Securities is a general term that refers to:
- Bonds and debentures;
- Notes; and
- A variety of interests that involve an investment where the return primarily or exclusively depends on the efforts of a person other than the investor.
A security is a financial instrument that represents some amount of financial value. In general, securities take the form of a certificate that grants the holder rights related to the distributions of profit from a business.
Securities are typically exchanged on securities markets, such as the New York Stock Exchange. Securities markets may be subject to manipulative or unfair business practices, which may include insider trading and securities fraud, among many others.
Because of these issues, securities markets are regulated heavily by both federal and state laws. These securities laws are designed to protect people who invest in securities. In addition, there are other entities that regulate securities markets, exchanges, and broker-dealers in securities. For example, the Financial Industry Regulatory Authority is a non-profit, government-authorized organization that oversees U.S. broker-dealers. It licenses stock brokers.
What Is Securities Law?
Securities laws are both state and federal laws that regulate numerous aspects of the creation and trade of securities. They address such issues as the following:
- The purchase and sale of securities;
- Supervision of stock brokers and investment advisers;
- The American stock exchanges;
- Brokerage firms that buy and sell securities;
- The sale of securities;
- Mergers and acquisitions of publicly traded companies.
This list is not exhaustive.
Among the government agencies involved in regulating securities markets and the players involved in them is the Federal Securities Exchange Commission (SEC). The SEC was created by the Securities Exchange Act of 1934. It registers new securities and regulates all of the filings that publicly traded companies must make, such as annual and quarterly reports. It also regulates American stock exchanges as well as entities involved in selling securities.
Other important laws governing securities are the Securities Act of 1933, the Sarbanes-Oxley Act of 2002, and several other federal laws.
Each state also has its own securities regulator who enforces their state’s “blue sky” laws. These laws regulate many of the same activities that are regulated by the SEC, such as the sale of securities and the professionals who trade in securities. A state regulator can only address the securities trade within its borders.
One of the goals of securities laws is to provide all investors, whether they are private individuals or large institutions, with access to clear and accurate information about an investment before they purchase it. Individuals are only able to make sound investment decisions when they have access to information that is timely, comprehensive, and accurate.
These laws were also enacted to ensure that company insiders and others who have access to information about securities do not abuse their inside knowledge by making investments in information that has not yet been made public.
Each year, the Securities and Exchange Commission (SEC) brings somewhere between 400 and 500 civil enforcement actions against individuals and companies that break securities laws. Typical infractions that occur include:
Violations of securities laws are serious crimes that may result in a prison sentence and/or substantial criminal fines. As previously noted, there are a number of ways to violate securities laws. One common violation is securities fraud. Securities fraud occurs when an individual uses material misrepresentation, i.e., fraud or deceit, in connection with the sale of securities.
Another common type of securities violation involves the conduct of trustees or individuals who are charged with responsibility for managing an individual’s securities. Brokers and trustees have a duty to manage securities in a prudent manner. If a trustee breaches this duty, they may be liable for losses of the investor which result from the mismanaged securities. Other forms of securities violations and securities litigation may include:
- Market manipulation: This occurs when a securities company, investor, or broker engages in any activity that creates a false impression regarding security, including its:
- Insider trading: As noted above, insider trading involves a person with inside information regarding a company’s stock using that information to make a profit for themselves that members of the public did not have the opportunity to do. This is because they did not have the same access to information;
- A breach of fiduciary duty: A broker or trustee may not be able to manage the securities of another person with whom they have been entrusted because they have a conflict of interest. If this is the case, they may breach their fiduciary duty and could be liable for losses;
- Churning: If a broker engages in excessive buying and selling of securities, mutual funds, or annuities on behalf of a client in order to boost their own sales commissions, they could be guilty of churning. This conduct is considered unethical and is prohibited by securities laws;
- Unauthorized trading: If a trustee abuses their authority to invest prudently and reasonably and engages in trading against the wishes of the stockholder, they have engaged in unauthorized trading;
- Malpractice: A person may lack the qualifications or licensing they should have to engage in trading in securities on behalf of others. If so, they may be guilty of professional malpractice and possibly worse, e.g., criminal fraud.
For example, suppose a corporation’s employee discovers that their company plans to enter into a merger agreement with a rival competitor. That employee, using that knowledge, may purchase shares of stock with an expectation that the stock’s value will increase after the merger agreement becomes public knowledge. If that is the case, that employee has abused their insider status and has engaged in insider trading.
What Are the Penalties for Violating Securities Laws?
The legal penalties for a securities violation may be quite severe. A person can go to prison if they are convicted of certain violations. The exact punishment in any given case depends on the nature of the violation and the penalty that the law provides for it. Even a minor violation may lead to misdemeanor charges, which can be punished by payment of a fine and/or jail time.
More serious violations may lead to felony charges, including violations that involve falsifying tax information.
In addition to possible criminal penalties, there are many types of securities violations that can result in civil lawsuits. In these situations, it is common for the victim of wrongdoing who violates securities law to file a lawsuit against a broker or trustee who has failed to manage the security assets according to professional standards and in accordance with the law.
A brokerage firm, individual broker, or trustee may have to pay an award of compensatory damages to compensate a victim for their economic losses.
As noted above, churning is an example of a serious violation of securities laws. Brokers who engage in excessive buying and selling for a client’s account may violate SEC rules, which address manipulative and deceptive conduct.
The SEC investigates complaints from consumers about brokers who appear to be serving their own interests in racking up commissions over those of their clients.
The Financial Industry Regulatory Authority (FINRA) also has a rule that addresses overtrading. In addition, a rule of the New York Stock Exchange (NYSE) prohibits churning. People who have been victims of churning are able to file a complaint with either the SEC or FINRA.
The industry regards churning as a serious offense. If a victim successfully proves their case, the broker who is liable can lose their job and even be barred from the industry. If the victim files a claim with FINRA, this agency might levy a fine of from $5,000 to $116,000. FINRA also has the right to suspend the broker from trading on the exchanges that it regulates for one month to two years.
Do I Need a Lawyer for Violations of Securities Laws?
If you have been the victim of an unethical securities broker, you want to consult a securities lawyer. LegalMatch.com can connect you to a lawyer who can review the facts of your case and file complaints with all of the regulatory agencies that regulate broker-dealers. Your lawyer can represent you in court in a civil lawsuit for damages so you are compensated for your losses.
Or you may have a company that you want to take public by issuing stock. Your securities lawyer can guide you through the complexities of this process and make sure you comply with all the rules at play in this situation.