Order Code RS22581
January 25, 2007
Overview of Major Federal Securities Laws
Michael V. Seitzinger
American Law Division
The major federal securities laws may be grouped into two categories according to
the time of their passage: the acts passed in the wake of the stock market crash of 1929
and the acts passed later in the twentieth century and in 2002. The acts in the first group
include the most important of the federal securities acts: the Securities Act of 1933,
which concerns the initial registration of securities, and the Securities Exchange Act of
1934, which requires ongoing disclosure reports. The acts in the second group include
laws which specifically prohibit insider trading, restrict the bringing of shareholder
derivative suits, and require additional reporting by officers and directors. This report
will be updated as warranted.
The major federal securities laws which form the basis for the regulation of securities
in the United States were enacted in the wake of the stock market crash of 1929. These
acts include the Securities Act of 1933,1 the Securities Exchange Act of 1934,2 the
Investment Company Act of 1940,3 and the Investment Advisers Act of 1940.4 Other
important securities acts were passed late in the twentieth century and in 2002. These acts
include the Insider Trading Sanctions Act of 1984,5 the Insider Trading and Securities
Fraud Enforcement Act of 1988,6 the Private Securities Litigation Reform Act of 1995,7
15 U.S.C. §§ 77a et seq.
15 U.S.C. §§ 78a et seq.
15 U.S.C. §§ 80a-1 et seq.
15 U.S.C. §§ 80b-1 et seq.
P.L. 98-376, codified in a number of provisions of 15 U.S.C. §§ 78a et seq.
P.L. 100-704, codified in a number of provisions of 15 U.S.C. §§ 78a et seq.
P.L. 104-67, codified in a number of provisions of 15 U.S.C. §§ 78a et seq.
the Securities Litigation Uniform Standards Act of 1998,8 and the Sarbanes-Oxley Act of
Securities Act of 1933. The Securities Act of 1933 makes it illegal to offer or
sell securities10 to the public unless they have been registered with the Securities and
Exchange Commission (SEC or Commission).11 A registration statement becomes
effective twenty days after it is filed with the Commission, unless it is delayed or
suspended.12 Registration under the 1933 Act covers only the securities actually being
offered and only for the purposes of the offering in the registration statement. The
registration statement consists of two parts: the prospectus, which must be provided to
every purchaser of the securities, and Part II, which contains information and exhibits
which do not have to be provided to purchasers but which are available for inspection by
the public at the Commission. Section 7 of the 1933 Act,13 referring to Schedule A,14 sets
forth the information which must be contained in the registration statement. This
schedule requires a great deal of information, such as the underwriters, the specific type
of business, significant shareholders, debt and assets of the company, and opinions as to
the legality of the issue. Section 10(a) of the 1933 Act specifies the information which
the prospectus must contain.15 There are also numerous regulations issued by the
Commission which provide further details about the registration process under the 1933
Certain transactions and securities are exempted from the registration process. The
exempted transactions include private placements, intrastate offerings, and small
offerings.17 Among the exempted securities are government securities, bank securities,
P.L. 105-353, codified in a number of provisions of 15 U.S.C. §§ 78a et seq.
P.L. 107-204, codified in a number of provisions of 15 U.S.C. §§ 78a et seq.
The term “security” is defined very broadly in 15 U.S.C. section 77b(1) as:
any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate
of interest or participation in any profit-sharing agreement, collateral-trust certificate,
preorganization certificate or subscription, transferable share, investment contract,
voting-trust certificate, certificate of deposit for a security, fractional undivided
interest in oil, gas, or other mineral rights, any put, call straddle, option, or privilege
entered into on a national securities exchange relating to foreign currency, or, in
general, any instrument or instrument commonly known as a “security”, or any
certificate of interest or participation in, temporary or interim certificate for, receipt
for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
15 U.S.C. § 77e.
15 U.S.C. § 77h(a).
15 U.S.C. § 77g.
15 U.S.C. § 77aa.
15 U.S.C. § 77j(a).
See, e.g., 17 C.F.R. Parts 230, 231, and 239.
15 U.S.C. § 77d.
and short-term commercial paper, all securities for which it is believed that other,
adequate means of government regulation exist.18
Securities Exchange Act of 1934. The Securities Exchange Act of 1934 is
concerned with many different areas, one of which is the ongoing process of disclosure
to the investing public through the filing of periodic and updated reports with the
Commission.19 Any issuer which has a class of securities traded on a national securities
exchange or, in certain circumstances, has total assets exceeding $1,000,000 and a class
of equity securities with at least 500 shareholders must register under the 1934 Act with
the SEC.20 Every issuer which must register under the 1934 Act must file periodic and
other reports with the SEC.21 Section 1222 requires the filing of a detailed statement about
the company when the company first registers under the 1934 Act. Section 1323 requires
a registered company to file annual and quarterly reports with the SEC. These reports
must contain essentially all material information, financial and otherwise, about the
company which the investing public would need in making a decision about whether to
invest in the company. Section 1424 contains information about proxy solicitation. Some
exemptions from these reporting requirements are provided.25 The Commission has
issued extensive regulations to specify information which these reports must provide.26
Failure to disclose material information is actionable. For example, section 18(a) of
the Securities Exchange Act27 grants an express private right of action to investors who
have been injured by reliance upon material misstatements or omissions of facts in reports
which have been filed with the SEC. Section 10(b) of the 1934 Act,28 the general
antifraud provision, and Rule 10b-5,29 issued by the SEC to carry out the statutory fraud
prohibition, provide for a cause of action for injuries which have been caused by
omissions, misrepresentations, or manipulations of material facts in statements other than
those filed in documents with the SEC.30
15 U.S.C. § 77c.
15 U.S.C. § 78m.
15 U.S.C. § 78l. As stated earlier, the 1933 Act requires the registration of a particular offering
of securities. The 1934 Act requires the registration of a class of securities.
15 U.S.C. §§ 78l, 78m, and 78n.
15 U.S.C. § 78l.
15 U.S.C. § 78m.
15 U.S.C. § 78n.
15 U.S.C. § 78l.
See, e.g., 17 C.F.R. Parts 240, 241, and 249.
15 U.S.C. § 78r(a).
15 U.S.C. § 78j(b).
17 C.F.R. § 240.10b-5.
See, e.g., State Teachers Retirement Board v. Fluor Corp., 654 F.2d 843 (2d Cir. 1981), and
Goldberg v. Meridor, 567 F.2d 209 (2d Cir. 1977).
Investment Company Act of 1940. The Investment Company Act of 1940 was
enacted to protect investors who use others to manage and diversify their investments.
An investment company which meets the statutory definition of “investment company”31
and which is not exempted from the act32 must register with the SEC and file specified
information.33 Unless the investment company complies with the provisions of the act,
it cannot participate in certain activities involving securities.34 Various affiliations and
interests of directors, officers, and employees of investment companies are
circumscribed.35 For example, an investment company cannot have a board of directors
with more than 60% of the members considered interested persons of the company.36
Registered investment companies must file specified reports and financial statements.37
Investment Advisers Act of 1940. The Investment Advisers Act of 1940
defines an investment adviser as any person who for compensation advises others as to
the value of securities or as to the advisability of investing in, purchasing, or selling
securities or who for compensation analyzes securities.38 Unless registered with the SEC,
it is unlawful for any investment adviser to make use of the mails or any means or
instrumentality of interstate commerce in connection with his business as an investment
adviser.39 An investment adviser may be registered by filing specified information with
Insider Trading Sanctions Act of 1984 and Insider Trading and
Securities Fraud Enforcement Act of 1988. The Insider Trading Sanctions Act of
1984 was enacted because of the belief that
[i]nsider trading threatens...markets by undermining the public’s expectations of
honest and fair securities markets where all participants play by the same rules. This
legislation provides increased sanctions against insider trading in order to increase
deterrence of violations.
“Insider trading” is the term used to refer to trading in the securities markets while in
possession of “material” information (generally, information that would be important
to an investor in making a decision to buy or sell a security) that is not available to the
15 U.S.C. § 80a-3(a).
Exemptions may be found at 15 U.S.C. § 80a-3(b) and (c).
15 U.S.C. §§ 80a-7 and 80a-8.
15 U.S.C. § 80a-7(a), (b), and (c).
15 U.S.C. § 80a-10.
15 U.S.C. § 80a-10(a).
15 U.S.C. § 80a-29.
15 U.S.C. § 80b-2(11).
15 U.S.C. § 80b-3(a).
15 U.S.C. § 80b-3(c).
H.Rept. 98-355, at 2 (1984).
The act provides that, if the Commission believes that any person has bought or sold
a security while in possession of material nonpublic information, the commission may
bring an action in United States district court to seek a civil penalty. The penalty may be
up to three times the profit gained or loss avoided.42
After a number of hearings and considerable debate in the 100th Congress, the
President signed the Insider Trading and Securities Fraud Enforcement Act of 1988 (P.L.
100-704). This act expanded the scope of civil penalties to control persons who fail to
take adequate steps to prevent insider trading; increased the maximum jail terms for
criminal securities law violations
from five years to ten years, with
fines for individuals to be increased from $100,000 to $1,000,000 and for corporate
persons from $500,000 to $2,500,000
; initiated a bounty program giving the SEC
discretion to reward informants who provide assistance to the agency; and required
broker-dealers and investment advisers to establish and enforce written policies
reasonably designed to prevent the misuse of inside information.
Private Securities Litigation Reform Act of 1995
The Private Securities
Litigation Reform Act of 1995 was enacted to address the perceived problem of an
increase in frivolous shareholder lawsuits. The stated reasons for bringing these lawsuits
fraud, mismanagement, nondisclosure of material information
practically all of the lawsuits involved the loss of money by shareholders of the
corporation. Some of the lawsuits had merit because some corporate managers had,
according to proponents, misled or defrauded investors. However, some of the lawsuits
were deemed frivolous and were brought when, for example, the share value of the stock
of a corporation went down for reasons having nothing to do with the culpability of
The act limits shareholder lawsuits in federal courts by such actions as having the
court appoint a lead plaintiff determined to be the most capable of adequately representing
the interests of class members, prohibiting a person from being a lead plaintiff in any
more than five class actions in a three-year period, guaranteeing that plaintiffs receive full
disclosure of settlement terms
, eliminating coverage of securities fraud by the Racketeer
Influenced and Corrupt Organizations Act
, providing a safe harbor for forward-looking
statements, providing for proportionate liability, and providing for auditor disclosure of
Securities Litigation Uniform Standards Act of 1998
Litigation Uniform Standards Act of 1998 (SLUSA) was enacted in response to the
perceived failure of the Private Securities Litigation Reform Act of 1995 (PSLRA) to curb
alleged abuses of securities fraud litigation. PSLRA had set out a framework for
securities fraud cases in federal courts. In many instances, plaintiffs
circumvented PSLRA by bringing cases in state courts on the basis of common law fraud
or other non-federal claims.
SLUSA attempted to make certain that plaintiffs could not avoid the PSLRA
requirements by allowing a securities fraud case to be brought only in a federal court and
only under a uniform standard if five criteria are satisfied: (1) The lawsuit is a covered
15 U.S.C. § 78u-1(a)(2).
class action; (2) The claim is based on state statutory or common law; (3) The claim
concerns a covered security; (4) The plaintiff alleges a misrepresentation or omission of
a material fact; and (5) The misrepresentation or omission is made in connection with the
purchase or sale of a covered security.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 had its genesis
early in 2002 after the declared bankruptcy of the Enron Corporation, but for some time
it appeared as though its impetus had slowed. However, when the WorldCom scandal
became known in late June
Congress showed renewed interest in enacting stiffer
corporate responsibility legislation, and Sarbanes-Oxley quickly became law.
The act establishes a Public Company Accounting Oversight Board, which is
supervised by the SEC. The act restricts accounting firms from performing a number of
other services for the companies
they audit. The act also requires additional
disclosures for public companies and the officers and directors of those companies.
Among the other issues affected by Sarbanes-Oxley are securities fraud, internal
assessment of management controls of the covered corporation, criminal and civil
penalties for violating the securities laws and other laws, blackouts for insider trades of
pension fund shares, and protections for corporate whistleblowers.