Securities Law: An Overview
Securities law exists because of unique informational needs of investors. Securities are not inherently valuable; their worth comes only from the claims they entitle their owner to make upon the assets and earnings of the issuer or the voting power that accompanies such claims. The value of securities depends on the issuer's financial condition, products and markets, management, and the competitive and regulatory climate. Securities laws and regulations aim at ensuring that investors receive accurate and necessary information regarding the type and value of the interest under consideration for purchase. (For more information on the history of securities, see securities law history).
Securities exist in many types of instruments including notes, stocks, and bonds. Much of the litigation related to securities involves defining what is a security subject to the requirements of securities law. In deciding what constitutes a security, the law focuses on the substantive elements of investor expectations and nature of the investment rather than form. (For more information on the scope of securities, see security).
The Setting for Buying and Trading
Two principle settings for buying and selling securities exist - issuer transactions and trading transactions. On the one hand, issuer transactions are the means by which businesses raise capital. These transactions involve the sale of securities by the issuer to investors. On the other hand, trading transactions refers to the purchasing and selling of outstanding securities among investors. Investors trade outstanding securities through securities markets that can be either stock exchanges or "over-the-counter."
Stock exchanges provide a place, rules, and procedures for buying and selling securities, and the government heavily regulates them. Generally, to have their securities sold and bought on a stock exchange, a company must list its securities on a given exchange. The Securities and Exchange Commission (SEC) must approve the stock exchange's rules before they take effect.
Transactions that do not take place on a stock exchange occur in the residual securities market, known as the over-the-counter market. Only dealers and brokers registered with the SEC may engage in securities business both on stock exchanges and in over-the-counter markets. Most of the broker-dealers serving the public used to be members of the National Association of Securities Dealers (NASD), which served the NASDAQ stock market, but in 2007, the NASD merged with the dealers from the New York Stock Exchange to form the Financial Industry Regulatory Authority (FINRA) a national securities association registered with SEC. See self-regulatory organization.
Federal law primarily regulates securities, but some state blue sky laws also have important regulations on securities. The Securities Act of 1933 is the main federal securities legislation that regulates the public offering and sale of securities in interstate commerce, focusing on securities in the primary market. This Act also prohibits the offer or sale of a security not registered with the Securities Exchange Commission and requires the disclosure of certain information to the prospective securities' purchaser.
The Securities Exchange Act of 1934 is the second fundamental securities law which regulates securities offered on secondary markets and created the Securities and Exchange Commission (SEC) to administer securities laws. The Securities Exchange Act of 1934 also regulates officers, directors, and principal shareholders in an attempt to maintain fair and honest markets. The 1934 Act also regulates proxy solicitation and requires that certain information be given to a corporation's shareholders as a prerequisite to soliciting votes.
The 1934 Act permits the SEC to promulgate rules and regulations to protect the public and investors by prohibiting manipulative and deceptive devices and contrivances via the mail system or other means of interstate commerce. The SEC designs many important rules that govern the trading of securities, such as safe harbor laws that list the requirements for the SEC to consider a security compliant with securities laws. The SEC issues influential releases that publicly disclose its positioning on the requirements of a law, rule, or other regulation that, while not a regulation itself, can have the effect of a regulation. Also, the SEC, upon request, will publicly issue no action letters where the staff will evaluate whether a proposed securities transaction is in compliance.
The Securities Exchange Act of 1934 also regulates officers, directors, and principal shareholders in an attempt to maintain fair and honest markets. The Act requires that issuers, subject to certain exemptions, register with the SEC if they want to have their securities traded on a national exchange. Issuers of securities registered under the 1934 Act must file various reports with the SEC in order to provide the public with adequate information about companies with publicly traded stocks. The 1934 Act also regulates proxy solicitation and requires that certain information be given to a corporation's shareholders as a prerequisite to soliciting votes. The 1934 Act permits the SEC to promulgate rules and regulations to protect the public and investors by prohibiting manipulative and deceptive devices and contrivances via the mail system or other means of interstate commerce. Section 10(b) deals with trading fraud, and rule 10(b)-5 protects against insider trading. Under 10(b), non-government plaintiffs can bring a private cause of action against perpetrators of securities fraud that directly caused the plaintiff financial injury.
The U.S. Supreme Court recently expounded on 10(b) in a pair of cases. In 2007 Tellabs, Inc. v. Makor Issues & Rights, LTD (06-484) determined the requisite specificity when alleging fraud. With Congress requiring enough facts from which "to draw a strong inference that the defendant acted with the required state of mind," the Supreme Court determined that a "strong inference" means a showing of "cogent and compelling evidence." In the 2007-2008 term, the Supreme Court determined that 10(b) does not provide non-government plaintiffs with a private cause of action against aiders and abettors in securities fraud cases, either explicitly or implicitly (see Stoneridge v. Scientific-Atlanta (06-43) (2008)).
Certain activities that fall within the scope of securities law also fall within the scope of antitrust law. These activities have traditionally received exemptions from antitrust law. The U.S. Supreme Court took up this very issue in 2007 in Credit Suisse Securities (USA) v. Billing (05-1157). The Court decided that if securities regulation and antitrust law are incompatible, then the securities regulation prevails and individuals who would otherwise violate antitrust law receive antitrust immunity. Determining incompatibility requires the presence of the following four criteria: 1) behavior squarely within securities regulation; 2) clear and adequate SEC authority to regulate; 3) active and ongoing SEC regulation; and 4) a serious conflict between regulatory and antitrust regimes.
State securities laws are commonly known as blue sky laws. Typical provisions include prohibitions against fraud in the sale of securities, registration requirements for brokers and dealers, registration requirements for securities to be sold within the state, remedial sanctions and civil liability. A majority of states have adopted at least part of the Uniform Securities Act, although notably California and New York have not done so.
U.S. Constitution and Federal Statutes
- U.S. Code:
- 15 U.S.C., Chapter 2A - Securities Act of 1933
- 15 U.S.C., Chapter 2B - Securities Exchanges
- 15 U.S.C., Chapter 2B-1 - Securities Investor Protection Act
- CRS Annotated Constitution
- Title 17 C.F.R., Chapt. II - Securities and Exchange Commission
Federal Judicial Decisions
- U.S. Supreme Court:
- Other Important Securities Decisions
- Uniform Securities Act
- State Statutes Concerning Corporations
Key Internet Sources
- Cornell Law School Securities Law Clinic
- Corporate Information from SEC Filings (EDGAR)
- Financial Industry Regulatory Authority (FINRA)
- Stock Valuation:
- Seeking Alpha
- Federal Agencies:
- Securities and Exchange Commission
- Internal Revenue Service
[Last updated in October of 2023 by the Wex Definitions Team]