Overview Of Federal Securities Laws By Thomas Lee Hazen

overview of federal securities laws by thomas lee hazen june 2007 1. securities transactions are subject to regulation under both

Overview of Federal Securities Laws
By Thomas Lee Hazen
June 2007
1. Securities transactions are subject to regulation under both
federal and state law. Since the federal securities laws are based on
Congress' power to regulate interstate commerce, they generally apply
only to transactions involving "the use of any means or instruments of
transportation or communication in interstate commerce or of the
mails." The courts have been willing to find the requisite use of
interstate commerce facilities in doubtful situations. Use of the
mails to accomplish any part of the transaction, including payment or
confirmation after a sale, is sufficient to support federal
jurisdiction. See, e.g., Franklin v. Levy, 551 F.2d 521 (2d Cir.
1977). An intrastate telephone call has also been held to involve the
use of interstate facilities. See, e.g., Dupuy v. Dupuy, 511 F. 2d 641
(5th Cir. 1975).
2. Federal securities law is based upon six statutes enacted between
1933 and 1940, and periodically amended in the intervening years, one
statute enacted in 1970, and one enacted in 2002. Those statutes are:
a. The Securities Act of 1933 (15 U.S.C. §§ 77a et seq.)
b. The Securities Exchange Act of 1934 (15 U.S.C. §§ 78a et seq.)
c. The Public Utility Holding Company Act of 1935 (15 U.S.C. §§ 79 et
seq.), repealed in 2005
d. The Trust Indenture Act of 1939 (15 U.S.C. §§ 77aaa et seq.)
e. The Investment Company Act of 1940 (15 U.S.C. §§ 80a-1 et seq.)
f. The Investment Advisers Act of 1940 (15 U.S.C. §§ 80b-1 et seq.)
g. The Securities Investor Protection Act of 1970 (15 U.S.C. §§ 78aaa
et seq.)
h. Sarbanes-Oxley Act of 2002 (various provisions of 15 U.S.C. and
other titles of the U.S. Code)
3. The Securities Act of 1933 regulates public offerings of
securities. The Securities Act of 1933, sometimes referred to as "the
truth in securities act," prohibits offers and sales of securities
which are not registered with the Securities and Exchange Commission
(SEC), subject to exemptions for enumerated kinds of securities and
transactions. It also prohibits fraudulent or deceptive practices in
any offer or sale of securities.
4. The Securities Exchange Act of 1934 extended federal regulation to
trading in securities which are already issued and outstanding. Unlike
the Securities Act of 1933, which focuses on a single regulatory
provision relating to the distribution of new issues and other public
offerings of securities, the Securities Exchange Act of 1934 contains
a number of distinct groups of provisions, aimed at different
participants in the securities trading process. The Securities
Exchange Act of 1934 established the Securities and Exchange
Commission and transferred to it the responsibility for administration
of the Securities Act of 1933 (which had originally been assigned to
the Federal Trade Commission). Other provisions of the Securities
Exchange Act:
a. impose disclosure and other requirements on publicly-held
corporations; prohibit various "manipulative or deceptive devices or
contrivances" in connection with the purchase or sale of securities,
b. restrict the amount of credit that may be extended for the purchase
of securities,
c. require brokers and dealers to register with the SEC and regulate
their activities;
d. and provide for SEC registration and supervision of national
securities exchanges and associations, clearing agencies, transfer
agents, and securities information processors.
5. The Public Utility Holding Company Act of 1935 was enacted to
correct abuses disclosed in Congressional inquiries, in the financing
and operation of electric and gas public utility holding company
systems, and to achieve physical integration and corporate
simplification of those systems. The SEC's functions under the Public
Utility Holding Company Act PUHCA) were substantially completed by the
1950's, and the Act accounted for a very small part of the
Commission's work. In 1995, the SEC recommended to Congress that the
Act be repealed, and that the SEC's functions under the Act be
transferred to the Federal Energy Regulatory Commission (FERC). After
many years and numerous calls for the Act's repeal, the Public Utility
Holding Company Act was repealed in 2005. The regulatory functions
that survived PUHCA's repeal were transferred to FERC.
6. The Trust Indenture Act of 1939 applies generally to public issues
of debt securities in excess of a specified amount, which the SEC has
fixed at $ 10 million. See Trust Indenture Act Rule 4a-3. Even though
the issuance of the debt securities are registered under the
Securities Act of 1933, the indenture covering the securities must
also be qualified under the 1939 Act, which imposes standards of
independence and responsibility on the indenture trustee and requires
other provisions to be included in the indenture for the protection of
the security holders. In 1990, the Trust Indenture Act was amended to
simplify the process of preparing indentures and set new
conflict-of-interest standards for indenture trustees.
7. The Investment Company Act of 1940 gives the SEC regulatory
authority over publicly owned companies, which are engaged primarily
in the business of investing and trading in securities. The Act
regulates the composition of the management of investment companies,
their capital structure, approval of their advisory contracts and
changes in investment policy, and requires SEC approval for any
transactions by such companies with directors, officers or affiliates.
It was amended in 1970 to impose additional controls on management
compensation and sales charges. The Investment Company Act provides a
potential trap for companies with a shortage of operating assets in
comparison to their passive investments.
a. Inadvertent Investment Companies. Companies not intending to be
investment companies have been found to be inadvertent companies. This
can happen for example when a company sells a substantial part of its
operating assets and then puts the proceeds into investment securities
while it is searching for other assets or companies to acquire.
Recently this has begun to be a problem for Internet companies that
have raised substantial capital but have few hard assets and most of
their assets in liquid investments (i.e. securities). The problem of
inadvertent investment companies has gained new significance with the
large number of Internet and other high-tech offerings for start-up
companies that initially invest most of their capital.
8. The Investment Advisers Act of 1940, as amended in 1960,
establishes a scheme of registration and regulation of investment
advisers comparable to that contained in the Securities Exchange Act
of 1934 with respect to broker-dealers. Investment Adviser regulation
under the 1940 Act is not as comprehensive as broker-dealer regulation
under the 1934 Act.
9. The Securities Investor Protection Act of 1970 established the
Securities Investor Protection Corporation (SIPC), which has power to
supervise the liquidation of securities firms which get into financial
difficulties and to arrange for the payment of claims asserted by
their customers.
10. The Sarbanes-Oxley Act of 2002 was the Congressional reaction
(overreaction?) to scandals such as Enron and WorldCom. Sarbanes-Oxley
("SOX") brought in various corporate governance reforms, new rules for
auditors, enhanced reporting requirements, increased criminalization,
and new rules of lawyer conduct. SOX amended many provisions of the
1933 and 1934 Acts as well as adopting some standalone provisions.