The term “securities” refers to assets of any kind that can be traded. Securities are essentially financial instruments that represent some amount of financial value. Securities take the form of a certificate that grants the holder rights associated with the profit distributions of a business. A security may also refer to a variety of interests that involve investments, with the return of the investments primarily or exclusively dependent upon the efforts of some person other than the investor.
Generally, securities refer to stocks, bonds, and notes. However, the term security can also be used to refer to other types of assets and investments. The most common categories for securities include:
- Debt-based securities, which include bonds and banknotes;
- Equity-based securities, which include common stock; and
- Derivative contract securities, which include futures and options.
What Does Security Law Cover?
Securities law addresses a wide range of different assets that individuals and businesses can own. Additionally, securities law is often included under the broader category of finance law, statutes, and laws that address all kinds of assets, loans, and other valuables. Securities law represents the compilation of the many federal laws and regulations that govern the sale, purchase, and creation of security interests.
The laws and regulations around securities assert that all investors, whether large institutions or private individuals, should have access to specific basic facts about an investment before buying it. Such access to facts regarding securities is only accomplished through the steady flow of timely, comprehensive, and accurate information that can help people make sound investment decisions.
Securities, such as stocks, are generally exchanged through security markets. In the past, trading markets were especially vulnerable to unfair or manipulative business practices, such as insider trading and securities fraud. Because of this, securities markets are now heavily regulated by federal and state laws intended to protect investors from such practices.
The agency responsible for enforcing securities law throughout the United States is the Securities and Exchange Commission (“SEC”). The SEC is primarily tasked with protecting investors and maintaining the integrity of the securities markets by requiring any public company to disclose meaningful financial information to the public freely.
Once again, the purpose of the financial disclosures is so all investors can meaningfully evaluate security investments before investing in that specific security.
What Is the Securities Exchange Act?
The Securities Exchange Act of 1934 (“SEA”) is the Act that created the Securities and Exchange Commission. Once again, the primary purpose of the SEC is to ensure that the securities market is a fair place for investors. The SEA grants the SEC the authority to regulate brokerage firms, transfer agents, clearing agencies, and the nation’s securities self-regulatory organizations, such as the various different stock exchanges.
As such, the Securities Act insures that investors are not blindly buying stocks, bonds, mutual funds, and other securities. Instead, the Act requires that investors be given detailed financial and other information about their investments.
For example, if an investor was buying shares of stock of a public company, the company would be required to furnish that investor with information such as balance sheets, return on investment, prospective investments, and budgets to name a few. Additionally, the public company would also have to supply other basic information about the company, such as the company’s purpose and goals.
The Act also ensures that there can be no fraud or deceit in the sale of securities by levying legal penalties against companies that commit such acts. In other words, the information provided to investors must be truthful and accurate to the best knowledge of the supplier, or the public company may face legal penalties for security violations.
How Does the SEC Regulate These Different Groups?
One way that the SEC regulates companies is by requiring companies with over $10 million in assets and more than 500 owners of securities to make detailed periodic reports to the SEC. The information required in the reports is outlined in the Securities Act of 1933. It involves disclosing company balance sheets, budgets, and a description of the business and its objectives.
Additionally, if and when a public company is going to have a stockholder vote for the election of a board of directors or any other action of the company, the company must also disclose information about those issues to be voted upon to the SEC.
The SEC also regulates any investor who wishes to purchase more than 5% of a company’s stock; a purchase would be considered a controlling interest in the company. Those investors must also submit information to the SEC regarding purchasing the company’s stock.
In addition to investors and companies, other security market participants must register and disclose information to the SEC, including:
- Brokers and dealers;
- Transfer agents; and
- Clearing agencies.
What Are Some Common Examples Of Securities Law Violations?
Every year, the SEC brings approximately 400-500 civil enforcement actions against individuals and companies that are found to violate securities law. Security law violations are considered serious criminal infractions that can result in incarceration and substantial civil and criminal fines.
Insider trading is one of the most common examples of a security law violation. Insider trading occurs when a transaction in securities of a publicly held company is made by people with inside or advance information on which the trading is based. Generally, a trader is considered an “insider” if employed or has another relationship of trust with the corporation.
For example, if an employee of a corporation learns that their company will enter into a merger agreement with a rival competitor, and then with that knowledge purchases shares of stock with the expectation that the value will increase once the merger agreement becomes public, that will likely be considered insider trading.
Once again, securities are highly regulated due to the fact that they are generally very high in value in monetary terms. Examples of other common security violations that are regulated by securities law include, but may not be limited to:
- Securities fraud. Securities fraud occurs when a party uses fraud, misrepresentation, or untrue statements in connection with the sale of a security.
- It is important to note that to have a successful claim for securities fraud, the investor must have relied on the information that was given to them when making their investment decisions, and they must have suffered some type of harm because of the information;
- Loan fraud;
- Business non-compliance violations; and
- Tax-related violations.
Do I Need a Lawyer for Help With Securities Law?
If you are having any issues involving securities law, you should immediately consult with an experienced and local securities lawyer. An experienced securities attorney will be able to help you understand your legal rights and options according to your state’s specific securities law and federal law. A security attorney will also be able to inform you of the protections afforded to you under the Securities Exchange Act of 1934.
As noted above, the SEC requires that companies provide certain information to investors. As such, if you have invested in securities by a company based on false information provided by the company, an experienced securities law attorney will be able to assist you in your fraud claim.
An experienced attorney can evaluate your claim and help you determine if you are entitled to monetary damages in a lawsuit against the company. Finally, an attorney can also represent you in court, as needed.