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The SEC, FINRA, the States, and much more<
By Mark J. Astarita, Esq.
The history of the securities regulation arena are well beyond the scope of this work, and the reader is commended to any one of a number of books in the area. One of the best known, and often cited treatise on the topic is Loss and Seligman, Securities Regulation, a multi-volume treatise on the subject, published by Little Brown & Co in New York City. A single volume version is also available, and can be ordered online.
For purposes of this work, it is sufficient to note that there is a myriad of regulations affecting the securities professional - depending on the specifics of his business, a securities professional can be subjected to rules and regulations of 55 different regulatory agencies, including the Securities Commission in each of the Fifty States, the District of Columbia and Puerto Rico, as well as the Securities and Exchange Commission, the National Association of Securities Dealers, Inc., and any of the regional exchanges of which he or his firm is a member.
While this regulatory morass is in reality a series of similar, and overlapping, regulations, the vast number of regulatory agencies is pointed out as a reminder that there are thousands of regulatory persons in the United States who are watching the industry, some more diligently than others, but the mere size of the regulatory bodies is often enough to cause problems for the securities professional, as noted throughout this work.
the specifics of the regulations to later chapters, it is sufficient to
note that the vast majority of securities regulations are aimed at one
goal - to promote fair and full disclosure of all material information
relating to the markets, and to specific securities transactions, including
all aspects of market trading, as well as the financing and financial
reporting by public companies. While it may seem at times that specific
regulations go well beyond such goals, that is the true goal of the regulatory
scheme, and an underlying principle that should guide every market professional
in his dealings with the industry, and the public, for, while no simple
method of compliance is guaranteed, a policy of full disclosure will prevent
most regulatory mishaps, certainly on the retail side of the business.
Federal Securities Laws
The Federal Securities Laws are comprised of a series of statutes, which in turn authorize a series of regulations promulgated by the government agency with general oversight responsibility for the securities industry, the Securities and Exchange Commission.
The two main statutes involved in the Federal Securities laws are the The Securities Act of 1933 and the The Securities Exchange Act of 1934. Generally speaking, the '33 Act governs the issuance of securities by companies, and the '34 Act governs the trading, purchase and sale of those securities. Each has a wealth of regulations promulgated by the Securities and Exchange Commission, as well as regulations adopted by the National Association of Securities Dealers, Inc. and the various stock exchanges.
of you searching for the law are well advised to start by reading a treatise
on the subject, rather than the statutes themselves, since the statues
are only the start of the climb into the securities laws. For those brave
souls who wish to jump right into it, the regulations under each Act are
on the Web, at the Center
for Corporate Law, which has the text of the rules
promulgated under the Securities Act of 1933 as well as the text of
the forms promulgated
under the Securities Act of 1933. The Center for Corporate Law also
rules promulgated under the Securities Exchange Act of 1934. As stated
elsewhere, be sure to consult an attorney before relying on those rules,
and the text, and the interpretations of those rules are in a constant
state of flux.
Section 10b-5 and Rule 10b-5
The most well known securities regulation is Rule 10b-5, promulgated pursuant to Section 10b of the '34 Act.3 The Rule is the most often used Rule in the area of securities law, and most every securities fraud case involves, in one way or another, Rule 10b-5.
for that reason alone, Section 10(b) demands a full quotation herein:
and Section 10b are known as the Anti-Fraud provisions of the 34 Act,
and most regulations flow from this rule. The rule has been the subject
of extensive litigation, and later revisions to this article will address
some of the significant aspects of those matters, including insider trading,
market manipulation, fraud in connection with public offerings and takeovers,
and fraud in connection with dealings with customers.
State Securities Laws
While the SEC directly, and through its oversight of the NASD and the various Exchanges, is the main enforcer of the nation's securities laws, each individual state has its own securities regulatory body, typically known as the state Securities Commissioner. A list of state securities commissioners, and their addresses, is available in our Guide to State Securities Regulators.
Most states have left the anti-fraud regulations to the SEC and the various SROs, but do in fact have the power and authority to bring actions against securities violators pursuant to state law. Further, each state has its own securities act, which governs, at least, the registration and reporting requirements for broker-dealers and stock brokers doing business, sometimes even indirectly, in the state.
state securities regulators have most of their impact in the area of registration
of securities brokers and dealers, and in the registration of securities
transactions. For futher information on the state regulatory scheme, and
its impact on market participants, see Introduction
to the Blue Sky Laws.
Common Law and the Securities Markets
In addition to the varied securities rules and regulations enacted by statute, there is a large body of case law, decisions by judges, which impact severly on the securities industry. Briefly, there is the concept of common law fraud, and in theory, if perchance a particular act did not fall within the scope of the federal securities laws, the actor may still be subject to a fraud claim under the common law. In some states, and in certain circumstances stock brokers may be considered to be fiduciaries to their customers. That is, they are expected to conduct themselves with a higher degree of care than would the ordinary person. Additionally, the common law notions of contract and negligence also find their way into the securities laws, for each purchase and sale of a security is in reality a contract, and each transaction between market participants, whether in the financing of an IPO, or in the customary stock purchase with a broker, can involve issues of negligence law. For an example of how the common law interfaces with the securities laws and securities transactions, see, Customer Disputes.
Federal Securities Law Violations
Later versions of this document will include a discussion of the various types of securities law violations that occur under federal law, including insider trading, market manipulation, fraudulent financial statements, and similiar topics.
If you have any suggestions for topic to be included, please contact the author.
Securities Law Blog
Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article. SECLaw.com was created by and is sponsored by Mark J. Astarita, Esq., a securities attorney and partner in the law firm of Sallah Astarita & Cox, LLC, who represents all participants in the financial markets. Mr. Astarita can be contacted by email at email@example.com.
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