Securities regulation in the United States

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Securities regulation in the United States is the field of U.S. law that covers various aspects of transactions and other dealings with securities. The term is usually understood to include both federal- and state-level regulation by purely governmental regulatory agencies, but sometimes may also encompass listing requirements of exchanges like the New York Stock Exchange and rules of self-regulatory organizations like the Financial Industry Regulatory Authority (FINRA). On the Federal level, the primary securities regulator is the Securities and Exchange Commission (SEC). Futures and some aspects of derivatives are regulated by the Federal Commodity Futures Trading Commission (CFTC).

Overview[edit]

FINRA is a self-regulatory organization that promulgates rules that govern brokers and dealers and certain other kinds of professionals in the securities industry. It was formed by the merger of the enforcement divisions of the National Association of Securities Dealers (NASD) and the New York Stock Exchange. FINRA, like the exchanges and the Securities Investor Protection Corporation (SIPC), is overseen by the SEC, and FINRA's rules are generally subject to SEC approval.

All brokers and dealers that are registered with the SEC (pursuant to 15 U.S.C. § 78o), with a number of exceptions, are required to be members of SIPC (pursuant to 15 U.S.C. § 78ccc) and are subject to its regulations. The SIPC, like the exchanges and FINRA, is overseen by the SEC, and the SIPC's rules are generally subject to SEC approval.

The federal securities laws were largely created as part of the New Deal. There are 5 particularly prominent federal securities laws:

  1. Securities Act of 1933 - regulating distribution of new securities
  2. Securities Exchange Act of 1934 - regulating trading securities, brokers and exchanges
  3. Trust Indenture Act of 1939 - regulating debt securities
  4. Investment Company Act of 1940 - regulating mutual funds
  5. Investment Advisers Act of 1940 - regulating investment advisers

Since these laws were originally enacted, Congress has amended them many times. The Holding Company Act and the Trust Indenture Act in particular have changed significantly since then. The titles listed above, including the year of original enactment, are the so-called "popular names" of these laws, and practitioners in this area reference these statutes using these popular names (e.g., "Section 10(b) of the Exchange Act" or "Section 5 of the Securities Act"). When they do so, they do not generally mean the provisions of the original Acts; they mean the Acts as amended to date.

When Congress amends the securities laws, those amendments have their own popular names (a few prominent examples include Securities Investor Protection Act of 1970, the Insider Trading Sanctions Act of 1984, the Insider Trading and Securities Fraud Enforcement Act of 1988 and the Dodd-Frank Act). These acts often include provisions that state that they are amending one of the primary 5 laws. Other laws passed since then include Private Securities Litigation Reform Act (1995), Sarbanes–Oxley Act (2002), Jumpstart Our Business Startups Act (2012), and various other federal securities laws.

Although practitioners in this area use these popular names to refer to the federal securities laws, like many U.S. statutes these laws are generally codified in the U.S. Code, the official codification of U.S. statutory law. They are contained in Title 15 of the U.S. Code. Thus, for example, the official code citation for Section 5 of the Securities Act of 1933 is 15 U.S.C. section 77e. Not every law adopted by Congress is codified, because some are not appropriate for codification. For example, appropriations statutes are not codified.

There are also extensive regulations under these laws, largely made by the SEC. One of the most famous and often used SEC rules is Rule 10b-5, which prohibits fraud in securities transactions as well as insider trading. Because interpretations under rule 10b-5 often deem silence to be fraudulent in certain circumstances, efforts to comply with Rule 10b-5 and avoid lawsuits under 10b-5 have been responsible for a large amount of corporate disclosure.

The federal securities laws govern the offer and sale of securities and the trading of securities, activities of certain professionals in the industry, investment companies (such as mutual funds), tender offers, proxy statements, and generally the regulation of public companies. Public company regulation is largely a disclosure-driven regime, but it has grown in recent years to the point that it begins to dictate certain issues of corporate governance.

State laws governing issuance and trading of securities are commonly referred to as blue sky laws.

History[edit]

Before the Wall Street Crash of 1929, there was little regulation of securities in the United States at the Federal level. The crash spurred the Congress to hold hearings, known as the Pecora Commission, after Ferdinand Pecora.

After holding hearings on the abuses, Congress passed the Securities Act of 1933. This statute prescribed rules for the interstate sales of securities and made it illegal to sell securities into a state without complying with that state's laws. The statute requires companies which want to sell securities publicly to file a registration statement with the U.S. Securities and Exchange Commission. The registration statement provides a broad range of information about the company and is a matter of public record. The SEC does not approve or disapprove the issue of securities, but rather permits the filing statement to "become effective" if sufficient required detail is provided, including risk factors. The company can then begin selling the stock issue, usually through investment bankers.

The following year, Congress passed the Securities Exchange Act of 1934, to regulate the secondary market (general-public) trading of securities. Initially, the 1934 Act applied only to stock exchanges and their listed companies (as the word "Exchange" in the Act's name implies). In the late 1930s, the Act was amended to provide regulation of the over-the-counter (OTC) market (i.e., trades between individuals with no stock exchange involved). In 1964, the Act was amended to apply to companies traded in the OTC market.

After these acts, courts interpreted the laws, assembling a body of United States securities case law. In 1988 the Supreme Court of the United States decided Basic Inc. v. Levinson, which allowed for class action lawsuits under SEC Rule 10b-5 and the "fraud-on-the-market" theory, which resulted in an increase in securities class actions.[1] The Private Securities Litigation Reform Act and the state model law Securities Litigation Uniform Standards Act was a response to class actions.[1]

In October 2000, the Securities and Exchange Commission issued the Regulation Fair Disclosure regulation (Reg FD), which required publicly traded companies to disclose material information to all investors at the same time. Reg FD helped level the playing field for all investors by helping to reduce the problem of selective disclosure.

In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was passed to reform securities law in the wake of the financial crisis of 2007–2008.

See also[edit]

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