Securities Laws and Acts
Securities Act of 1933
The Securities Act of 1933 was enacted as a result of the market crash of 1929. It was the first major piece of federal legislation to apply to the sale of securities. The legislation was enacted as the need for more information within and about the securities markets was acknowledged. Prior to 1933, regulation of securities was chiefly governed by state laws.
The Securities Act of 1933 is also known as the "Truth in Securities Act." The 1933 Act was based on the idea that companies offering securities should provide potential investors with sufficient information about both the issuer and the securities to make an informed investment decision.The 1933 Act has two basic objectives:
- to require that investors receive significant (or “material”) information concerning securities being offered for public sale;
- to prohibit deceit, misrepresentations, and other fraud in the sale of securities to the public.
The 1933 Act requires that securities offered or sold to the public in the U.S. must be registered by filing a registration statement with the SEC. A prospectus is generally filed along with the registration statement.Under the Act, the registration statement must include:
- a description of the issuer's properties and business;
- a description of the securities to be offered for sale;
- information about the management of the issuer;
- information about the securities (if other than common stock);
- financial statements certified by independent accountants.
If a statement on its face appears incomplete or inaccurate, the SEC may refuse to allow the statement to become effective. A misstatement or omission of a material fact may result in the registration's suspension. The agency frequently issues "letters of comment," also known as "deficiency letters," after reviewing registration documents. The SEC uses this method to require or suggest changes or request additional information.
The1933 Act does contain a number of exemptions. The most important exemption involves securities sold in certain kinds of transactions, including transactions by someone other than an issuer, underwriter, or dealer. This provision effectively exempts almost all secondary trading, which involves securities bought and sold after their original issue. Certain small offerings are also exempt.
The Securities Act of 1934
The Securities Act of 1934 established the Securities and Exchange Commission (SEC). The 1934 Act also gives the SEC broad power to police the sale of securities in the U.S. Powers held by the SEC include the authority to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation's securities self regulatory organizations, including the New York Stock Exchange and the American Stock Exchange.
According the SEC website, the 1934 Act includes the following provisions:
The securities laws broadly prohibit fraudulent activities of any kind in connection with the offer, purchase, or sale of securities. These provisions are the basis for many types of disciplinary actions, including actions against fraudulent insider trading. Insider trading is illegal when a person trades a security while in possession of material nonpublic information in violation of a duty to withhold the information or refrain from trading.Tender Offers
The 1934 Act requires disclosure of important information by anyone seeking to acquire more than 5 percent of a company's securities by direct purchase or tender offer. Such an offer often is extended in an effort to gain control of the company. As with the proxy rules, this allows shareholders to make informed decisions on these critical corporate events.Corporate Reporting
Companies with more than $10 million in assets whose securities are held by more than 500 owners must file annual and other periodic reports. These reports are available to the public through the SEC's EDGAR database.Proxy Solicitations
The 1934 Act also governs the disclosure in materials used to solicit shareholders' votes in annual or special meetings held for the election of directors and the approval of other corporate action. This information, contained in proxy materials, must be filed with the Commission in advance of any solicitation to ensure compliance with the disclosure rules. Solicitations, whether by management or shareholder groups, must disclose all important facts concerning the issues on which holders are asked to vote.Registration of Exchanges, Associations, and Others
The Act requires a variety of market participants to register with the Commission, including exchanges, brokers and dealers, transfer agents, and clearing agencies. Registration for these organizations involves filing disclosure documents that are updated on a regular basis.
The exchanges and the National Association of Securities Dealers (NASD) are identified as self-regulatory organizations (SRO). SROs must create rules that allow for disciplining members for improper conduct and for establishing measures to ensure market integrity and investor protection. SRO proposed rules are published for comment before final SEC review and approval.