What Is Securities Law?

The main goal of securities law is to promote fair and full disclosure of all market-related material information with the hopes of preventing regulatory mishaps. All investors, whether they are individuals or large organizations, should have access to certain information concerning an investment before they purchase it as well as while they hold it. Depending on a securities professional's specific business, there are a multitude of regulations and regulatory agencies. Major securities laws fall into three categories: federal, state, and common laws.

Federal Securities Law

The federal securities laws that govern the industry consist of several statutes, the two principal ones being The Securities Act of 1933 and The Securities Exchange Act of 1934.

The Securities Act of 1933, also known as the "truth in securities law," is to make sure that investors receive full and fair disclosure of information about the nature of a security prior to purchase and to prevent fraud in securities sales. It requires the registration of securities, which gives investors financial information so that they may make knowledgeable judgments when it comes to purchasing a security. The SEC requires that the information be accurate, though it does not guarantee it so it remains upon the investor to research or seek advice about prospective investments.

Registration forms usually call for descriptions of the company's business and properties and the security for sale, information regarding the company's management, and financial statements certified by independent accountants. Some securities need not be registered with the SEC and these exemptions include intrastate offerings, limited-size offerings, private offerings to a restricted number of individuals or institutions, and federal, municipal, or state government securities. These exemptions reduce the cost of offering securities to the public and are the SEC's way of facilitating the formation of capital.

Full Text of the Securities Act

The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) and allotted it broad authority over the securities industry.

The SEC is the government agency responsible for general management of all aspects of the securities industry. Its mission is three-fold: to protect investors, to maintain a market that is fair, efficient, and organized, and to assist with the creation and development of capital. To accomplish these goals, the SEC offers investor education on its website, allows access to disclosure documents that public companies must file with the Commission, and works closely with Congress, various federal agencies and departments, state securities regulators, stock exchanges, and several other officials, institutions, and organizations.

This Act also distinguishes and bans certain types of behavior, such as fraudulent insider trading, in the markets and apportions disciplinary powers to the SEC to deal with individuals or organizations that engage in such prohibited conduct. Additionally, the Act gives the SEC power to require companies with publicly traded securities to periodically report information. These companies include those with over $10 million worth of assets whose securities are held by more than 500 investors.

Full Text of the Securities Exchange Act

State Securities Law

The SEC is the chief enforcer of securities laws but each state has its own regulatory body, usually known as the state Securities Commissioner. Though most states have left it up to the SEC to deal with anti-fraud regulations and violations, each state has its own securities act often referred to as the "blue sky law." These state rules and laws regulate the offer and sale of securities and administer registration and reporting requirements for brokers and dealers doing business in the state.

Federal legislation recently limited the state's ability to review, limit, or restrict the sale of securities in an effort to eliminate duplications in federal and state securities laws. The legislation has restricted the state's power to review registration of nation-wide securities offerings but brokers and dealers must still fulfill state notice and filing requirements and state regulators retain the ability to carry out investigations and to launch disciplinary action against fraud.

Common Securities Law

There is a substantial body of case law or decisions by judges that affect the securities industry in addition to the various federal and state regulations enforced by the SEC and state securities regulators. In some states, brokers are considered fiduciaries to their customers, meaning that they must act with prudence when it comes to the customers' finances. This includes thoroughly investigating each investment, maintaining records, seeking expert assistance in areas of uncertainty, and always acting in the customer's best interest and within the customer's financial scope.

Furthermore, common law fraud may apply; when and if a certain act does not fall under the scope of federal securities law, it may still be subject to the conditions of the common law. In addition, common law concepts of contract and negligence apply because each sale and purchase of a security is in effect a contract and transactions between market participants can involve negligence laws.

About James Seltzer

James Jay Seltzer is an attorney who practices Securities Law and Administrative Law in Emeryville, California and is the founder of The Law Offices of James Jay Seltzer that practices in California, the District of Columbia, and New York.