Why Do We Need Securities Law?

July 19, 2022

Consumer interest in securities law has been fueled by recent financial scandals. The collapse of Enron, an energy company, was a perfect example of deceptive accounting practices that inflated stock prices to the detriment of shareholders. More recently, MF Global, a large commodities brokerage firm, abused investors by illegally misappropriating nearly $1 billion in customer funds and gave their securities attorney a run for his money. The company ultimately declared bankruptcy in 2011.

Investor protection

The main purpose of the Securities Act is to ensure that the investors are aware of the company’s obligations. In particular, it aims to protect investors by preventing unscrupulous promoters from obtaining capital resources. But it also serves as a safety net for legitimate companies and businesses. Here are some reasons why we need securities law:

The laws have also been helpful to prevent fraud and deception in the securities market. Without a law, securities are worthless pieces of paper. Nonetheless, they can be manipulated to gain an unfair advantage. This law protects the public by preventing manipulation and deception by stock brokers. It is a vital component of the financial system, allowing investors to make informed decisions without fear of being taken advantage of. While the law is not perfect, it does serve a useful purpose: it prevents the public from being exploited by manipulative actions by stock brokers.

The Securities Exchange Act was passed in 1934. This law does not judge the quality of an investment, but it regulates how a corporation interacts with its investors. Violations of securities laws are punishable by the SEC, and courts have a role to play in deciding whether these laws have been violated. Further, the National Securities Markets Improvement Act of 1996 has made the laws more uniform. A good example of this is the National Securities Exchange Council.

A competitive market for information traders

The central role of securities regulation in a competitive market for information traders is to protect and facilitate the work of analysts. Securities regulators should protect analysts because they are the best group to underwrite a vibrant financial market. By protecting analysts, securities law will not only promote efficient capital markets but also reduce transaction costs for other types of investors.

Compensation for wrongdoing

Clawback compensation, or the ability to recover stock profits or bonuses for wrongdoing, is a key part of the Securities and Exchange Commission’s agenda, and the new Democratic leadership in Congress has a clear message for executives: it’s time to pay up. As the SEC tries to reign in corporate wrongdoing, thousands of executives may find themselves losing millions of dollars in stock sale profits and bonuses. The SEC has already dusted off narrow clawback powers that were created after the Enron and WorldCom accounting scandals.

Disgorgement is one of the most powerful tools for the SEC, and the court heard arguments on the merits of disgorgement in Liu v. SEC. In some cases, the disgorgement is calculated so as not to result in a “penalty” but to compensate victims of securities law violations. However, disgorgement isn’t necessarily the best solution for all harmed investors.

Exemptions from registration requirements

The Securities Act of 1933 outlines numerous exemptions from the registration requirements for investment companies. Among these exemptions are those for sale of securities to accredited investors, such as institutions and wealthy individuals. These exemptions are also available to securities issued by U.S. governments, municipal bonds, and most life insurance contracts. The exemption also covers transactions involving investment risk, such as sales of bonds or shares of stock. Other types of securities are not subject to registration requirements, including bankers’ acceptances and commercial paper.

A few exceptions to the registration requirement apply to finders in Ohio. The Securities Division has issued Ohio Securities Bulletin 2013-2 (May 2013). While registration with the SEC is not mandatory until the proposal is adopted, finders in Ohio must register with the state securities division. Without doing so, finders risk substantial penalties. However, these exemptions are only temporary. The Ohio Securities Division is working to amend the rules to clarify the state registration requirements for finders.