Laws Governing 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: 1) require that investors receive
financial and other significant information concerning securities being
offered for public sale; and 2) prohibit deceit, misrepresentations,
and other fraud in the sale of securities.
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.
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. 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. 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.
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.
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.
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.
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.
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.
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.
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.
