Chapter 46
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Chapter 46 SECURITIES REGULATION - PowerPoint PPT Presentation

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Chapter 46 SECURITIES REGULATION . State Regulations. State blue sky laws, which apply only to intrastate transactions, protect the public from the sale of fraudulent securities.

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Chapter 46 securities regulation


State regulations
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.

Federal regulation
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.


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

The securities act of 1933
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.

The securities act of 19331
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.

Securities exchange act of 1934
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.

1934 act rule 10b 5
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.


  • 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.

Section 10 b and rule 10b 5 insider trading
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.

Insider trading
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.


  • 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.

Disclosure of ownership
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.

Regulation of accountants
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.

Industry self regulation
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.