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The Securities and Exchange Act of 1934, also known as the Exchange Act, is a federal law that regulates the trading of securities in the secondary market. This law primarily governs transactions between parties that are not the original issuer, such as trades made by retail investors through brokerage companies.
To protect investors, the Exchange Act requires companies to disclose information that investors would find pertinent to making investment decisions. This mandatory disclosure process is designed to ensure that companies provide accurate and complete information to investors. The Act also regulates the exchanges on which securities are sold.
Companies with registered publicly held securities and companies of a certain size are called "reporting companies" and must make periodic disclosures by filing annual reports (Form 10-K) and quarterly reports (Form 10-Q). Reporting companies must also promptly disclose certain important events (Form 8-K). These reports include information about the company's officers and directors, the company's line of business, audited financial statements, and the management discussion and analysis section.
The Exchange Act requires disclosure of important information by anyone seeking to acquire more than 5 percent of a company's securities by direct purchase or tender offer. Such an offer often is extended in an effort to gain control of the company. If a party makes a tender offer, the Williams Act governs. The Williams Act requires the tender offeror to file disclosure documents with the SEC that disclose its future plans relating to its holdings in the company. This information allows investors to decide whether to sell or not.
The Securities and Exchange Commission (SEC) is the federal agency responsible for enforcing securities laws. The SEC ensures that companies meet the Exchange Act's disclosure requirements and registers and establishes rules regulating the conduct of market participants, stock exchanges, and self-regulatory organizations (SROs). The SEC can sanction, fine, or otherwise discipline market participants who violate federal securities laws.
The Exchange Act prohibits fraud and establishes severe penalties for those who defraud investors, as well as those who engage in some trading practices that take advantage of information most investors do not have (such as insider trading). The SEC can bring a civil enforcement action or criminal action for violations. Investors can also sue market participants who have defrauded them.
Section 10(b) is the primary anti-fraud statutory provision. The SEC primarily enforces this anti-fraud provision under Rule 10b-5, which prohibits the use of any "device, scheme, or artifice to defraud." Rule 10b-5 also imposes liability for any misstatement or omission of a material fact, or one that investors would think was important to their decision to buy or sell a security. Courts have held that there is a private right of action to sue under 10b-5.
Section 9 allows investors to sue for trading activities and patterns of trading conduct that mislead investors about the true value of a security, inducing them to trade. Claims under Section 9 are difficult to prove, since investors must show that the price was actually affected by the manipulation, and that the defendant acted willfully.
Section 20 provides for joint and several liability for people who control or abet violators of the Exchange Act, increasing the chance that an investor will be able to collect any damages that are awarded.
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