Securities law (or Capital Markets law) is the group of laws and regulations that govern the issuance of securities. A security is a financial instrument usually designed to raise money for a business from investors in the business. Securities law dictates what a corporation has to do in order to offer their investment to the public. The laws exist in order to make sure that public investments are fair to everyone who might invest in the company.
What is a security?
A security is a financial investment. Usually, a corporation offers a security in order to raise capital for their business. A stock is an example of a security. Bonds, mortgages and loan packages may also be securities. Securities are a way of financing a business enterprise or making an investment in a business.
The investors who buy a security hope to profit from the transaction. The corporations who sell securities want to raise money. Securities are an important part of business. Security laws ensure that this aspect of business operates fairly to all involved in the buying and selling of securities. Most securities are public offerings, but a security may also be private with a limited group of investors.
Types of securities laws
The practice of securities law takes on several forms. The practice of securities law may be transactional and regulatory, or it may involve litigation:
- Administrative securities law – In addition to transactions, regulations and litigation, the practice of securities law may include an appearance in an administrative hearing. If the Securities and Exchange Commission (SEC) suspects non-compliance or fraud, they may bring a civil action to an administrative law judge within the SEC. The SEC judge is an independent judge who hears allegations of non-compliance with securities laws. Lawyers work to both pursue allegations of violations on behalf of the SEC as well as to defend against the allegations on behalf of corporations.
- Litigation securities law – When disputes arise in buying and selling securities, lawyers who practice securities law become litigators. They prepare filings for court. They participate in the traditional activities of litigation including discovery, motion practice and trial. Many litigation cases go to arbitration, so attorneys who practice securities law must be skilled in arbitration. Attorneys working in securities regulation may represent both corporations and investors. When an investor believes that a corporation has acted with fraud or has otherwise failed to comply with securities regulations, they may seek the help of a securities lawyer to help them pursue a remedy. In turn, corporations rely on attorneys to help them defend against allegations of fraud.
- Regulatory securities law – Regulatory securities law is helping a client comply with the myriad of state and federal regulations that apply to security offerings. Both before and after a business is offered to the public for investment, the business must comply with regulatory filings and mandatory information disclosures. They must prepare statements both quarterly and annually. Securities lawyers help their clients comply with the regulatory process by preparing and reviewing mandated disclosures.
- Transactional securities law – To offer a security, a corporation must prepare the investment for offering. Securities lawyers are transactional lawyers in that they advise their clients about how to make a public offering. They prepare documents and negotiate investments. Security law is business law. Security lawyers negotiate investment deals and prepare and review documents for their clients as part of the process of offering a public investment in a business.
Where do securities laws come from?
Lawmakers began to take an interest in securities legislation after the stock market crash of 1929. The lawmakers believed that some companies made big, inaccurate promises to potential purchasers about what they could make from various investments. Lawmakers thought it wasn’t fair to consumers to have so little information to make their decisions. Securities laws developed in order to regulate what information companies must provide when they offer a security for a public offering. That way, consumers have a reasonable opportunity to make an informed decision about whether to invest.
Securities laws are both state and federal laws
Corporations wanting to offer securities must comply with both state and federal regulations. Some laws, like the Securities Act of 1933 and the Securities Exchange Act of 1934, apply throughout the United States. Other laws apply to each state. One of the things that securities attorneys do for their clients is help them determine what laws and regulations apply to a public offering. Corporations must comply with both federal and state regulations.
Securities Act of 1933
– The Securities Exchange Act of 1933 requires corporations that sell investments to the public to register the investments with the SEC. The Act also calls for mandatory disclosures by the corporation that are meant to help consumers decide if they want to choose the investment.
Securities Exchange Act of 1934
– Stock exchanges and trading are regulated through the Securities Exchange Act of 1934. The Act doesn’t judge whether an investment is good. Instead, it only regulates what corporations must do in order to lawfully approach investors and exchange investments on a stock exchange. The Act gives private parties standing to bring a case if they suspect fraud on the part of those responsible for issuing a security.
National Securities Markets Improvement Act
– The National Securities Markets Improvement Act (NSMIA) is a 1996 update to already-existing securities laws. The goal of the NSMIA is to make securities laws more uniform.
State Securities Laws
– Often called Blue Sky Laws, many states don’t leave it to the federal government to regulate securities transactions. Existing state laws aim to deter fraud. Many state Blue Sky Laws require broker and dealer registration. They may also call for civil liability for law violations. Many states have adopted all or portions of the Uniform Securities Act.
The Securities and Exchange Commission
The Securities and Exchange Commission (SEC) is a federal government agency. There are five commissioners but hundreds of employees in offices in large cities throughout the United States. The SEC works to enforce securities regulations. They may bring civil enforcement proceedings, or they may refer cases to litigation through the U.S. Department of Justice.
Federal law calls for the five SEC commissioners to be from a mix of political parties so that no political party has sole control of SEC activities. In addition to criminal penalties for fraud, the SEC may also seek civil remedies that include license revocation, fines and injunctions. The SEC may issue subpoenas in order to conduct investigations to carry out their work.
Who practices securities law?
Securities lawyers are business lawyers. While they must also be skilled litigators, securities lawyers are transactional business lawyers first. They must understand complex regulations and financial matters. Most securities lawyers have a background in business and finance.
Many securities attorneys work for large law firms in major cities like New York and Washington DC. Because securities offerings are a complex process usually undertaken by businesses that are growing, security law work can be quite substantial and complex. Many securities lawyers team up to form large practices in order to have the resources and the knowledge base to help their clients navigate the transactional, regulatory, administrative and litigation aspects of securities law effectively. Very few securities attorneys work in small towns in solo practice. Rather, securities law is concentrated to big law firms in big cities.
Why Become a Securities Lawyer?
Lawyers who practice securities law are in demand for their niche mastery of a complex area of law. Securities law is not an area of law that an attorney can practice successfully without significant experience and specialized knowledge. Because of the complexity of this area of law, corporations routinely turn to experienced counsel to meet their needs for securities regulation, compliance and litigation.
In addition, securities law provides ongoing work. Even after a public offering is complete, security law work isn’t done. The corporation must provide timely disclosures on an ongoing basis. They must respond to allegations of wrongdoing. Practicing security law allows an attorney to build a client base that may last throughout a career.
Helping business do business with securities law
Securities laws are complex. A securities lawyer is a trusted advocate for the clients they serve. Working on behalf of corporations, private entities and for the government, securities lawyers play an important role in ensuring that business is conducted with a level playing field. Securities lawyers have the opportunity to do their part to make business investments fair, transparent and beneficial to all involved.