The Laws That Govern the Securities Industry
Securities Act of 1933
Often referred to as the "truth in securities" law, the Securities Act
of 1933 has two basic objectives:
- require that investors receive financial and other significant
information concerning securities being offered for public sale; and
- prohibit deceit, misrepresentations, and other fraud in the sale of
securities.
The full text of this Act is available at: https://www.sec.gov/cgi-bin/goodbye.cgi?www.law.uc.edu/CCL/sldtoc.html.
(The SEC does not control or maintain this site.)
Purpose of Registration
A primary means of accomplishing these goals is the disclosure of
important financial information through the registration of securities.
This information enables investors, not the government, to make informed
judgments about whether to purchase a company's securities. While the SEC
requires that the information provided be accurate, it does not guarantee
it. Investors who purchase securities and suffer losses have important
recovery rights if they can prove that there was incomplete or inaccurate
disclosure of important information.
The Registration Process
In general, securities sold in the U.S. must be registered. The
registration forms companies file provide essential facts while minimizing
the burden and expense of complying with the law. In general, registration
forms call for:
- a description of the company's properties and business;
- a description of the security to be offered for sale;
- information about the management of the company; and
- financial statements certified by independent accountants.
Registration statements and prospectuses become public shortly after
filing with the SEC. If filed by U.S. domestic companies, the statements
are available on the EDGAR database
accessible at www.sec.gov. Registration statements are subject to
examination for compliance with disclosure requirements.
Not all offerings of securities must be registered with the Commission.
Some exemptions from the registration requirement include:
- private offerings to a limited number of persons or institutions;
- offerings of limited size;
- intrastate offerings; and
- securities of municipal, state, and federal governments.
By exempting many small offerings from the registration process, the
SEC seeks to foster capital formation by lowering the cost of offering
securities to the public.
Securities Exchange Act of 1934
With this Act, Congress created the Securities and Exchange Commission.
The Act empowers the SEC with broad authority over all aspects of the
securities industry. This includes the power to register, regulate, and
oversee brokerage firms, transfer agents, and clearing agencies as well as
the nation's securities self regulatory organizations (SROs). The various
stock exchanges, such as the New York Stock Exchange, and American Stock
Exchange are SROs. The National Association of Securities Dealers, which
operates the NASDAQ system, is also an SRO.
The Act also identifies and prohibits certain types of conduct in the
markets and provides the Commission with disciplinary powers over
regulated entities and persons associated with them.
The Act also empowers the SEC to require periodic reporting of
information by companies with publicly traded securities.
Corporate Reporting
Companies with more than $10 million in assets whose securities are
held by more than 500 owners must file annual and other periodic reports.
These reports are available to the public through the SEC's EDGAR
database.
Proxy Solicitations
The Securities Exchange Act also governs the disclosure in materials
used to solicit shareholders' votes in annual or special meetings held for
the election of directors and the approval of other corporate action. This
information, contained in proxy materials, must be filed with the
Commission in advance of any solicitation to ensure compliance with the
disclosure rules. Solicitations, whether by management or shareholder
groups, must disclose all important facts concerning the issues on which
holders are asked to vote.
Tender Offers
The Securities Exchange Act requires disclosure of important
information by anyone seeking to acquire more than 5 percent of a
company's securities by direct purchase or tender offer. Such an offer
often is extended in an effort to gain control of the company. As with the
proxy rules, this allows shareholders to make informed decisions on these
critical corporate events.
Insider Trading
The securities laws broadly prohibit fraudulent activities of any kind
in connection with the offer, purchase, or sale of securities. These
provisions are the basis for many types of disciplinary actions, including
actions against fraudulent insider trading. Insider trading is illegal
when a person trades a security while in possession of material nonpublic
information in violation of a duty to withhold the information or refrain
from trading.
Registration of Exchanges,
Associations, and Others
The Act requires a variety of market participants to register with the
Commission, including exchanges, brokers and dealers, transfer agents, and
clearing agencies. Registration for these organizations involves filing
disclosure documents that are updated on a regular basis.
The exchanges and the National Association of Securities Dealers (NASD)
are identified as self-regulatory organizations (SRO). SROs must create
rules that allow for disciplining members for improper conduct and for
establishing measures to ensure market integrity and investor protection.
SRO proposed rules are published for comment before final SEC review and
approval.
The full text of this Act can be read online at: https://www.sec.gov/cgi-bin/goodbye.cgi?www.law.uc.edu/CCL/sldtoc.html.
(The SEC does not control or maintain this site.)
Public Utility Holding Company Act of 1935
Interstate holding companies engaged, through subsidiaries, in the
electric utility business or in the retail distribution of natural or
manufactured gas are subject to regulation under this Act. These
companies, unless specifically exempted, are required to submit reports
providing detailed information concerning the organization, financial
structure, and operations of the holding company and its subsidiaries.
Holding companies are subject to SEC regulations on matters such as
structure of their utility systems, transactions among companies that are
part of the holding company utility system, acquisitions, business
combinations, the issue and sale of securities, and financing
transactions. The full text of this Act is available online at: https://www.sec.gov/cgi-bin/goodbye.cgi?www.law.cornell.edu/uscode/15/ch2C.html
(The SEC does not control or maintain this site.)
Trust Indenture Act of 1939
This Act applies to debt securities such as bonds, debentures, and
notes that are offered for public sale. Even though such securities may be
registered under the Securities Act, they may not be offered for sale to
the public unless a formal agreement between the issuer of bonds and the
bondholder, known as the trust indenture, conforms to the standards of
this Act.
Investment Company Act of 1940
This Act regulates the organization of companies, including mutual
funds, that engage primarily in investing, reinvesting, and trading in
securities, and whose own securities are offered to the investing public.
The regulation is designed to minimize conflicts of interest that arise in
these complex operations. The Act requires these companies to disclose
their financial condition and investment policies to investors when stock
is initially sold and, subsequently, on a regular basis. The focus of this
Act is on disclosure to the investing public of information about the fund
and its investment objectives, as well as on investment company structure
and operations. It is important to remember that the Act does not permit
the SEC to directly supervise the investment decisions or activities of
these companies or judge the merits of their investments. The text of the
Investment Company Act of 1940 is part of the Internet web page located
at: https://www.sec.gov/cgi-bin/goodbye.cgi?www.law.uc.edu/CCL/sldtoc.html.
(The SEC does not control or maintain this site.)
Investment Advisers Act of 1940
This law regulates investment advisers. With certain exceptions, this
Act requires that firms or sole practitioners compensated for advising
others about securities investments must register with the SEC and conform
to regulations designed to protect investors. Since the Act was amended in
1996, generally only advisers who have at least $25 million of assets
under management or advise a registered investment company must register
with the Commission.The full text of this Act is available online at: https://www.sec.gov/cgi-bin/goodbye.cgi?www4.law.cornell.edu/uscode/15/ch2D.html.
(The SEC does not control or maintain this site.)
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act
of 2002, which he characterized as "the most far reaching reforms of
American business practices since the time of Franklin Delano Roosevelt."
The Act mandated a number of reforms to enhance corporate responsibility,
enhance financial disclosures and combat corporate and accounting fraud,
and created the "Public Company Accounting Oversight Board," also known as
the PCAOB, to oversee the activities of the auditing profession. The full
text of the Act is available at https://www.sec.gov/cgi-bin/goodbye.cgi?www.law.uc.edu/CCL/SOact/soact.pdf.
You can find links to all Commission rulemaking and reports issued under
the Sarbanes-Oxley act at https://www.sec.gov/spotlight/sarbanes-oxley.htm.
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