March 1, 2024
    The Importance of Securities Law in Regulating Financial Markets

    The Importance of Securities Law in Regulating Financial Markets

    Securities law is the set of laws governing fungible financial instruments that hold some form of monetary value. They protect investors by requiring corporations selling securities to register their offerings with the Federal Securities and Exchange Commission.

    Most financial transactions require the issuance of securities. Securities lawyers are transactional business attorneys at heart but must also be skilled litigators.

    Regulation

    Securities law regulates the trading of financial instruments. The most well-known example is the common stock, governed by federal and state laws. The Federal Securities Act of 1933 set the stage for modern securities regulations, requiring companies to register any offerings with the SEC before selling them in interstate commerce. The act also prohibits the sale of a security without registration and sets up disclosure requirements for buyers. The states adopted varying laws, called blue sky laws, to supplement the federal rules.

    These laws are mainly concerned with market trading and disclosure. However, the same notions of contract and negligence also intersect with the laws governing securities transactions, as every purchase or sale of a security involves a contractual promise and an implied duty to perform.

    The recent failure of brokerage firms have heightened public awareness of securities issues. Securities lawyers are tasked with keeping up with the latest changes in state and federal securities law and the vast array of regulations that govern various aspects of trading and investment.

    Securities regulation can be a complex area of law, and it is no wonder that individuals and corporations seek experienced counsel when faced with a complex regulatory issue. Securities attorneys can help them navigate a complicated state and federal law field, helping them avoid costly mistakes.

    Litigation

    Securities law is a specialized field encompassing laws and regulations about issuing, trading, and regulating financial instruments. These instruments can be stocks, bonds, mortgages, or loan packages grouped and sold to investors. Securities laws are designed to prevent fraud, insider training, and market manipulation.

    They are also designed to promote transparency through a complex reporting and enforcement system. For example, the law requires publicly traded companies to report regularly on their financial condition and results and disclose the compensation paid to executives. These reports are vital to investors and brokers, who rely on them for their investment decisions.

    The first federal law regulating securities was passed in 1933 in response to the Pecora hearings. It required the registration of securities and their salespeople and prohibited the sale of a security without complying with federal law. Before that, most states had their own securities laws, known as blue sky laws.

    Securities lawyers often work as compliance counselors for big corporations to help them avoid breaking the rules, but they also litigate civil cases and white-collar crimes involving securities violations. Securities law is a specialized area, and finding an attorney who understands it is important. A lawyer who focuses on this area of law has spent years honing their skills and is constantly keeping up with the latest changes.

    Enforcement

    Securities law is a body of rules and regulations that governs the issuance of financial investments known as securities. These instruments, such as stocks and bonds, represent claims upon the assets and earnings of a business entity, often accompanied by voting rights. The laws ensure that the public receives adequate and necessary information about a security’s type, quality, and value. The laws also protect investors against fraudulent and manipulative practices.

    Investors have become more interested in securities regulation following recent scandals that caused significant losses. 

    The federal laws governing the sale of securities were first developed in response to the stock market crash 1929 and subsequent depression. The development of securities law resulted from companies and brokers enthusiastically promoting stocks to attract investments but made little or no disclosure of important information.

    The United States has many regulatory agencies that oversee various aspects of the securities industry. These agencies have varying levels of diligence, creating inconsistencies and challenges for securities professionals. For instance, some state regulators have a long history of regulating the sales and marketing of securities, but others are more lenient.

    Compliance

    Securities law can be complex, and its application to particular situations can vary widely. However, the broad goals of federal and state regulations can be distilled into a single goal: to provide investors with information about the value and risk of investments they are considering.

    The Securities Act of 1933 prohibits fraud in the sale of securities and requires companies to disclose financial information so that investors can make informed decisions about their investments. State securities laws, often called “Blue Sky” laws, add additional protections from fraudulent investments for individuals in specific states.

    For example, the law prohibits pooling, where several stock brokers conspire to sell a large block of a company’s shares simultaneously to manipulate price and generate profits. The SEA also regulates tender offers and purchases to gain company control by buying out shareholders.

    The SEA was created in response to a series of brokerage firm failures that resulted in substantial losses for customers and erosion of investor confidence. Congress aimed to prevent future broker-dealer failures and upgrade the financial responsibility requirements for registered firms. The SEA created a system of “self-regulatory organizations” to oversee the business practices of member firms. It established a process for liquidation that enables the speedy return of most customer property.

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