Chapter 46 SECURITIES REGULATION

1. Chapter 46SECURITIES REGULATION

2. State Regulations • State blue sky laws, which apply only to intrastate transactions, protect the public from the sale of fraudulent securities. • National Securities Markets Improvement Act of 1996 allocated responsibilities between federal and state authorities.

3. Federal Regulation • There are two principal laws providing the basic framework for federal regulation of the sale of securities in interstate commerce: • The Securities Act of 1933. • The Securities Exchange Act of 1934. • Now, the Sarbanes-Oxley Act of 2002.

4. Definition • The term “securities” is defined as “stocks and bonds issued by a corporation,” and may also include other interests that provide unearned income.

5. The Securities Act of 1933 • The Securities Act of 1933 deals with the issue or original distribution of securities by issuing corporations. • Except for certain private and limited offerings, the 1933 act requires that a registration statement be filed with the SEC and that a prospectus be provided to each potential purchaser.

6. Registration Process

7. The Securities Act of 1933 • Exemptions from Registration: • Rule 504 (up to $1M during 12 months). • Rule 505 (up to $5M to less than 35 unaccredited investors during a 12 month period). • Rule 506 (no limitation on money). • Restrictions on 505, 506 securities. • Liability. • False or misleading statements.

8. Securities Exchange Act of 1934 • The Securities Exchange Act of 1934 regulates the secondary distribution or sale of securities on exchanges. • The 1934 act provides reporting requirements for companies whose securities are listed on a national exchange and unlisted companies that have assets in excess of $3 million and 500 or more shareholders.

9. 1934 Act: Rule 10b-5 • Rule 10b-5 is the principal antifraud rule under the 1934 act. • Applies to all private securities actions. • Liability for material misrepresentations or omissions in fact.

10. Enforcement • Criminal and civil penalties exist for fraudulent statements made in reporting. • The Securities and Exchange Commission administers both the 1933 and the 1934 Acts. • The SEC under authority of the Williams Act regulates cash tender offers. • The securities industry provides arbitration procedures to resolve disputes between customers and firms.

11. Section 10(b) and Rule 10b-5: Insider Trading • Trading on “inside information” is unlawful and may subject those involved to a civil penalty of three times the profit made on the improperly disclosed information.

12. Insider Trading • Director or corporate employees are liable. • Temporary insider is a consultant (attorney, CPA, etc). • ‘Tippee’ receives information from an insider. Tippee not liable if the insider does not breach a fiduciary duty.

13. Misappropriation • Occurs when persons with fiduciary duty steal information and use that information to trade in securities. • Liable under Section 10(b) and Rule 10b-5.

14. Disclosure of Ownership • A disclosure statement is required by: • Corporate directors or officers owning equity securities in their corporation. • Shareholders owning more than 10% of any class of the corporation’s equity securities. • Any of the above people selling these securities for a profit less than 6 months after buying them may be guilty of making a short-swing profit.

15. Regulation of Accountants • Disclosure rules require accountants to reveal market risk information for derivative investments. • These rules also require a description of the accounting policies used to account for derivatives. • The SEC may disbar or suspend accountants who violate securities laws. • Section 307 Sarbanes-Oxley.

16. Industry Self-Regulation • Many securities investment firms have adopted a code of arbitration, giving customers a contractual right to settle disputes through arbitration. • Courts rarely overturn the decisions of an arbitrator in these cases.