The Laws That Impact The Securities Markets

Published: 25th June 2015
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In the wake of the stock market crash of 1929, Congress decided that something needed to be done to rein in our unregulated capital markets, with a view to preventing another similar disaster. The first laws passed were contained in the Securities Act of 1933 (the "Securities Act"). That was followed quickly by the Securities and Exchange Act of 1934 (the "Exchange Act"). Together, the two are the foundation of our securities regulations, and have been amended continuously to reflect changing times, changing financial instruments, and changing markets.

Over the succeeding decades, they were followed by a number of other important pieces of legislation, all of them aimed at increasing transparency and preventing fraud.

The Securities Act of 1933

The Securities Act of 1933 is often called the "truth in securities" law. It has two basic objectives: to require that investors receive financial and other important information about securities being offered for sale, and to prohibit deceit, misrepresentation, and other fraud in the sale of securities.

The Act obligates issuers to register stock they're selling, or to avail themselves of an appropriate exemption from registration.

When a company files a 1933 Act registration statement such as a Form S-1, it must provide copious information about itself, its business plan, its risk factors, financial reports and more. Issuers filing a Securities Act registration statement are registering an offering, not a class of stock.

Securities and Exchange Act of 1934

With the Exchange Act, Congress created the Securities and Exchange Commission (the "SEC"). The act empowers the SEC to regulate all aspects of the securities industry, overseeing broker-dealers, transfer agents, clearing agencies, and self-regulatory organizations ("SROs") like our national securities exchanges. The Financial Industry Regulatory Authority ("FINRA") is also an SRO.

It is the 1934 Act that gave the SEC its teeth, by granting the Commission disciplinary powers over regulated entities and the people associated with them.

It also made periodic reporting--the filing of annual and quarterly financial reports and other information--a requirement for SEC registrants. There are also 1934 Act registration statements issuers may use. They are different from Securities Act registration statements in that they register a class of stock rather than a single offering.

Exchange Act registrants must also file proxy statements and report tender offers. In addition, officers, directors and greater-than-5% beneficial owners of 1934 Act companies need to file Forms 3, 4, and 5 when acquiring or distributing stock they control.

Trust Indenture Act of 1940

This Act regulates companies like mutual funds whose business is investing, reinvesting, and trading in securities, and whose own securities are offered for sale to the public. These companies must disclose their financial condition and policies to investors and potential investors on a regular basis. The Act does not provide for government interference in the companies' choice of investments or activities; it merely requires that they provide the disclosure necessary for investors to make informed decisions.

Investment Advisers Act of 1940

This Act requires that investment advisers--firms or individuals that are paid to advise about investments--must register with the SEC and observe regulations designed to protect investors. It was amended in 1996 and again in 2010. The changes made specified that generally only advisers who have at least $100 million of assets under management or advise a registered investment company must register with the SEC, but the Dodd-Frank Act subsequently forced many smaller advisers to register.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act was passed in 2002, largely as a consequence of the highly-publicized Enron and WorldCom scandals. The object of the Act was to increase corporate responsibility and financial disclosure, and to combat corporate and accounting fraud. It also created the Public Company Accounting Oversight Board ("PCAOB) to act as the accounting profession's watchdog.

While Sarbanes-Oxley requires, among other things, that CEOs and CFOs sign every financial report, swearing on penalty of perjury that they are accurate and not fraudulent, full compliance with some other provisions of the Act has proved to be extremely costly for small companies. That burden will be to some extent alleviated by the new JOBS Act.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

The Dodd-Frank Act was a response to the financial crisis of 2008. The idea was to "transform" the regulatory system. While many original provisions of the Act were vitiated along the way to passage, it has brought about some reforms intended to increase investor confidence and promote market stability.

Jumpstart Our Business Startups Act of 2012

The JOBS Act was enacted on April 5, 2012, with the aim of making it easier for small businesses to raise capital by reducing regulatory requirements. It has many proponents, and many detractors; the latter feel it could open the floodgates to fraud, especially where microcap companies are involved. Among other things, it will allow more non-accredited investors to participate in offerings, and will permit general solicitation of those offerings.

The SEC was supposed to have finished its formulation of new rules and regulations compliant with the JOBS Act by August 2012. It has still not finished, leaving many provisions of the act in limbo. It is not known when the Act will be fully effective.


please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 201 S, Boca Raton, Florida,

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