Ch21-SG - InvestorProtection and CorporateGovernance...

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Chapter 21: Investor Protection and Corporate Governance W HAT   THIS  C HAPTER  I S  A BOUT The general purpose of securities laws is to provide  sufficient, accurate informa tion to investors to enable  them  to make informed  buying and  selling decisions about securities. This chapter provides an outline of federal  securities laws. This chapter also discusses issues of corporate governance. C HAPTER  O UTLINE I. THE SECURITIES AND  EXCHANGE COMMISSION  (SEC) The SEC administers the federal securities laws and  regulates the sale and  purchase of securities. A. T HE  SEC’ S  B ASIC  F UNCTIONS 1. Require disclosure of facts concerning offerings of certain securities. 2. Regulate national securities trading. 3. Investigate securities fraud. 4. Regulate securities brokers, dealers, and  investment  advisers. 5. Supervise mutual funds. 6. Recommend  sanctions  in  cases  involving  violations  of  securities  laws.  (The  U.S. Department  of  Justice prosecutes violations.) B. T HE  SEC’ S  E XPANDING  R EGULATORY  P OWERS The SEC’s powers include  the power  to seek sanctions against those who  violate foreign securities laws;  to suspend  trading  if prices  rise  and  fall in  short  periods  of time; to  exempt  persons,  securities,  and   transactions from securities law requirements; and  to require more corporate disclosure. II. SECURITIES ACT OF 1933 This act requires that all essential information  concerning  the issuance  (sales) of new  securities be disclosed   to investors. A. W HAT  I S   A  S ECURITY ? 1. Courts’ Interpretation of the Securities Act  Securities includes investment  contracts, which exist in any transaction  in which a person  (1) invests  (2) in a common  enterprise (3) reasonably expecting profits (4) derived   primarily  or  substantially  from  others’ managerial or entrepreneurial efforts. 2. A Security Is an Investment Examples: stocks, bonds,  investment  contracts  in condominiums,  franchises,  limited  partnerships,  and  oil or gas or other mineral rights. 167
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168 UNIT 5: THE REGULATORY ENVIRONMENT
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CHAPTER 21: INVESTOR PROTECTION AND CORPORATE GOVERNANCE 169 B. R EGISTRATION  S TATEMENT Before  offering  securities  for sale, issuing  corporations  must  (1) file a registration  statement  with  the  Securities and  Exchange  Commission  (SEC) and  (2) provide  investors  with  a prospectus  that  describes   the security  being  sold, the  issuing  corporation,  and  the  investment  or risk. These documents  must  be  written  in “plain English.” 1. Contents of a Registration Statement a. Description  of the significant provisions of the security and  how  the registrant  intends  to use the  proceeds of the sale.
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