BU315 - Ch. 16 Regulation of Securities, Corporate Governance, and Financial Markets

Securities law

The body of federal and state laws governing the issuance and trading of equity and debt instruments to public investors.

Equity

Ownership interest in a corporation whereby financial return on the investment is based primarily on the performance of the venture.

Debt

A common tool for raising capital; includes promissory notes, bonds, and debentures that offer investors a fixed rate of return, regardless of the profitability of the corporation, and repayment after a certain period of years. Debt is senior in priority to equity instruments.

Common stock (common shares)

A form of equity instrument that entitles the equity owner to payments based on the current profitability of the company.

Preferred stock

A form of equity instrument that has less risk than common stock because it has certain quasi-debt features. Preferred stockholders have preference rights over common stockholders in receiving dividends from the corporation.

Disclosure

The process in which companies are to release all information, positive or negative, that might bear on an investment decision; serves as the underlying premise of all securities regulation and is required by the Securities and Exchange Commission to protect investors and ensure public confidence in the integrity of the securities market.

Securities and Exchange Commission (SEC)

The independent federal administrative agency charged with rulemaking, enforcement, and adjudication of federal securities laws.

EDGAR

The SEC’s primary online filing and public database system; Electronic Data Gathering, Analysis, and Retrieval

Securities Act of 1933

Federal legislation that covers the processes of issuing and reissuing securities to the public; requires registration and certain disclosures and authorizes the Securities and Exchange Commission to oversee the transactions.

Prospectus

The first part of the security registration statement prescribed by Securities and Exchange Commission regulations; intended to give investors a realistic view of the issuer’s business, risk factors, financial position, financial statements, and disclosures concerning directors, officers, and controlling shareholders.

Exemptions

For smaller issuers of securities, types of offerings or transactions in selling a security that are not subject to certain Securities and Exchange Commission regulations on registration; intended to assist business ventures seeking smaller amounts of capital from the public investment community.

Regulation D

A securities law provision that exempts an issuer from registration on the basis of certain transactions; applies to limited offers that involve a relatively small amount of money or offers that are made in a limited manner.

Private placement

A securities law provision that exempts an issuer from registration when the issuer accepts investments only from those who meet the standards for accredited investors.

Private Securities Litigation Reform Act of 1995 (PSLRA)

Federal legislation making it more difficult to pursue litigation under the securities laws that is based solely on commentary by company executives; intended to protect publicly held companies from frivolous litigation.

Securities Exchange Act of 1934

Federal legislation that regulates the sale of securities between investors after an investor has purchased them from a business entity issuer.

Insider trading

Illegal securities trading in which a corporate insider uses information not available to the general investor public as the basis for trades in the company’s stock.

Insider Trading and Securities Fraud Enforcement Act

Federal legislation passed in 1988 that raised the criminal and civil penalties for insider trading, increased the liability of brokerage firms for wrongful acts of their employees, and gave the Securities and Exchange Commission more power to pursue violations of insider trading.

Section 16

Provision of the Securities Exchange Act of 1934 that imposes restrictions and reporting requirements on ownership positions and stock trades made by certain corporate insiders named in the statute.

Scienter

Specific intent to deceive, manipulate, or defraud.

Securities Litigation Uniform Standards Act of 1998

An amendment to the Securities Exchange Act of 1934 that prevents private parties from instituting certain lawsuits in federal or state court that are based on the statutory or common law of any state that punishes “a misrepresentation or omission of a material fact” or the use of “any manipulative device or contrivance” concerning the purchase or sale of a covered security.

Blue-sky laws

State securities laws intended to cover purely intrastate securities offerings.

Corporate governance

The process used by corporate officers and directors to establish lines of responsibility, approval, and oversight among key stakeholders and set out rules for making corporate decisions.

Sarbanes–Oxley (SOX) Act of 2002

Amendments to the 1933 and 1934 Securities Acts that impose stricter regulation and controls on how corporations do business, through regulation of auditing, financial reporting, and internal corporate governance.

American Recovery and Reinvestment Act of 2009

Federal legislation that created a loan program and underlying mandates for corporations most acutely impacted by the financial crisis that began in 2008; also established the Troubled Assets Relief Program (TARP) to administer the loans.

Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010

Federal legislation designed to overhaul the regulation of U.S. financial services and markets.