The securities Acts the SEC administers

Four Acts, one idea: disclosure

The Securities Act of 1933 is often called the truth in securities law. It has two aims: investors get financial and other significant facts about securities offered for public sale, and fraud in selling them is banned. Registration is the main tool. The facts let investors, not the government, judge the offering. The SEC requires the information to be accurate but does not guarantee it. A buyer who loses money has recovery rights if she can prove the disclosure was incomplete or inaccurate.

The Securities Exchange Act of 1934 created the SEC. It covers the trading markets and the people in them. It gives the SEC power to register, regulate and oversee brokerage firms, transfer agents, clearing agencies and self-regulatory organizations such as the exchanges and FINRA. It lets the SEC require periodic reports from companies whose securities trade publicly, and it governs the proxy materials used to ask shareholders for their votes.

Two 1940 Acts finish the set. The Investment Company Act regulates companies, such as mutual funds, that invest in securities and sell their own shares to the public. It aims to limit conflicts of interest and focuses on disclosure and on fund structure and operations, but it does not let the SEC direct a fund’s investments or judge their merits. The Investment Advisers Act regulates firms paid to advise others about securities; generally the larger advisers, and advisers to registered funds, register with the SEC.

Disclosure only works if people can read it. Registration statements and prospectuses become public shortly after filing, and filings by U.S. companies are on the SEC’s EDGAR database, free. When a question asks what the SEC promises, the answer is accurate disclosure backed by enforcement. It is not a profit, and it is not an approval of quality.

Exam terms

Securities Act of 1933

Disclosure and anti-fraud rules for securities offered for public sale.

Securities Exchange Act of 1934

Created the SEC; covers trading markets, broker-dealers, SROs and public-company reports.

Investment Company Act of 1940

Regulates funds such as mutual funds; does not let the SEC pick their investments.

Investment Advisers Act of 1940

Regulates firms paid to advise others about securities.

EDGAR

The SEC’s free public database of company filings.

Proxy materials

Disclosure filed with the SEC before shareholders are asked to vote.

Worked example

Nerys Hollingworth buys shares in a company’s new public offering and later holds them in her brokerage account while the company files its annual report.

1. Before the sale, the 1933 Act applies: the company registers the offering and gives buyers a prospectus with the significant facts.
2. The SEC reviews the filing for disclosure compliance. It does not decide whether the shares are a good buy.
3. Once the shares trade, the 1934 Act applies: her broker-dealer is registered with the SEC, and the company files periodic reports.
4. She can read every filing free on EDGAR. If the registration statement or prospectus for the offering left out important facts, the 1933 Act gives her recovery rights if she can prove it.

Check yourself

Try a question, then read the explanation to review the rule.

Same rule, new context

Related practice

• The federal securities Acts and what each governsPractice this