The SEC, FINRA, the States, and much more
Mark J. Astarita is a nationally known securities attorney with over 30 years of experience representing investors and financial professionals across the country in regulatory investigations, arbitration and litigation. If you have a securities law question, call 212-509-6544
The history of the securities regulation and federal securities law 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 the federal securities acts are in reality a myriad of rules and 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.
Leaving 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.
Those 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 maintains the 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. 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.
And for that reason alone, Section 10(b) demands a full quotation herein:
15 USC Sec. 78j
Sec. 78j. Manipulative and deceptive devices
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange –
(a) To effect a short sale, or to use or employ any stop-loss order in connection with the purchase or sale, of any security registered on a national securities exchange, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
Rule 10b-5, 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 FINRA 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.
The various 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 further 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 similar topics.
Louis Loss has long been the top authors in the area of securities regulations. Loss’ treatise is a staple in every securities attorney’s library. His single volume version, Fundamentals of Securities Regulation is an excellent resource for the layman, as well as for the attorney who does not practice securities law every day. Follow the link, and you can order it online, at a discount, from Amazon.com.