able to realize on 1933 Act and 1934 Act when we are confronting securities. There are other several statutes that we won’t have time to study but shall be mentioned for disclosure sake, such as the 1933 and 1940 Acts (market professionals that run investment funds, advisory services to the public, qualifying to be allowed to conduct this activity), broker-dealer regulation (how the act, the fiduciary rules etc), M&A regulation and state law regulation. These regulations take a further step on federal securities.

Congress and the administration were able to tell the States that the aim was not to interfere – just to require disclosure. It is not totally true, as below the surface, the acts are not only about disclosure oriented rules, but substantial regulation over the conduct of the companies.

Securities are about moving capital resources from producers to users.

Internal investment: It could be only a matter of transactional law. However, there are some problems with this, as it is costly to find people in either side of the equation and put them together (tremendous agency cost, due diligence etc) – it may be indirect, but it would increase the cost that would offset the advantage leverage wise. Under an economical perspective, there will be serious problems of resource allocation.

External investment: Financial Intermediaries: got to find somebody specialized in the search, rather than having our capital producer to hunt opportunities, for a small fee. Their day-to-day business is to seek for opportunities. There are economies of scale. They know where to look and don’t have to search the entire market to find someone with capital. We are talking about, for example, the investment and commercial banks (there is a great difference between them and they are structured separately and operates separately), as well as other institutions such as thrift institutions/saving associations (down-market retail financial institutions), mutual funds (includes MMMFs), insurance, pension funds and other intermediates, even securities market (they only cannot do commercial bank transactions) or government (taxation, spending, borrowing, lending, insurance). The fee of an intermediary should be less than if you weren’t using them. However, a study showed that 95% of the companies are capitalized with own money of the shares.

The problem is that the securities market has a separate intermediation with particular rules that loses part of efficiency on the intermediation in comparison with the other. For years, the exchanges in the US had a competitive advantage. That system has broken down – not only small companies are using non exchange structure supported. The raise of other forms and media for the intermediation will change the scenario time to time. This is challenging for the regulation.

All of this for a long time was purely a matter of state law and a matter of private and individual transactional law. Not subject to specific regulation and normally governed by contract. The big challenge than was to decide how to create private rules to support compliance on this market. As soon as you have a set of laws to recognize the role of each party you relief the structure. There was one exception related to commercial banks and thrift structure – they had to be subjected on some supervision as they have a very important role in the society. Even on that there were no federal involvement.

McCulloch v.

zed it was necessary to regulate the market – more devastating than 2009)

Emergence of the Contemporary Financial Regulatory System

Regulate the behavior of the participants in the financial market- Imposing special obligations and responsibilities to report affirmatively the facts which has never been an obligation under the common law – common law never requires to tell the truth – this law does – that is the approach –

+ Creating of Federal Home Loan Bank Board (1932): relief on the retail level;

+ Separating Commercial and Investment Banking (1933 Banking Act) – this Glass Stickle Act – cannot be affiliate to each other – banks were required to decide in one year from the June 1933 act what business they would keep – until 1999 even an affiliate was not allowed; Very important part to the legislation response to each part.

+ Creating of the Federal Deposit Insurance Corporation (1933 Amendments to Federal Reserve Act – this protection was not extended to Securities Companies). Legislation create for the first time securities system

+ Federal Regulation of Issuance of Securities in Public Markets (1933 Securities Act – only governed the activities of investment bank – commercial banks were excluded) *** emergence

+ Creating of Federal Savings and Loan Insurance Corporation (National Housing Act of 1934) – extension to Commercial Banks;

+ Federal Chartering of Savings and Loan Associations (home owners loan act of 1934)

+ Creating of the Securities and Exchange Commission (Securities Exchange Act of 1934) *** one year after with no federal litigation – another piece that is the central part of the securities regulation (no material change until 2010)