Securities laws and regulations are designed to ensure that investors have access to accurate company information. Bonds, stocks, certificates of interest, notes and other securities vary in value. Accordingly, it’s important that investors are properly informed about the value and nature of these financial instruments.
Securities can be sold and traded in venues such as stock exchanges, residual securities markets and through private deals. Different laws regulate each kind of security and trade with the majority being addressed in the Securities Act of 1933 and the Securities Exchange Act of 1934.
The Securities Act
The Securities Act of 1933 mandates that most offerings of securities go through a registration process. Disclosures include publicly available information and prospectus documents that are distributed to investors who want to buy the security. Risk factors are required to be disclosed.
Securities and Exchange Commission
The Securities Exchange Act of 1934 resulted in the creation of the Securities and Exchange Commission and granted it power to regulate and oversee, as well as register, brokerage firms, clearing agencies and other companies that deal in securities. It additionally regulated market conduct and granted the SEC disciplinary powers. Issuers or sellers who attempt to deal in unregistered securities, for example, can face SEC actions, injunctions, cease-and-desist letters and civil penalties.
When issuers misrepresent the value of company stock or similar securities, investors may suffer losses. Making misleading statements is typically known as securities fraud, and it can take numerous forms. In some cases, third parties distribute false data concerning stocks. Schemes like "pump and dump" aim to sell shares in stock for undue profit at the buyer's expense.
Another form of fraud, insider trading, takes place when personnel who have access to confidential data, such as upcoming corporate activities, use their knowledge to obtain an unfair advantage over the public and make profitable moves in advance.
One good example of this type of activity is the 2003 Martha Stewart case. In late 2001, the stock price of pharmaceutical company ImClone Systems experienced a major dip after one of its products didn't get regulatory approval. The SEC subsequently discovered that multiple executives, their relatives and Martha Stewart all sold their stock just before the loss. Stewart, the stock broker who told her a drop was coming, and the CEO were fined and imprisoned for insider trading and obscuring justice by lying about their actions.
Brokers, who buy and sell securities on their own accounts, must also follow strict rules in their dealings. Common violations of those rules can include:
- Trading without authorization from investors
- Excessive trading to increase commissions
- Selling client accounts and keeping the proceeds
- Making inappropriate investments
- Individual Protections Under Federal Laws
When brokers and other entities commit fraud, their victims may include investors, creditors and elderly persons like pension holders. In addition to implementing law enforcement efforts and regulating fraud-prone financial vehicles, federal and state securities laws explicitly protect whistleblowers who reveal illicit actions.
Both the SEC and the North American Securities Administrators Association, or NASAA, maintain that investors have certain rights. These include receiving account statements, complete and accurate risk information and being provided with copies of all agreements. Victims who suffer losses often find it constructive to pursue civil lawsuits to recover assets.
Filing Securities Claims
When fraud, misconduct or omissions occur that cause losses, the victims may choose to pursue a lawsuit or other means of dispute resolution. Generally, the National Association of Securities Dealers requires that its members arbitrate upon request of the consumer, and in many cases, customers may have already agreed to arbitration in an initial customer agreement. Securities arbitration is similar to a lawsuit, but it takes place out of court and takes less time.
If a broker or company commits a fraud or omission that affects many investors at once, those investors may take part in a class action lawsuit to pursue recovery in the same action.
The information on this page is meant to provide a general overview of the law. The laws in your state and/or city may deviate significantly from those described here. If you have specific questions related to your situation you should speak with a local attorney.
Additional Securities Articles
- What Is A Security?
- Individual Protection when a Brokerage Firm Fails or Files for Bankruptcy
- What Are The Federal Securities Laws?
- What Do These Securities Laws Cover?
- What Is The Securities Investor Protection Act?
- Are There State Securities Laws?
- What Are Blue Sky Laws?
- Are All Companies Subject To Securities Laws?