BSN 107

1. ESSENTIALS OF THE LEGAL
ENVIRONMENT TODAY, 5E
ROGER LEROY MILLER
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2. CHAPTER 20
INVESTOR PROTECTION AND
CORPORATE GOVERNANCE
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3. 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?
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4. LEARNING OBJECTIVES (CONT’D)
5. What certification requirements does
the Sarbanes-Oxley Act impose on
corporate executives?
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5. 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
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6. 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
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7. SECURITIES ACT OF 1933
• Registration Statement
• Section 5 provides a security must be
registered
• Contents of the registration statement
1. Securities offered for sale
2. Corporation’s properties and business
3. Management of the corporation
4. How the corporation intends to use proceeds of sale
5. Any pending lawsuits or special risk factors
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8. SECURITIES ACT OF 1933
• Registration process
• Prefiling period
• Waiting period
• Posteffective period
• Well-known seasoned issuers (WKSI)
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9. SECURITIES ACT OF 1933
• 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
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10. EXHIBIT 20.1
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11. SECURITIES ACT OF 1933
• 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
• Defenses
1. Statement or omission was not material
2. Plaintiff knew about misrepresentation at time of stock purchase
3. Defendant exercised due diligence in preparing registration
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12. 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.
LO-2
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13. SECURITIES EXCHANGE ACT OF 1934
• 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
LO-3
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14. SECURITIES EXCHANGE ACT OF 1934
• Disclosure under SEC Rule 10b-5
• Material fact examples calling for disclosure
1.Fraudulent trading by broker-dealer
2.Dividend change
3.Contract for sale of corporate assets
4.New discovery, new process, new product
5.Significant change in firm’s financial condition
6.Potential litigation against the company
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15. SECURITIES EXCHANGE ACT OF 1934
• 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
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16. EXHIBIT 20.2
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17. SECURITIES EXCHANGE ACT OF 1934
• 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
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18. 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
LO-4
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19. 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
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20. CORPORATE GOVERNANCE
• 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
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21. CORPORATE GOVERNANCE
• 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
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22. CORPORATE GOVERNANCE
• 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
LO-5
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23. EXHIBIT 20.3
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24. ONLINE SECURITIES FRAUD
• Major problem facing SEC
• Online Investment Scams and
Newsletters
• Fraudulent E-Mails
• Ponzi Schemes
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