Federal Securities Laws
Federal securities laws have a long and complicated history. The Roaring Twenties saw a speculative boom in stock prices, but everything came crashing down with the stock market crash of October 1929, which hurled the United States into the Great Depression. President Herbert Hoover had previously warned of a “growing tide of speculation,” but his warnings went unheeded, and he ended up bearing the brunt of criticism once the Depression hit and he lost the 1932 election to Franklin D. Roosevelt. Against this volatile economic and political climate, President Franklin D. Roosevelt proposed the reforms of the New Deal. Part of the New Deal was the Securities Act of 1933, which paved the way for a new era of federal regulation in the securities industry. This regulation was met with opposition at every turn and yet ultimately restored investor confidence, leading to the revival of the most robust securities markets in the world—those of the United States.Securities Act of 1933
The Securities Act of 1933 (the “Securities Act”) is known as the “truth in securities” law. It prohibits fraud in the sale of securities. To this end, it requires that investors receive information concerning securities being offered for public sale. This is done through registration. Registration documents are available in the public EDGAR database. The Securities Act also lays out certain exemptions to registration. For example, private placements (also known as alternative investments), are exempt from registration because they are private offerings to a limited number of people (known as “accredited investors”, who meet federal criteria regarding income, net worth, and level of financial sophistication). Offerings of a limited size, intrastate offerings, and securities of municipal, state, and federal governments are also exempt from registration.Securities Exchange Act of 1934
The Securities Exchange Act of 1934 (the “Exchange Act”) created the Securities and Exchange Commission (SEC). President Franklin D. Roosevelt signed this act into law on June 6, 1934. He named Joseph P. Kennedy, the father of the future President John F. Kennedy, to become the first chairman of the SEC. Some criticized this move, as there were rumors that Joseph P. Kennedy was a stock manipulator, and he served only a little more than a year in that role, but he laid the foundation for a strong SEC, an agency dedicated to market regulation but also on friendly terms with businesspeople. Section 10(b) of the act prohibits market manipulation. Later adopted in 1942, Rule 10b-5 goes further, making it illegal to defraud investors or make untrue statements in the sale or offering of securities.
What is the role of the SEC? The SEC has the power to register, regulate, and oversee the major parties in the securities industry—broker-dealers, transfer agents, clearing firms, and self-regulatory organizations (like FINRA, the New York Stock Exchange, and the Chicago Board of Options). The Exchange Act mandates that market participants register with the SEC and file disclosure documents. Companies with more than $10 million in assets and with securities held by more than 500 owners must file annual reports. These reports are made available to the public through the EDGAR database.Investment Advisers Act of 1940
The Investment Advisers Act of 1940 defines the roles and responsibilities of investment advisers, responsibilities that have come to be known as the obligations of a fiduciary, someone who puts their client’s interests ahead of their own. The law states that anyone who meets the definition of an “investment adviser” must register with the SEC unless they are exempt from registration. The Investment Advisers Act of 1940 defines an “investment adviser” as any person or firm that meets all of the following three criteria: 1) Receives compensation 2) for engaging in the business of 3) making recommendations, issuing reports, or analyzing securities for compensation. “Investment adviser” with an “e” is a legal term, while “investment advisor” with a “o” is a generic term, so it is important to note that not all investment advisors fall under the Investment Advisers Act of 1940.
Who is exempt from registration? Lawyers, teachers, engineers, and accounts are exempt from registration if they give investment advice as an incidental part of their profession. More importantly, broker-dealers are exempt from registration if their advisory services are tangential to the conduct of their business as broker-dealers. Some investment advisers are also exempt from registration with the SEC. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 amended the Advisers Act so that only investment advisers with at least $100 million assets under management (AUM) must register with the SEC. This was just one of the many reforms implemented by Dodd-FrankDodd-Frank Wall Street Reform and Consumer Protection Act of 2010
Colloquially known as “Dodd-Frank”, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was passed in the wake of the 2008 financial crisis. It features eight major aspects, all designed to prevent another financial catastrophe. Let’s look at each component.
- Established the Financial Stability Oversight Council
- Established the Federal Insurance Office
- Created the Volcker Rule
- Empowered the Government Accountability Office to review future emergency loans or bailouts
- Monitors derivatives
- Requires private funds (i.e. hedge funds and private equity funds) to register with the SEC
- Created the Office of Credit Ratings
- Oversees credit reporting agencies, credit cards, debit cards, payday loans, and most consumer loans
The Financial Stability Oversight Council (FSOC) can turn firms over to the Federal Reserve for closer supervision if they become too large. This is just one way that the FSOC identifies large-scale risks that have the potential to affect the whole financial industry.
In creating the Federal Insurance Office, Dodd-Frank paved the way for the Treasury Department to identify at-risk insurance companies (like AIG leading up to the 2008 financial crisis). The Federal Insurance Office also ensures that insurance companies do not violate anti-discrimination policies.
The Volcker Rule prohibits banks from using consumer deposits for their own profit. Banks can only use hedge funds at the request of a customer.
After the big banks were bailed out during the 2008 financial crisis, many citizens criticized the bailout decision. The Government Accountability Office (GAO) assuaged some of these fears by implementing a process by which the Treasury Department must review future emergency loans or Federal Rserve bailouts.
The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) regulate dangerous and risky derivatives. Regulators can identify instances of excessive risk and then bring them to the attention of policymakers.
Dodd-Frank requires private funds, including all hedge funds, to register with the SEC. Funds must provide the SEC with information about their trades and portfolios, which allows the SEC to evaluate market risk. This provision also means that investment advisers with $100 million or more assets under management must register with the SEC. Previously, investment advisers with $30 million or more assets under management had to register with the SEC, but Dodd-Frank raised the threshold. The result? Following the passage of Dodd-Frank, 10% fewer advisers are registered with the SEC, but there are 13% more assets under management.
Dodd-Frank also created the Office of Credit Ratings (OCR) at the SEC, regulating credit-rating agencies (i.e. Moody’s and Standard & Poor’s).
Ultimately, Dodd-Frank was landmark legislation that help restore consumer faith in the financial industry and ensured that provisions were put in place to help prevent a future financial crisis. Dodd-Frank protects consumers and holds the financial industry accountable.Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act was passed in 2002 in the wake of major corporate scandals, such as Enron. The Sarbanes-Oxley Act is sometimes referred to as the most significant piece of corporate reform legislation since the 1930s. The law requires the Securities and Exchange Commission (SEC) to create regulations defining how public corporations must comply with the law. It protects investors from corporations that engage in fraudulent financial reporting. To combat fraudulent reporting, it mandated that corporations keep more detailed records. Some critics have complained that this provision places an undue burden on public companies because it can be costly to establish and maintain internal controls, including reporting methods. However, the goal of the Sarbanes-Oxley Act is investor protection, so these provisions were needed to accomplish that goal. To this end, the Sarbanes-Oxley Act also mandated strict reforms to existing securities laws, enacting tougher penalties for those who violate securities laws.Conclusion
The history of federal securities laws is a long and complex one, and if you have questions about securities laws, you shouldn’t hesitate to contact a securities attorney. Call (877) 238-4175 or email firstname.lastname@example.org to speak with the securities attorneys of Fitapelli Kurta.
- Account Churning
- Boiler Rooms
- Breach of Contract
- Breach of Fiduciary Duty
- Failure to Diversify
- Failure to Execute Trades
- Failure to Supervise
- Financial Elder Abuse
- Ponzi Schemes
- Unauthorized Trading
- Understanding Selling Away or Private Security Transactions
- Broker Misconduct
- Pyramid Schemes
- What is FINRA?
- Margin Accounts
- Understanding FINRA Rule 3110
- Tips for Avoiding “Pump and Dump” Scams
- Suitability – Important Information for Every Investor
- FINRA Arbitration Basics
- FINRA Rule 2090: Know Your Customer