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CHAPTER 13. Securities Regulation and Compliance. Learning Objectives. Discuss the purpose of regulation of the securities industry Define a security Explain the purpose of securities regulation in the U.S. Explain how a company becomes a commodity in the market

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    1. CHAPTER 13 Securities Regulation and Compliance

    2. Learning Objectives Discuss the purpose of regulation of the securities industry Define a security Explain the purpose of securities regulation in the U.S. Explain how a company becomes a commodity in the market Describe insider trading and the effects of fraud on the market Discuss the Sarbanes Oxley Act of 2002 Analyze the blue sky laws Analyze some of the issues involved in the securities area

    3. Regulation of the Securities Industry • Securities industry is a multi-billion dollar industry in the U.S. • Susceptible to fraud • Congress has enacted regulations to protect investors’ funds in corporations through brokers, and the market as a whole • The Securities and Exchange Commission (SEC) oversees all U.S. stock exchanges and organizations trading securities

    4. Regulation of the Securities Industry • Consumer confidence in the market shaken by: • Collapse of internet and telecommunications companies • Collapse of Enron, Arthur Andersen, WorldCom, Adelphia, Quest, Tyco, Global Crossings • Convictions of their executives • Mortgage and credit crises • Ponzi schemes

    5. What is a Security? • A negotiable instrument that represents value • May be bought, sold, or pledged in the open market • Debt Securities • Loans to be repaid with interest: Bank notes, Bonds • Equity Securities • Assets representing percent of ownership in a company: Stocks (shares)

    6. The Securities Act of 1933 • Requires that investors receive financial and other significant information concerning securities being offered for public sale • Prohibits deceit, misrepresentation, and other fraud in the sale of securities • The Act generally requires the registration of all securities being placed in the hands of the public for the first time

    7. Initial Public Offering (IPO) • A privately-held corporation decides to “go public” • Offers its shares for sale through an IPO • Company gets evaluated by a team of professionals • Underwriter, auditors, accountants, lawyers • Company receives a large amount of cash from IPO • Fees to administer the IPO are very high • Legal, accounting, printing, SEC filing fee

    8. The Securities Act of 1934 • Created the SEC • Empowered SEC with broad authority in the securities industry • Self Regulatory Organizations (SROs) • Financial Industry Regulatory Authority (FINRA) • Regulatory oversight of all securities firms that do business with the public • Municipal Securities Rulemaking Board (MSRB) • Rules governing broker-dealers, banks that underwrite, trade or sell tax-exempt bonds, college savings plans

    9. The Securities Act of 1934 • Rule 10b-5 liability • Insider-Trading Liability • Case: SEC v. Gann, 565 F3rd 932 (5th Cir. 2009) • Section 16 – Insider Trading Liability

    10. Communication between Shareholders and Corporation • Proxy Statements • Proxy Solicitations • Annual Reports • Management Discussion and Analysis

    11. Sarbanes-Oxley Act of 2002 • Under the Act: • SEC enacts rules for corporate compliance • Public Company Accounting Oversight Board (PCAOB) oversees, regulates, disciplines accounting firms when they act as auditors of public companies • Auditor independence • Corporate governance • Internal control assessment • Financial disclosures

    12. Sarbanes-Oxley Act of 2002 • Role of Attorneys • Duty to report when there is credible evidence that a material violation has occurred, is ongoing, or is about to occur. • Material violation of federal or state securities law • Breach of fiduciary duty arising under federal or state law • Ethical Considerations • Report up • Report out

    13. State Securities laws • States have agencies regulating securities • State Securities Commissioner • Blue Sky Laws • State statutes prohibiting fraud in the sale of securities • Regulate registration and reporting for broker-dealers and investment advisors • Companies must comply before selling securities in a state