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Federal Securities Laws-25

Federal Securities Laws-25

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Published by: robinkapoor on Jan 02, 2009
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The federal securities laws consist mainly of eight statutes:Securities Act of 1933 (SA)Securities Exchange Act of 1934 (SEA)Public Utility Holding Company Act of 1935 (PUHCA)Trust Indenture Act of 1939 (TIA)Investment Company Act of 1940 (ICA)Investment Advisers Act of 1940 (IAA)Securities Investor Protection Act of 1970 (SIPA)Sarbanes-Oxley Act of 2002 (SOA)We first summarize what each of the laws covers to provide an overview of the patternof legislation. We then develop some of the more important provisions in greater detail.The early major acts were enacted beginning in 1933. There is a reason for the timing. Thestock market crash of 1929 was followed by continued depressed markets for severalyears. Because so many investors lost money, both houses of Congress conducted lengthyhearings to find the causes and the culprits. The hearings were marked by sensationalismand wide publicity. The securities acts of 1933 and 1934 were the direct outgrowth of thecongressional hearings.The Securities Act of 1933 regulates the sale of securities to the public. It provides for the registration of public offerings of securities to establish a record of representations. All participants involved in preparing the registration statements are subject to legal liabilityfor any mis-statement of facts or omissions of vital information.The Securities Exchange Act of 1934 established the Securities and ExchangeCommission (SEC) to administer the securities laws and to regulate practices in the purchase and sale of securities.The purpose of the Public Utility Holding Company Act of 1935 was to correct abusesin the financing and operation of electric and gas public utility holding company systemsand to bring about simplification of the corporate structures and physical integration of theoperating properties. The SEC’s responsibilities under the act of 1935 were substantiallycompleted by the 1950s.The Trust Indenture Act of 1939 applies to public issues of debt securities with a valueof $5 million or more. Debt issues represent a form of promissory note associated with along document setting out the terms of a complex contract and referred to as the indenture.The 1939 act sets forth the responsibilities of the indenture trustee (often a commercial bank) and specifies requirements to be included in the indenture (bond contract) for the protection of the bond purchasers. In September 1987, the SEC recommended to Congressa number of amendments to establish new conflict-of-interest standards for indenturetrustees and to recognize new developments in financing techniques.- 1 -
The Investment Company Act of 1940 regulates publicly owned companies engaged inthe business of investing and trading in securities. Investment companies are subject torules formulated and enforced by the SEC. The act of 1940 was amended in 1970 to placeadditional controls on management compensation and sales charges.The Investment Advisers Act of 1940, as amended in 1960, provides for registrationand regulation of investment advisers, as the name suggests.The Securities Investor Protection Act of 1970 established the Securities Investor Protection Corporation, (SIPCO). This corporation is empowered to supervise theliquidation of bankrupt securities firms and to arrange for payments to their customers.The Securities Act Amendments of 1975 were passed after 4 years of research andinvestigation into the changing nature of securities markets. The study recommended theabolition of fixed minimum brokerage commissions. It called for increased automation of trading by utilizing data processing technology to link markets. The SEC was mandated towork with the securities industry to develop an effective national market system toachieve the goal of nationwide competition in securities trading with centralized reportingof price quotations and transactions. It proposed a central order routing system to find the best available price.In 1978, the SEC began to streamline the securities registration process. Large, well-known corporations were permitted to abbreviate registration statements and to discloseinformation by reference to other documents that already had been made public. Beforethese changes, the registration process often required at least several weeks. After the1978 changes, a registration statement could be approved in as little as 2 days.In March 1982, Rule 415 provided for shelf registration. Large corporations canregister the full amount of debt or equity they plan to sell over a 2-year period. After theinitial registration has been completed, the firm can sell up to the specified amount of debtor equity without further delay. The firm can choose the time when the funds are neededor when market conditions appear favorable. Shelf registration has been actively used inthe sale of bonds, with as much as 60% of debt sales utilizing shelf registration. Less than10% of the total issuance of equities have employed shelf registration.In 1995, the Private Securities Litigation Reform Act (PSLRA) was enacted byCongress. This law placed restrictions on the filing of securities fraud class action suits. Itsought to discourage the filing of frivolous claims. In late 1998, the Securities LitigationUniform Standards Act (SLUSA) was signed into law. It had been found that some classaction plaintiffs had been circumventing the PSLRA by filing suits in state courts. SLUSAestablishes a uniform national standard to be applied to securities class actions and makesclear such suits will be the exclusive jurisdiction of the federal courts. SLUSA forces allclass action plaintiffs alleging securities fraud to provide greater detail on the basis for their claims. It enables defendant companies to delay the expenses of discovery of evidence until the complaint has withstood a motion to dismiss. The 1998 act seeks to protect companies against unfounded securities fraud class actions. This reduces the- 2 -
 pressure on defendant companies to enter into a settlement to avoid the litigation expensesthat otherwise would be incurred.In the wake of the recent allegations of fraud, insider trading, and questionableaccounting practices by large companies such as Adeiphia, Enron, Global Crossing,ImClone, Qwest, and Tyco, President Bush signed into law on July 31, 2002, theSarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act is expected to have a huge impacton corporate governance, financial disclosures, auditing standards, analyst reports, insider trading, and so forth. Observers view the Act as the most comprehensive reform of securities laws since the 1933 and 1934 Acts. The Act contains eleven titles:I. Public Accounting Oversight BoardII. Auditor IndependenceIII. Corporate ResponsibilityIV. Enhanced Financial DisclosuresV. Analyst Conflicts of InterestVI. Commission Resources and AuthorityVII. Studies and ReportsVIII. Corporate and Criminal Fraud AccountabilityIX. White Collar Crime Penalty EnhancementsX. Corporate Tax ReturnsXI. Corporate Fraud AccountabilityBelow is a brief summary of some of the Titles. Title I establishes a five member Public Company Accounting Oversight Board to oversee audits, establish standards, andmonitor registered public accounting firms. Title II requires auditor independence by prohibiting auditors from performing certain non-audit services contemporaneous with anaudit, requires auditor rotation, and requires that auditors report detailed material to theaudit committee. Title III strengthens corporate responsibility by requiring each member of the audit committee to be an independent member of the board, requires the CEO andCFO to certify financial reports, requires the CEO and CFO to forfeit bonus andcompensation if an accounting restatement is due to non-compliance of the firm, andrequires that attorneys appearing before the SEC to report violations of securities by afirm or its management. Title IV provides for greater financial disclosures such asrequiring financial reports to reflect all material adjustments and off- balance sheet items, prohibits loans to executives, requires insiders to disclose insider trans actions within 2 business days of the transaction, and requires that at least one member of the auditcommittee be a financial expert. Title V attempts to separate analyst conflicts of interest by restricting the ability of investment bankers to pre-approve research reports, restrictsemployers from firing analysts for having written negative reports, and requires analyststo disclose any potential conflicts such as having owned stock in the company covered.Titles VIII, IX, and XI provide stringent penalties for corporate and financial fraud andother white-collar crimes by corporations and management.The Sarbanes-Oxley Act went through Congress at a rapid pace without anyopposition in the Senate and minimal opposition in the House of Representatives.- 3 -

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