Thinking of Getting Into Investing? Be Aware of These Securities Regulations Legal Issues

If you are an investor in the United States (or a foreign investor who wants to invest in a U.S. business), you need to be aware of the web of securities regulations that have been put in place by the federal government over the last century.

There are several major legislative acts which regulate securities in the United States. In response to the Great Depression, and as part of the spate of new federal legislation and programs that came as part of the New Deal, the first major securities law in the U.S. was the Securities Act of 1933.

The Securities Act of 1933 represents the first major federal regulation of securities and investments. One of the major rules it imposes is a registration requirement. Unless a specific exception (of which there are very few) applies, all securities sold, or offered for sale, to the public must be registered with the Securities and Exchange Commission (SEC). The registration must include a description of the security offered for sale, information concerning the management of the security’s issuer, and independently-verified financial statements.

The SEC was created by a later act, the Securities Exchange Act of 1934. In addition to creating the SEC, the 1934 act was primarily meant to regulate the secondary trading of securities. As with the 1933 act, the 1934 act contains significant anti-fraud provisions. Section 10(b) is most often cited as the major anti-fraud provisions. Its language is broad and sweeping, and it has been used to punish conduct ranging from insider trading to price fixing (artificial inflation or depression of stock prices through manipulation). It also creates a few exemptions from the reporting requirement, when such reporting would endanger national security.

One of the biggest rules in securities law is the prohibition on insider trading. Insider trading is any purchase or exchange of a publicly-traded security by a person who has advance inside information on which they are basing their decision to buy or sell a security. It carries significant criminal penalties.

The next major regulation of investments came in 1940, with the Investment Company Act of 1940, and the Investment Advisers Act of 1940. The 1940 act is aimed at eliminating conflicts of interest in investment companies. It requires investment companies to make certain disclosures to their customers, with the aim of reducing the incidence of fraud and conflicts of interest. The act also places some restrictions on mutual funds and short sales of stocks.

That same year saw the passage of the Investment Advisers Act of 1940. As the name suggests, it is meant to regulate the conduct of investment advisers, and the advice that they give to their clients. It requires that investment advisers register with the SEC, as well as make certain written disclosures to clients and prospective clients.

After the wave of new rules brought on by the New Deal, there was not a major update to American securities regulation for nearly 30 years, which came with the Securities Investor Protection Act of 1970. Its main goal is the creation of the Securities Investor Protection Corporation (SIPC). Most brokers and dealers of securities who are registered with the SEC must also be members of the SIPC, which maintains a fund to help protect investors from misappropriation of their money in the event that their broker fails (goes out of business).

In 2002, one of the largest additions to American Securities law in history was enacted, in response to the Enron collapse. It is called the Sarbanes-Oxley Act of 2002 (SOX). SOX requires that enhanced financial disclosures by publicly-traded companies. It also creates a new federal oversight board to monitor the accounting practices of public companies.

And in a significant departure from the usual legal doctrine that corporations are separate legal entities from any individual person, SOX makes individual corporate executives personally responsible for the accuracy (or inaccuracy, as the case may be) of all corporate financial reports. This, in theory, makes it far more difficult for the people who run corporations to hide behind the “corporate veil” while they use a corporation to commit crimes for which they will not be held responsible.

This article barely scratches the surface of the full scope of securities regulation in the U.S. For that reason, if you have any questions about your rights as an investor, or your responsibilities as an investment adviser or broker, you should speak with a lawyer who specializes in securities regulations.

John Richards is a writer for LegalMatch.com and the LegalMatch.com Law Blog. The above article is for general informational purposes only, and should not be construed in any way as legal advice relevant to your particular situation. The only person qualified to give you legal advice is an attorney licensed to practice in your jurisdiction, who has been apprised of all the relevant facts of your situation.