Question

Federal security laws are based on the assumption that, as long as the issuer provides adequate disclosure, investors are knowledgeable enough to assess the quality of a stock. Many states take a different approach--they refuse to permit the sale of securities that they deem to be of poor quality. Should securities laws protect investors in this way?

Answer 1

The Securities Exchange Act of 1934 also regulates officers, directors, and principal share holders in an attempt to maintain fair and honest markets. The Act requires that issuers, subject to certain exemptions, register with the SEC if they want to have their securities traded on a national exchange. Issuers of securities registered under the 1934 Act must file various reports with the SEC in order to provide the public with adequate information about companies with publicly traded stocks. The 1934 Act also regulates proxy solicitation and requires that certain information be given to a corporation's shareholders as a prerequisite to soliciting votes. The 1934 Act permits the SEC to promulgate rules and regulations to protect the public and investors by prohibiting manipulative and deceptive devices and contrivances via the mail system or other means of interstate commerce. Section 10(b) deals with trading fraud, and section 10(b)-5 protects against insider trading. Under 10(b), non-government plaintiffs can bring a private cause of action against perpetrators of securities fraud that directly caused the plaintiff financial injury.

Then, needing an agency to enforce those regulations, Congress established the Securities Exchange Act of 1934, which created the SEC. Since then, Congress has charged the SEC with administering federal securities laws. The 1933 Act's registration requirements aimed to enable purchasers to make reasoned decisions by requiring companies to provide reliable information