Securities Law

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 What Is Securities And Finance Law?

Securities refers to assets of any kind that can be traded. There are financial instruments which represent some amount of financial value, and take the form of a certificate which grants the holder rights associated with the profit distributions of a business. A security may also refer to a variety of interests that involve an investment, with the return primarily or exclusively dependent upon the efforts of some person other than the investor.

Generally speaking, the term refers to stocks, bonds, and notes. However, it can also be used to refer to other types of assets and investments. The defining categories for securities include:

  • Debt-based securities, such as bonds and bank notes;
  • Equity-based securities, such as common stock; and
  • Derivative contract securities, such as futures and options.

As such, securities law addresses a wide range of different assets which can be owned by individuals as well as businesses. Additionally, securities law is often included under the broader category of finance law, which addresses assets, loans, and other valuables of all kinds. Securities law represents the many federal laws and regulations governing the sale, purchase, and creation of security interests.

These rules assert that all investors, whether large institutions or private individuals, should have access to specific basic facts regarding an investment prior to buying it. This is only accomplished through the steady flow of timely, comprehensive, and accurate information that can help people make sound investment decisions.

Securities are generally exchanged through securities markets. Trading markets may be especially vulnerable to unfair or manipulative business practices, such as insider trading and securities fraud. Because of this, securities markets are heavily regulated by both federal and state laws that are intended to protect investors from such practices, as was previously discussed.

The agency that has the sole responsibility of enforcing securities law throughout the United States is the Securities and Exchange Commission, or SEC. They are primarily tasked with protecting investors, as well as maintaining the integrity of the securities markets by requiring public companies to disclose meaningful financial information to the public. This is so that they can evaluate security investments prior to making those investments.

What Are Some Common Examples Of Securities Law Violations?

Every year, the SEC brings between 400-500 civil enforcement actions against both individuals and companies that are found to be in violation of securities law. These law violations are considered to be serious criminal infractions that can result in both incarceration and substantial fines.

One of the most common examples of a security law violation would be insider trading. Insider trading refers to transactions in securities of publicly held corporations, made by people with inside or advance information on which the trading is based. Generally speaking, the trader is an “insider” with an employment or other relationship of trust with the corporation.

An example of this would be if an employee of a corporation learns that their company will enter into a merger agreement with a rival competitor. With this knowledge, the employee purchases shares of stock with the expectation that the value will increase once the merger agreement becomes public knowledge. In doing so, the employee is abusing their insider status and as such has engaged in illegal insider trading.

To reiterate, securities are especially highly regulated due to the fact that they are generally very high in value in monetary terms. Some examples of violations that are regulated by securities law include, but may not be limited to:

  • Securities fraud, which will be further discussed below;
  • Loan fraud;
  • Business non-compliance violations; and
  • Tax-related violations, as securities violations frequently overlap with other areas of law.

Another common type of securities violation is known as securities fraud, which happens when a party uses fraud, misrepresentation, and/or untrue statements in connection with the sale of a security. In order to have a claim for securities fraud, the investor must have relied on the information that was given to them when making their decisions, and they must suffer some type of harm because of the information.

Additionally, the fraud must affect interstate commerce in order to fall within federal securities fraud laws. However, this can be as simple as giving information over the telephone or internet; and, individual states may have their own securities fraud laws that apply as well.

One common type of securities violation is associated with the conduct of trustees, or people who are charged with the responsibility of managing another person’s securities. Trustees and brokers have a legal duty to manage the securities in a prudent manner. As such, any breach of this duty can cause the trustee to be liable for losses resulting from the mismanaged securities.

Some other examples of securities violations and securities litigation claims involve:

  • Market Manipulation: This can occur when a securities company, broker, and/or investor engages in any activity which creates a false impression regarding the price, availability, and/or distribution of a security;
  • Breach of Fiduciary Duty: A trustee or broker cannot manage another person’s securities if they have a conflict of interest that would prevent them from remaining loyal to the beneficiary;
  • Churning: Churning refers to when the broker engages in excessive amounts of trading in order to boost their own sales commissions. This is considered to be unethical, and as such it is prohibited by securities laws;
  • Unauthorized Trading: Although trustees do have a degree of freedom to invest prudently and reasonably, they generally cannot engage in trading against the wishes of the stockholder who has employed them; and
  • Malpractice or Ineptitude: Broker malpractice frequently occurs if an unqualified person holds themselves out to be a professional. An example of this would be brokering without a valid license to do so.

It is important to note that the laws which govern these types of securities violations may vary according to the nature of the particular security that is being traded. An example of this would be how laws may differ in terms of regulating the trade of stocks, versus the trade of other types of securities.

What Are Some Common Penalties For Security Or Finance Violations?

Securities violations can often result in considerably heavy legal penalties, including federal charges, which are associated with strict penalties. Some examples of penalties can include:

  • Either misdemeanor or felony charges;
  • Civil and/or criminal fines;
  • Jail or prison sentences, depending on the severity of the crime; and
  • Business penalties, such as a suspension of operating license or loss of broker certification.

Additionally, securities violations can result in class action lawsuits. An example of this would be when a company’s fraudulent issuing of stock affects a whole group of stockholders who take legal action against the company as one plaintiff. These lawsuits can take several years to complete, and as such can involve a substantial amount of money.

Once again, in addition to criminal penalties, many types of securities violations can also result in a civil litigation claim. An example of this would be how it is common for the holder of securities to file a lawsuit against a trustee when they have failed to manage security assets according to professional standards. The trustee could then be required to pay damages in order to compensate the plaintiff for their economic losses associated with the trustee’s mismanagement.

Do I Need An Attorney For Issues Involving Securities Law?

If you have any issues involving securities law, you will need to consult with an experienced and local securities lawyer. An attorney can help you understand your legal rights and options according to your state’s specific securities law, and will also be able to represent you in court, as needed.

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