Securities Regulation Outline - Rose

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Securities Regulation – Spring 2012 (Rose) Outline
Class 1 Slides

Federal Securities Regulation Seeks to:
1.Increase the amount of information available to investors about issuers through mandatory disclosure rules; and 2.To deter fraud (so the information disclosed is credible).

Ultimate Goal: The accurate pricing of securities, which is essential to a well-functioning economy. How Securities Differ
Importance of capital markets to society
Importance of investment decisions to individuals
Heightened concerns about irrationality
Heightened informational asymmetries due to intangibility
Collective action problems
Type of SecurityCash Flow RightsLiquidation RightsVoting Rights Common Stock (equity) jrResidual and discretionary dividendResidualYes Preferred Stock (equity)Fixed and discretionary div. (cumulates if not paid)MediumContingent Bonds (debt) srFixed and Certain interest paymentsHighestNone Capital Markets Overview

Terminology
oPrimary Market: Issuer -- Investor
Governed primarily by Securities Act of 1933
Private placements
Issue or sale of securities that are not a public offerings •Doesn't require as much disclosure
IPOs
First time a company achieves public company status
Seasoned public offerings
Other offerings
Major players
Broker-Dealers
Underwriters
Typically in IPO buy stock from issuer and sell it to the public at a higher price (the difference = compensation) •Offer advice on how to price the securities and promote them Attorneys
Accounting Firms
Audit financial statements
Lend reputational capital
Institutional Investors
Participate in IPOs
e.g., insurance companies, mutual funds, public pension funds
oSecondary Market: Investor -- Investor
Governed primarily by Securities Act of 1934
Volume of shares: secondary distribution
Plays out in national securities exchanges
e.g., NYSE, AMEX, NASDAQ
Provide important function
Provide liquidity of cap markets
Price transparency
Also plays out in the OTC markets (over the counter)
Not subject to same regulation as national securities exchanges More risk involved
And ECNs
Cut out the middle men and links up electronically people who want to trade securities oSRO: Self-Regulatory Organization
Recognized by SEC and subject to its oversight
e.g. FINRA (prim. regulatory authority over brokered deals), NYSE

CLASS 3 SLIDES
‘33 Act § 2(a)(1): Unless the context otherwise requires... The term "security" means any note, stock, treasury stock, security future, 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 on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest 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. [The definition in § 3(a)(10) of the ‘34 Act is similar.]

§ 2(a)(1) Categories of Securities Instruments commonly known as securities E.g., stocks, bonds
Instruments specified by the Act to be securities
E.g., fractional undivided interest in oil, gas, or other mineral rights Broad, catch-all phrase “investment contract”
Courts determine whether financial instrument is a security

What’s (Potentially) At Stake
Mandatory...
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