Federal Securities Laws: An Overview

Federal Securities Laws: An Overview

February 5, 2020
Federal Securities Laws: An Overview
Securities Act of 1933
implied private right of action, allowing injured plaintiffs to
The Securities Act of 1933 (Securities Act) governs the
sue persons who violate its requirements for damages.
process by which companies issue securities. The Act
prohibits any person from offering or selling a security to
Investment Company Act of 1940
the public unless the offering has been registered with the
The Investment Company Act of 1940 regulates issuers that
Securities and Exchange Commission (SEC) or falls under
engage primarily in investing, reinvesting, and trading in
an exemption. The Act’s exemptions include private
securities. Common examples of investment companies are
placements, certain small issues, and offerings involving
mutual funds and exchange-traded funds (ETFs). According
certain classes of securities (e.g., government securities and
to one estimate, investment companies registered in the
bank securities). If an exemption does not apply, an issuer
United States managed $21.4 trillion in net assets as of
must file a registration statement with the SEC that includes
2018. While these vehicles offer investors the benefits of
detailed information about the issuer’s business operations,
portfolio diversification and expert management, they were
financial condition, and the nature of the offering. If a
also the locus of a range of abusive practices during the
company issues securities in violation of the Act’s
1920s and 1930s, including misleading disclosures,
registration requirements, individuals who purchased the
management self-dealing, and embezzlement. To address
securities may sue the company to rescind their purchases
these problems, the Investment Company Act (1) requires
or for damages. The Act also allows purchasers to sue
investment companies to register with the SEC, subject to
issuers and other specified individuals—such as directors,
certain exceptions, (2) imposes disclosure requirements for
underwriters, and persons who signed the registration
the investment company and its investment policies, (3)
statement—for damages for certain material
prohibits many types of direct transactions between
misrepresentations or omissions in connection with the
investment companies and affiliated persons, (4) limits an
offering. The Trust Indenture Act of 1939 supplemented the
investment company’s ownership of shares of other
Securities Act by adding more requirements for public
investment companies, and (5) requires investment
offerings of debt securities.
companies to create shareholder-elected boards of directors
to police management conflicts of interest. Private funds,
Securities Exchange Act of 1934
such as hedge funds and private equity funds, typically fall
While the Securities Act governs primary offerings, the
within exceptions to the Act.
Securities Exchange Act of 1934 (Exchange Act) fosters
transparency and fairness in secondary securities markets.
Investment Advisers Act of 1940
The Act requires companies with securities traded on
The Investment Advisers Act of 1940 imposes a range of
national securities exchanges and companies with large
requirements on persons or firms in the business of advising
numbers of shareholders to register their securities with the
others about the value of securities or the advisability of
SEC and abide by a variety of reporting requirements. The
investing in securities. Under the Act and associated SEC
Act also regulates national securities exchanges, broker-
regulations, investment advisers are fiduciaries, meaning
dealers, and self-regulatory organizations (SROs); imposes
they must act in their clients’ best interests, fully disclose
certain requirements on tender offers (i.e., broad
any material conflicts of interest, seek best execution for
solicitations by a third party to purchase a substantial
client transactions, and have a reasonable basis for client
percentage of a company’s shares at a specified price, often
recommendations. The Act also requires investment
in an attempt to acquire the company); and governs proxy
advisers to register with the SEC, subject to certain
solicitation (i.e., the process by which a corporation’s
exceptions, and imposes certain disclosure obligations on
shareholders can authorize another party to vote their
registered advisers. Under the Dodd-Frank Wall Street
shares).
Reform and Consumer Protection Act’s amendments to the
Act and associated SEC regulations, investment advisers to
The Exchange Act also contains an important catch-all
many hedge funds and private equity funds must register
fraud provision. Section 10(b), as implemented by SEC
with the SEC.
Rule 10b-5, makes it unlawful to, “in connection with the
purchase or sale of any security,” make “any untrue
Foreign Corrupt Practices Act of 1977
statement of material fact” or to engage in fraudulent
Congress enacted the Foreign Corrupt Practices Act
schemes. Courts have held that Section 10(b) and Rule 10b-
(FCPA) in response to the SEC’s discovery that a large
5 apply to a wide range of fraudulent conduct, such as false
number of U.S. corporations had bribed foreign officials to
statements, insider trading, and market manipulation. The
secure business. The FCPA contains both anti-bribery and
Supreme Court has held that Section 10(b) contains an
accounting provisions. The anti-bribery provisions prohibit
making corrupt payments or giving anything of value to a
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Federal Securities Laws: An Overview
foreign official to obtain or retain business, and apply to
Investor Advocate, (2) established a whistleblower award
issuers, domestic concerns (i.e., U.S. persons and
program for reporting violations of the securities laws to the
businesses), and certain foreign nationals and entities who
SEC, (3) enhanced regulation of credit rating agencies, (4)
act in furtherance of a corrupt payment while in U.S.
required the sponsors of asset-backed securities to retain
territory. The FCPA’s accounting provisions require issuers
some credit risk of the assets they securitize, and (5)
to keep accurate books and records containing a reasonable
provided for additional disclosures about and shareholder
level of detail and to devise and maintain adequate internal
voting on executive compensation at public companies.
accounting controls. The accounting provisions aim to
ensure that corporations do not mischaracterize bribes in
Stop Trading on Congressional Knowledge Act of
their accounts or use corporate funds for improper
2012
purposes.
The Stop Trading on Congressional Knowledge Act of
2012 (STOCK Act) clarifies that federal insider trading
Private Securities Litigation Reform Act of 1995
laws apply to Members of Congress, congressional staff,
Congress enacted the Private Securities Litigation Reform
executive-branch employees, and judicial officers and
Act of 1995 (PSLRA) to minimize frivolous securities
employees. The Act explicitly provides that such persons
litigation. To that end, the PSLRA imposes more stringent
owe a duty to the U.S. government and citizens not to trade
pleading standards in certain private securities fraud
on material, nonpublic information acquired through their
actions, requires plaintiffs in such actions to prove that a
positions or from the performance of their official
defendant’s false statement or omission caused the loss for
responsibilities. The Act also directed relevant bodies
which they seek damages, and creates a safe harbor for
within the federal government to issue interpretive guidance
certain forward-looking statements by issuers, provided that
clarifying the prohibition on such officials’ use of
they include appropriate cautionary language. The PSLRA
nonpublic information for personal profit. The Act
also imposes a variety of procedural requirements in private
explicitly prohibits Members of Congress and certain other
securities class actions, including provisions relating to
government officials from acquiring securities in any IPO
class formation, discovery stays pending a motion to
in a manner unavailable to the public. Finally, the Act
dismiss, settlement approvals, and damages calculations. To
amended the Ethics in Government Act of 1978 to require
prevent plaintiffs from avoiding the PSLRA’s requirements
Members of Congress and certain executive-branch
by bringing their claims in state court rather than federal
officials to report securities transactions within 45 days.
court, Congress enacted the Securities Litigation Uniform
Standards Act of 1998 (SLUSA), and required securities
Jumpstart Our Business Startups Act of 2012
class actions meeting certain criteria to be brought in
Congress enacted the Jumpstart Our Business Startups Act
federal court, where they are governed by the PSLRA.
(JOBS Act) in 2012 to boost growth following the 2007–
2009 recession and in response to a decline in the number
Sarbanes-Oxley Act of 2002
of IPOs since the turn of the century. The JOBS Act allows
After accounting scandals at a number of major U.S.
certain small companies (known as “emerging growth
corporations in the early 2000s, Congress enacted the
companies”) to operate under reduced disclosure
Sarbanes-Oxley Act (SOX) in 2002. Under SOX and
requirements and exemptions from certain SOX
associated SEC regulations, a public company’s
requirements for five years or until they reach specified
management must assess and report on the company’s
financial milestones. The Act also created a registration
internal controls designed to ensure accurate financial
exemption for some companies that raise up to $1 million
disclosures. The Act also (1) requires the CEOs and CFOs
through “crowdfunding” and expanded preexisting
of public companies to certify that their annual and
exemptions in SEC Regulation A (relating to small issues)
quarterly reports do not contain material false statements or
and Regulation D (relating to private placements). Finally,
omissions, (2) prohibits public companies from exercising
the JOBS Act increased the number of shareholders who
improper influence over their auditors, (3) requires public
can invest in a private company before triggering
companies to disclose certain off-balance sheet activities,
registration and Exchange Act reporting requirements.
(4) requires public companies to establish procedures for
internal reporting of suspected abuses and complaints, and
CRS Related Products
(5) protects whistleblowers from various forms of
retaliatory action. Finally, the Act established the Public
CRS In Focus IF11062, Introduction to Financial Services: Capital
Company Accounting Oversight Board (PCAOB) to
Markets, by Eva Su
oversee the audits of public companies.
CRS Legal Sidebar LSB10293, Lies and Schemes: Supreme Court
Expands Securities Fraud Liability, by Jay B. Sykes
Dodd-Frank Wall Street Reform and Consumer
CRS Report R45163, Regulatory Reform 10 Years After the
Protection Act of 2010
Financial Crisis: Dodd-Frank and Securities Law, by Nicole Vanatko
The Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Dodd-Frank) effected a number of

significant financial regulatory changes in response to the
financial crisis of 2008. With respect to securities, Dodd-
Chris D. Linebaugh, Legislative Attorney
Frank brought security-based swap agreements under the
SEC’s jurisdiction. Additionally, Title IX of Dodd-Frank,
Jay B. Sykes, Legislative Attorney
also known as the Investor Protection and Securities
Nicole Vanatko, Legislative Attorney
Reform Act of 2010, (1) established the SEC’s Office of the
IF11422
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Federal Securities Laws: An Overview

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