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ESSENTIALS OF THE LEGAL ENVIRONMENT TODAY, 5E

ROGER LEROY MILLER

© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

CHAPTER 20

INVESTOR PROTECTION AND CORPORATE GOVERNANCE


LEARNING OBJECTIVES

1. What is meant by the term securities?

2. What are the two major statutes regulating the securities industry?

3. What is insider trading? Why is it prohibited?

4. What are some of the features of state securities laws?


LEARNING OBJECTIVES (CONT’D)

5. What certification requirements does the Sarbanes-Oxley Act impose on corporate executives?


INTRODUCTION

•Securities are any instruments representing corporate ownership (stock) or debts (bonds).• Sale and transfer of securities are regulated by federal and state statutes and government agencies.•New SEC regulations


SECURITIES ACT OF 1933

•What Is a Security?• Section 2(1) of the Securities Act

contains broad definition of securities• The Howey test• Many types of securities• Stocks and bonds – most common• Can be interests in whiskey, cosmetics, worms,

beavers, boats, etc.

LO-1© 2016 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


• Registration Statement• Section 5 provides a security must be

registered• Contents of the registration statement

1. Securities offered for sale2. Corporation’s properties and business3. Management of the corporation4. How the corporation intends to use proceeds of sale5. Any pending lawsuits or special risk factors



• Registration process• Prefiling period• Waiting period• Posteffective period

• Well-known seasoned issuers (WKSI)



• Exempt Securities and Transactions• Certain types of securities are exempt

from registration requirements• Regulation A offerings• Testing the waters• Using the Internet

• Small offerings—Regulation D• Rule 504 – most small businesses• Rule 505 – private, noninvestment company offerings • Rule 506—private placement exemption


EXHIBIT 20.1



• Resales and safe harbor rules• Most securities can be resold without registration• Rule 144 • Rule 144A

• Violations of the 1933 Act• Remedies• Prosecuted by Department of Justice

• Defenses1.Statement or omission was not material2.Plaintiff knew about misrepresentation at time of stock

purchase3.Defendant exercised due diligence in preparing registration


SECURITIES EXCHANGE ACT OF 1934

• Provides for regulation and registration of securities exchanges, brokers, dealers, and national securities associations• This act provides for continuous periodic disclosures by publicly held corporations to enable the SEC to regulate subsequent trading.



• Section 10(b), SEC Rule 10b-5, and Insider Trading• SEC Rule 10b-5 prohibits commission of

fraud in connection with purchase or sale of any security.• Insider trading• Purchase or sale of securities on the basis of

information that has not been made available to public• Gives trading advantage over general public



• Disclosure under SEC Rule 10b-5• Material fact examples calling for disclosure1.Fraudulent trading by broker-dealer2.Dividend change3.Contract for sale of corporate assets4.New discovery, new process, new product5.Significant change in firm’s financial condition6.Potential litigation against the company



• Outsiders and SEC Rule 10b-5• Tipper/Tippee Theory• Misappropriation Theory

• Insider reporting and trading—Section 16(b)• The Private Securities Litigation Reform

Act (PSLRA)• Limitations on class actions


EXHIBIT 20.2



• Regulation of Proxy Statements• Section 14(a) regulates solicitation of proxies

from shareholders of Section 12 companies• Violations of the 1934 Act• May be subject to criminal or civil liability• Scienter not required for Section 16(b)

violations• Criminal penalties• Civil sanctions


STATE SECURITIES LAWS

• “Blue sky laws” – regulate offer and sale of securities within states• Article 8 of the UCC• Requirements under State Securities Laws• Disclosure requirements and antifraud

provisions• Concurrent Regulation


CORPORATE GOVERNANCE

• A set of policies specifying the rights and responsibilities of the various participants in a corporation and spelling out the rules and procedures for making corporate decisions



• Attempts at Aligning the Interests of Officers with Those of Shareholders• Providing officers with stock options• The Goal Is to Promote Accountability• Effective corporate governance standards

designed to address problems and motivate officers to make decisions that promote financial interests of shareholders



• The company benefits• Governance and corporate law• State corporation statutes set up legal framework for

corporate governance• The board of directors• The audit committee• The compensation committee



• The Sarbanes-Oxley Act• Addresses issues relating to corporate

governance• More internal controls and accountability• Exemptions for smaller companies• Certification and monitoring requirements• Section 906 requires CEOs and CFOs certify information

in corporate financial statements• Improves directors’ monitoring of officers’ activities


EXHIBIT 20.3


ONLINE SECURITIES FRAUD

•Major problem facing SEC•Online Investment Scams and Newsletters• Fraudulent E-Mails• Ponzi Schemes


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