Securities Markets Regulation: Part 1

We all know about the Recession of 2008/2009 that impacted the economy and the financial health of the nation, but do you know why it happened? Long story short, mortgage loans were given out like lollypops at banks to people who did not have the means to repay them and many people defaulted on their loans. This lead to a huge deficit and prompted the government to enforce new laws and regulations for mortgage loans. Unfortunately, this is normally how new laws arise; from a crisis rather than from a preventive standpoint.

There are 2 bases of financial regulations:

  1. Disclosure (having all information known) so investors can make decisions
  2. Prevent fraud and market manipulation

These bases promote fair market practices that encourage investment.

Securities were once governed by the states in the early 1900s, which unfortunately lead to fraud and the establishment of the Blue Sky Laws (law preventing companies from selling a piece of the “blue sky”). The Great Depression of 1929 caused the establishment of Federal Regulation. The Securities Act of 1933 governed the issuing of new securities and the Securities Exchange Act of 1934 governed existing securities, required all issuing companies to file financial statements and disclose full information, and lead to the formation of the Securities and Exchange Commission (SEC)

The SEC protects investors, facilitates capital formation, and maintains fair, orderly and efficient markets. It also enforces the federal securities laws, requires companies to register their securities with the SEC and requires companies to provide full disclosure of information. If the SEC thinks something is in violation of it’s regulations or there is a problem maintaining an orderly market, it has the power to suspend trading. However, the SEC does NOT protect investors from losses from their investments.

The Full Disclosure Documents required from companies by the SEC include:

  • 10-Q: quarterly financial reports. These aren’t audited.
  • 10-K: annual, audited financials. Includes the 4 main financial statements: Balance Sheet, Income Statement, Statement of Shareholder Equity, and Cash Flows Statement
  • 13-D: alerts investors of possible takeover-reports anyone acquiring 5% or more of the company
  • 8-K: Interim material events. Filed in case of events that happen in the middle of the quarter that could have a material effect on the stock price.

Lastly for this week, we’ll briefly cover Insider Trading, which is the use of material/non-public information to profit from investments. This is highly illegal and can result in jail time (CC: Martha Stewart (went to jail because she lied to investigators in insider trader case), Enron executives, etc.). You do not have to be an employee of a company to be considered an insider. An insider can be anyone in possession of information that could affect the stock price. Due to Insider Trading laws, employees of a company selling investments have to wait a certain amount of days after news is made public before they can buy any of the company’s investments.

Regulations are needed to make securities markets a fair place to invest for everyone. We’ll discuss a few more regulations and the sale of new securities on next week’s #FinanceFriday. Don’t forget to comment below and hit me up on Twitter or Facebook. Happy Investing!

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