Chapter 19: Securities Regulation
In 1933, following the Great Depression and Stock Market crash, Congress passed the
Securities Act of 1933 (1933 Act) to regulate the issuance of new securities.
year, it passed the Securities Exchange Act of 1934 (1934 Act) to regulate companies
with publicly traded securities.
The 1934 Act also established the SEC, the regulatory
agency that oversee the securities industry
b) The Securities and Exchange Commission
The SEC creates law in 3 different ways
: The securities statutes are often little more than general guides.
its rules, the SEC fills in the crucial details
: These are informal pronouncements from the SEC on current issues.
Releases often operate as two-way communication. When the SEC issues a
release to announce a proposed change in the rules, it also asks for comments on
: Anyone who is in doubt about whether a particular
transaction complies with securities law can ask the SEC directly.
is called a no-action letter because it states that “the staff will recommend that the
Commission take no action” if the transaction is done in a specified manner.
ii) In addition to creating laws, the SEC has to power to enforce them.
It can bring
and desist orders
against those who violate the securities laws, and it can also levy
fines or confiscate profits from illegal transactions.
Those accused of wrongdoing
can appeal these sanctions to the courts.
The SEC cant bring criminal action, but
refers criminal cases to the Justice Department
What is a Security?
The official definition of a security includes a note, stock, treasury stock, bond,
debenture, evidence of indebtedness, certificate of interest or participation in any
profit-sharing agreement, and 17 other equivalents.
Courts have interpreted this
definition to mean that
a security is any transaction in which the buyer 1) invests
money in a common enterprise and 2) expects to earn a profit predominantly
from the efforts of others
2) Securities Act of 1933
a) The 1933 Act requires that, before offering or selling securities, the issuer must
register the securities with the SEC, unless the securities qualify for an exemption
is the company that issues the stock
When an issuer registers securities, the SEC does not investigate the quality of the
The 1933 Act prohibits fraud in
Before offering securities for sale, the issuer must determine whether they are exempt
from registration under the 1933 Act.
Typically, exemptions are based on two
factors: The type of security and the type of transaction.
However, the National
Securities Markets Improvement Act of 1996 gave the SEC new authority under both
the 1933 and 1934 Acts to grant exemptions that are “in the public interest” and
“consistent with the protection of investors”.