Securities Litigation

The PSLRA further prescribes guidelines for early notice to class members of the appointment of the lead plaintiff.  The PSLRA requires the court to adopt a rebuttable presumption that the most adequate plaintiff is the person with the largest financial interest in the relief sought by the class and declares that a person may be a lead plaintiff (or an officer, director, or fiduciary of a lead plaintiff) in no more than five securities class actions brought as plaintiff class actions during any three-year period.

The PSLRA prohibits settlements under seal except in limited circumstances. It mandates disclosure of settlement terms to class members. It further requires the court to determine whether an interest on the part of plaintiff's counsel in the securities that are the subject of the litigation constitutes a conflict of interest sufficient to disqualify the attorney from representing the party; provides for: (1) a stay of discovery during the pendency of any motion to dismiss; and (2) preservation of the evidence during the pendency of any stay of discovery; mandates court review, upon final adjudication of an action, of the parties' compliance with certain Rules of Civil Procedure and sets forth a rebuttable presumption in favor of award of attorney's fees and costs to opposing counsel by the party in violation of such Rules; establishes each defendant's right to written interrogatories to the jury on the issue of the defendant's particular state of mind with respect to specified alleged violations; and amends the SEA to authorize the court to require security for payment of class action costs.

The PSLRA also limits damages, where the plaintiff seeks to establish them by reference to the market price of a security, to the difference between the purchase or sale price paid or received by the plaintiff, as appropriate, and the mean trading price of the security during the 90-day period beginning on the date on which the information correcting the misstatement or omission that is the basis for the action is disseminated to the market.

Securities Act of 1933 - Often referred to as the "truth in securities" law, the Securities Act of 1933 has two basic objectives:

First to require that investors receive financial and other significant information concerning securities being offered for public sale; and

Second to prohibit deceit, misrepresentations, and other fraud in the sale of securities.

The full text of this Act is available at: http://www.sec.gov/about/laws/sa33.pdf.

Purpose of Registration

A primary means of accomplishing these goals is the disclosure of important financial information through the registration of securities. This information enables investors, not the government, to make informed judgments about whether to purchase a company's securities. While the SEC requires that the information provided be accurate, it does not guarantee it. Investors who purchase securities and suffer losses have important recovery rights if they can prove that there was incomplete or inaccurate disclosure of important information.

The Registration Process

In general, securities sold in the U.S. must be registered. The registration forms companies file provide essential facts while minimizing the burden and expense of complying with the law. In general, registration forms call for:

a description of the company's properties and business;

a description of the security to be offered for sale;

information about the management of the company; and

financial statements certified by independent accountants.

Registration statements and prospectuses become public shortly after filing with the SEC. If filed by U.S. domestic companies, the statements are available on the EDGAR database at www.sec.gov. Registration statements are subject to examination for compliance with disclosure requirements.

Not all offerings of securities must be registered with the Commission. Some exemptions from the registration requirement include: private offerings to a limited number of persons or institutions; offerings of limited size; intrastate offerings; and securities of municipal, state, and federal governments.

By exempting many small offerings from the registration process, the SEC seeks to foster capital formation by lowering the cost of offering securities to the public.

Securities Exchange Act of 1934- With this Act, Congress created the Securities and Exchange Commission. The Act empowers the SEC with broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as the nation's securities self regulatory organizations (SROs). The various securities exchanges, such as the New York Stock Exchange, the NASDAQ Stock Market, and the Chicago Board of Options are SROs. The Financial Industry Regulatory Authority (FINRA) is also an SRO.

The Act also identifies and prohibits certain types of conduct in the markets and provides the Commission with disciplinary powers over regulated entities and persons associated with them.

The Act also empowers the SEC to require periodic reporting of information by companies with publicly traded securities.

The full text of this Act can be read at: http://www.sec.gov/about/laws/sea34.pdf.

Corporate Reporting

Companies with more than $10 million in assets whose securities are held by more than 500 owners must file annual and other periodic reports. These reports are available to the public through the SEC's EDGAR database and often on the websites of the reporting companies as well.

Proxy Solicitations

The Securities Exchange Act also governs the disclosure in materials used to solicit shareholders' votes in annual or special meetings held for the election of directors and the approval of other corporate action. This information, contained in proxy materials, must be filed with the Commission in advance of any solicitation to ensure compliance with the disclosure rules. Solicitations, whether by management or shareholder groups, must disclose all important facts concerning the issues on which holders are asked to vote.

Tender Offers

The Securities 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.  As with the proxy rules, this allows shareholders to make informed decisions on these critical corporate events.

Insider Trading

The securities laws broadly prohibit fraudulent activities of any kind in connection with the offer, purchase, or sale of securities. These provisions are the basis for many types of disciplinary actions, including actions against fraudulent insider trading. Insider trading is illegal when a person trades a security while in possession of material nonpublic information in violation of a duty to withhold the information or refrain from trading.

Registration of Exchanges, Associations, and Others

The Act requires a variety of market participants to register with the Commission, including exchanges, brokers and dealers, transfer agents, and clearing agencies. Registration for these organizations involves filing disclosure documents that are updated on a regular basis.

The exchanges and the Financial Industry Regulatory Authority (FINRA) are identified as self-regulatory organizations (SRO). SROs must create rules that allow for disciplining members for improper conduct and for establishing measures to ensure market integrity and investor protection. SRO proposed rules are subject to SEC review and published to solicit public comment. While many SRO proposed rules are effective upon filing, some are subject to SEC approval before they can go into effect.

Trust Indenture Act of 1939

This Act applies to debt securities such as bonds, debentures, and notes that are offered for public sale. Even though such securities may be registered under the Securities Act, they may not be offered for sale to the public unless a formal agreement between the issuer of bonds and the bondholder, known as the trust indenture, conforms to the standards of this Act.

The full text of this Act is available at:  http://www.sec.gov/about/laws/tia39.pdf.

Investment Company Act of 1940

This Act regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations. The Act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis. The focus of this Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations. It is important to remember that the Act does not permit the SEC to directly supervise the investment decisions or activities of these companies or judge the merits of their investments. The full text of this Act is available at: http://www.sec.gov/about/laws/ica40.pdf.

Investment Advisers Act of 1940

This law regulates investment advisers. With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors. Since the Act was amended in 1996 and 2010, generally only advisers who have at least $100 million of assets under management or advise a registered investment company must register with the Commission.  The full text of this Act is available at: http://www.sec.gov/about/laws/iaa40.pdf.

Sarbanes-Oxley Act of 2002

On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law.  Being characterized as one of "the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt," Sarbanes-Oxley mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the "Public Company Accounting Oversight Board," also known as the PCAOB, to oversee the activities of the auditing profession. The full text of the Act is available at:http://www.sec.gov/about/laws/soa2002.pdf. (Please check the Classification Tables maintained by the US House of Representatives Office of the Law Revision Counsel for updates to any of the laws.)  You can find links to all Commission rule-making and reports issued under the Sarbanes-Oxley Act at:  http://www.sec.gov/spotlight/sarbanes-oxley.htm.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010 by President Barack Obama. The legislation set out to reshape the U.S. regulatory system in a number of areas including but not limited to consumer protection, trading restrictions, credit ratings, regulation of financial products, corporate governance and disclosure, and transparency.

Dodd-Frank also strengthened and expanded the existing whistleblower program promulgated by the Sarbanes-Oxley Act. Dodd-Frank established an incentive program under which whistleblowers can receive from 10% to 30% of the proceeds from the settlement of litigation, broadened the scope of a covered employee by including employees of a company's subsidiaries and affiliates and extended the statute of limitations under which whistleblowers can bring forward a claim against their employer from 90 to 180 days after a violation is discovered.

The full text of the Act is available at: http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf. You can find links to all Commission rule-making and reports issued under the Dodd Frank Act at: http://www.sec.gov/spotlight/dodd-frank.shtml.

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