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ECU FINA 2244 - Chapter 18 Outline

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Chapter 18Securities RegulationI. Elements of Securities Pg. 490-491A. The SEC—Securities and Exchange CommissionsB. Definition of Security: Federal agency in charge of administering and enforcing federal securities law. Notes, stocks, bonds, treasury stocks. Looks to the economic reality of the transaction to see if it qualities as a security.1. 1933 Securities Act definition 2. Howey test – four elements: investment of money in a common enterprise with an expectation of profit generated by the efforts of persons other than the investors. Pg. 492C. Securities Exempt From Regulation: Debt issued by the state, federal and local local government Insurance, and annuity contracts Pg. 493D. State Securities Law – Blue sky laws, efforts to prevent schemes that have nothing backing them. Latte: NCII. Offering to InvestorsA. “truth in securities” Disclosure of materials information by a seller to prospective investors before a security is sold Pg. 4931. Disclosure2. of material information—Relevant information an investor would like to knowB. The Registration Statement Pg. 4951. The prospectus/Schedule A: Ordinary investors and discusses thesecurity issuers finances and business, purpose for their offering, risks involved, experience and compensation, plans for the raisedfunds, financial statements provided by accountants2. Regulation S-K: More detailed, meant for investment analysts and SCC,3. Review by the SEC: To make sure disclosure is adequate and clear, does not review on merits on whether it is bad or good Pg. 4964. Cost of registration: Costly, hire attorneys and accountants, to make sure it is done correctly III. Securities Fraud Pg. 500A. Basis for Securities Fraud1. Section 11 – misstatements - misleading statements or material omissions and registration materials 2. Rule 10b-5: 1934 Securities Act which regulates trading of securities, it is unlawful to employ any device, scheme to defraud, to make untrue statements of material factB. Liability for Securities Law Violations Pg. 5011. Parties subject to suit: Directors of the Company, CEO, CFO, CAO, Accountants lawyers sand other experts 2. SEC action: Becomes public and to parties involved, injury to financial reputation can be costly if accused of security law violationsC. Liability for misstatements Pg. 5011. Safe harbor: Security Litigations Reform Act of 1995—Protects companies from liability for incorrect predicitons about profits and success. Must be accompanied with meaningful statements. Make predictions with disclaimers. Securities Litigation Uniform2. Federal exclusivity: Standard Act of 1998—Security suits with nationally traded securities must be brought to federal courts under federal law with federal jurisdiction Pg. 5023. City of Livonia: Must show the defendant knew his predictions were false with bad intent 4. Sarbanes-Oxley Act requirements: CEO and CFO of publicly traded companies must certify that financial reports made to SCCcomply with SCC ruled and the information is accurate. Knowing the statements is a criminal offense Pg. 503D. Insider Trading Pg. 5041. Definition: Buying or selling stock by people who have access toinformation affecting the stock value. Information not yet revealed to the public 10b-52. SEC prosecution: 10b-5 can prosecute an insider trader for use and passing on the information3. Supreme Court interpretationa. Chiarella: Newspaper b. Dirks 4. SEC v. Ginsburg: Family relatives investing in stock5. The Insider Trading Sanctions Act Pg. 506a. Damages: Triple damages on loss avoided or gainb. fines/prison terms: $1 million or 10 years in prisonc. bounties: 10% received by the government IV. The Investment Company Act Pg. 507A. Purpose of Act: Give the SCC control over investment companies.B. Regulation of Investment Companies: Invests and trades in management companies and mutual funds. Pg. 5081. Registration: Required, must state investment companies2. Reporting: Annual reporting 3. Limiting conflicts of interest: 74% of the company must be outsidersV. Investment Advisers Act Pg. 508A. Investment Advisers Act1. Definition of adviser: Gives advice about investing or purchasing securities for compensation. Must be registered with SEC2. Other securities professionalsi. Broker: Transaction of securities for othersii. Dealer: Buy and sell securities for their own account3. Responsibilities to clients: Fiduciary Responsibilities, loyalty. SEC limiting conflicts on interest and illegal practices4. Illegal practices Pg. 509i. Churning: Broker buys and sells and excessiveamount of stock to make money from commissionii. Scalping: Buying personal stock for benefit and urges investors to buy for personal benefit of the professional from price


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