Term
Overview of six Federal Security Regulation statutes
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Definition
‘33 Act - Securities Exchange Act of 1933
- Pertains to transactions between stock issuers and public (primary distributions)
- Crux of Act - Section 5 of ‘33 Act - every "offer" or sale of security must be registered for exempt from registration
- Civil remedies for violations
‘34 Act – Securities Exchange Act of 1934
- Pertains to secondary exchanges/trading (trading between investors)
- Crux of Act – regulates in two ways: 1) req’s public companies to make continuous disclosures to the public (10K, 10Qs, proxy statements); 2) Regulates conduct of market participants - rules & conduct req's for partic’s
- Established enforcement mechanisms and created the SEC
- However, SEC was a nod to "no regulation" crowd in Congress - more biz sympathetic than FTC
‘35 Act - Public Utility Holding Act of 1935 (repealed in 2005)
‘39 Act - Trust Indenture Act of 1939
- Very limited application - applies to large debt offerings ($100+ mill)
- Requires a trust indenture to be entered into so that a trustee steps in on behalf of debt holders and enforce payments if a company defaults
‘40 Act - Investment Advisor Act of 1940 AND Investment Company Act of 1940
- Regulates investment advisors – those in biz of providing others w/ advice re securities
- Regulates businesses that buy and sell securities like mutual funds, hedge funds, etc.
- 40 Act on regulates activity related to securities - investment advisors and companies do a lot of other things beside buy and sell securities
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Term
1932 Senate Banking Committee "Pecora" Hearing Findings: |
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Definition
Four key findings:
Fraud/manipulation – Joe Kennedy was worst offender – buying up stock w/ friends, touting value and selling at high price – “pump and dump”
Lack of issuer disclosures (no mandated disclosure – had to ask company directly for information, favored big institutions or little guys)
High leverage - could buy a lot of stock w/ a little money (low margin)
No federal regulator – state control only, no federal oversight |
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Term
How do 6 FSR statutes reflect Congressional response to Pecora findings?
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Definition
- ’33 Act – promotes disclosure re primary distribution
- ’34 Act – promotes disclosure and prevents fraud/manip re post IPO actions by participants, PLUS sets up federal regulatory agency and gives it enforcement powers
- ’35 Act – N/A (repealed)
- ’39 Act – prevents fraud and manipulation w/ regards to debt instruments
- ‘40 Act – prevents fraud and manipulation by advisors and investment firms
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Term
Sarbanes Oxley Act of 2002 - what is it about?
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Definition
Biggest change in securities laws since 1930's and 1940's
Amends previous securities laws rather than creating new laws
Req’s add’l disclosures, faster disclosures, & more penalties making fraudulent disclosures
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Term
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Definition
1) protect investors
2) promote fair and orderly markets (such as secondary trading)
3) facilitate capital formation (allowing companies to get $$) |
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Term
SEC organizational structure |
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Definition
One Chairman
Five Commissioner (usually politically divided)
4,000 Staff members
Four Divisions
Eleven Regional Offices
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Term
Functions of four operating divisions |
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Definition
Corp Fin - oversees disclosure process for companie raising $$ thru securities
- Covers both ‘33 Act and ‘34 Act companies (IPO & post-IPO)
- Per SOX, SEC has to review a public filing of each of the 12,000 publicly traded companies once each year
- Big part of job is monitoring acct’g profession – each of the 12,000 publicly traded companies has to provide audited financial statements and follow GAAP conventions
Trading and Markets - oversees major participants in trading markets
Investment Management - oversees $30 trillion industry of investment advisors; enforces and interprets 2 1940's acts
Enforcement – in charge of enforcing SEC acts - brought 650 cases worldwide in 2008 |
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Term
Parts of the regulatory scheme of securities industry
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Definition
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Term
Major sources for the federal securities laws
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Definition
- Constitution - Interstate Commerce Clause is hook for the federal securities laws - need jurisdictional nexus
- Congressional statutes – 15 USCA_ is code pleading
- SEC referrers to statutes as “Section 5”
- SEC rules/regulations – 17 CFR_ is code pleading
- Regulations defined: group of rules that relate to same subject
- SEC staff and informal guidance
- Interpretive guidance, e.g. speeches or pamphlets on new laws
- “No Action Letters”
- Litigated decisions
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Term
Basic v. Levinson - why did case get heard in light of TSC case decision? |
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Definition
TSC a proxy battle materiality case, Basic about director’s misleading statement about merger agreement
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Term
Basic v. Levinson - why didn't TSC adopt low materiality standard? |
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Definition
If materiality standard too low, investors woudl be buried in disclosure docs. Issuers would have to disclose everything, would be too taxing to sift through it all
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Term
Basic v. Levinson - why didn't Basic court adopt 3rd Cir. "agreement in principal" test? |
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Definition
Agreement in principal test: material re a merger agreement does not become material until there is an "agreement-in-principle" as to the price and structure of the transaction has been reached btwn merger partners
Ct. rejects b/c: 1) test underestimates investor's ability to sift through info; 2) SEC rules meant to protect investors not corps; 3) rule is a convenience for corp rather than a usuable bright line rule
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Term
Basic v. Levinson - court adopts "reasonable investor test", why? |
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Definition
RULE: reasonable investor test - protects investors interest, but is also flexible depending on the event and its likely damage to investor
Step 1: Would info be significant to a reasonable investor?
Step 2: If yes, balance probability & magnitude: materiality depends on balancing indicated probability that event will occur & anticipated magnitude of event in light of totality of corporate activity |
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Term
Section 2(1) of '33 Act - definition of “security" |
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Definition
Definition: any note, stock, bonds, debenture, investment contracts, voting trust certificate, etc. An exhaustive list but no definitions for each of the items.
- Some identified items relatively straightforward - e.g. stock, bond, debenture
- Some identified items need more interpretation - e.g. "investment contract", "note"
"Investment contracts" is a catch-all category for investment device through which companies can raise money that may or may not be a security
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Term
SEC v. Howey test for 'investment contract"
(Howey-in-the Hills orange grove contracts)
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Definition
RULE: four part test adopted by court – “investment contract” defined:
- Entail an investment of money
- For a common enterprise
- Involves an expectation of profits
- Profits coming solely from efforts of others (not investor)
Offer and sale are separate acts, although 15% of people in Howey-in-the-Hills scheme didn't purchase the service contract, they were still offered a "security"
Investment K exists even when enterprise is not speculative or promotional in character and where the tangible interest which is sold has intrinsic value indep of success of the enterprise
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