The law that regulates securities is one of the most complex in the legal field. However, there are a few basic concepts and laws that the average investor should know. As with most legal subjects, there are federal and state laws that regulate securities. As each state enacts its own laws, investors and businesses in one state may have different rights and obligations than those in other states. However, federal law governs the interstate sale of securities in every state to create a sort of minimum requirements.
What Is a Security?A security is an interest in something valuable. One of the most common examples is a company’s stock, which is a type of equity security. CDs and bonds are debt securities.
Securities are bought and sold through two types of transactions: issuer transactions and trading transactions. An issuer transaction occurs when a business sells an interest in the company to raise capital. One example of this is an initial public offering, or IPO. Trading transactions occur between investors and involve securities that already exist. Trades that occur on a stock market are trading transactions.
Modern securities law in the U.S. has its roots in the Great Depression. To prevent many of the problems that caused nationwide financial calamity, Congress passed the Securities Exchange Act of 1934, which is still the basic law that regulates the trading and issuing of securities. The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC), which is the primary government agency to which Congress delegated the right to regulate the interstate sale of securities.
The Securities Exchange Act of 1934 contains some basic securities regulations. One is the prohibition of the sale of any security that is not registered with the SEC. Another is the requirement that certain information about a security is provided to potential investors. These provisions help the SEC keep tabs on the securities that are being sold and prevent investors from being deceived.
The SEC has the power to investigate and bring legal actions against people or businesses suspected of violating federal securities laws. However, the Securities and Exchange Act of 1934 also gave the SEC the power to promulgate rules that help regulate securities transactions. One such rule is SEC Rule 10b, which is codified at 17 C.F.R. § 240.10b. Rule 10b gives private investors the right to bring a lawsuit against a defendant thought to have committed securities fraud or other violations of securities law. Specifically, Rule 10b-5 prohibits a person from committing fraud, deceit, omission of material facts, or misrepresentation in the course of a securities transaction.
State securities laws are often known as “Blue Sky laws.”
The Commerce Clause gives Congress the power to regulate interstate transactions, which is why it was able to pass the Securities Exchange Act of 1934 and other federal securities laws. States retain the power under the Tenth Amendment to pass laws that regulate commerce within their borders. Since these laws are passed by each individual state, their contents vary. However, many regulate the same aspects of securities trading, including the registration of securities and brokers, the prohibition of fraud and deceit, and the right to bring a lawsuit against those suspected of violating the law.
Last reviewed May 2024
Banking and Finance Law Center Contents
