Securities Law
The securities laws purpose is to protect investors and maintain the integrity of the securities markets. The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it.
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What are securities?
Securities can be notes, stocks, treasury stocks, bonds, certificates of interest or participation in profit sharing agreements, collateral trust certificates, preorganization certificates or subscriptions, transferable shares, investment contracts, voting trust certificates, certificates of deposit for a security, and a fractional undivided interest in gas, oil, or other mineral rights. 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. Their value depends on the issuer's financial condition, products and markets, management, and competitive and regulatory climate.
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Securities Transactions
Issuer transactions are the means by which businessmen raise capital and involve the sale of securities by the issuer to investor. Trading transactions are the purchasing and selling of outstanding securities among investors. Outstanding securities are traded through securities markets that can be either stock exchanges or "over-the-counter". A stock exchange provides a place, rules, and procedures for buying and selling securities. Generally, to have their securities sold and bought on a stock exchange, a company must list its securities on a given exchange. Stock exchange rules are subject to approval by the Securities and Exchange Commission (SEC). All transactions that do not take place on a stock exchange are said to be executed in the over-the-counter market, which is the residual securities market. Only dealers and brokers who are registered with the SEC may engage in securities business both on stock exchanges and over-the-couner market. Most of the broker-dealers serving the public are members of the National Association of Securities Dealers (NASD), a national securities association registered with SEC.
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Securities Act
Securities regulations focus mainly on the market for common stocks. Both federal and state laws regulate securities. In the wake of the Sock Market crash of 1929 and the subsequent 'Great Depression', Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws were designed to restore investor confidence in our capital markets by providing more structure and government oversight. The main purposes of these laws can be reduced to two common-sense notions:
- Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing.
- People who sell and trade securities - brokers, dealers, and exchanges - must treat investors fairly and honestly, putting investors' interests first.
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Securities Exchange Commission (SEC)
Congress established the Securities and Exchange Commission in 1934 to enforce newly-passed securities laws, to promote stability in the markets and, most importantly, to protect investors. President Franklin Delano Roosevelt appointed Joseph P. Kennedy, President John F. Kennedy's father, to serve as the first Chairman of the SEC. The Securities Exchange Act of 1934 requires that issuers, subject to certain exemptions, register with 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 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 or deceptive devices or contrivances via mails or other means of interstate commerce. Rule 10b-5 of The 1934 Act protects against insider trading.
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Blue Sky Laws
State securities law are also known as Blue Sky Laws. Typical provisions include prohibition against fraud in the sale of securities, registration requirements for brokers and dealers, registration requirements for securities to be sold within the state, and sanctions and civil liability. A majority of states, with the exception of New York and California, have adopted the Uniform Securities Act, at least in part.
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