If you have a brokerage account or any other type of investment account, you are likely invested in some form of securities. A security is simply a tradable financial asset, and they come in many different forms. For example, stocks, mutual funds, exchange traded funds (ETFs) and corporate or municipal bonds are all types of securities.
Securities are notoriously complex financial instruments. While securities, taken as a whole, offer great opportunities for investors, they also have the potential to be a conduit for financial fraud. As such, there have been many different state and federal laws enacted to regulate these products. Securities laws work to both to 1) promote market efficiency and 2) protect investors.
At the Sonn Law Group, our firm is passionate about protecting the rights and interests of investors. We fight aggressively to hold bad acting brokers and brokerage firms liable for their negligence and misconduct. If you believe that you have been a victim of securities fraud, please do not hesitate to contact our experienced investor losses attorneys today. We will help you assess how the securities laws apply to your legal claim.
New Deal Era Legislation Created the Backbone of Federal Securities Law
Prior to the Great Depression, there were almost no federal securities laws on the books. As the New Deal era hit in the 1930s, that changed fast. In fact, within that period, five critically important securities laws were passed by the United States Congress and signed by President Franklin D. Roosevelt. The five foundational laws are as follows:
- The Securities Act of 1933: The first major piece of legislation to regulate the sale of securities at the federal level, the Securities Act of 1933 was passed with the goal of increasing transparency in the markets. The law created new requirements regarding financial disclosures and created much stricter enforcement against all types of fraud and misrepresentation.
- The Securities Exchange Act of 1934: This law created the United States Securities and Exchange Commission (SEC), a federal agency tasked with overseeing the industry. The SEC has considerable legal authority to enforce the federal securities laws. The Securities Exchange Act also created requirements that companies must follow before they can get their stock listed on an American exchange.
- Trust Indenture Act of 1939: As some debt instruments are also securities, bond investors were in need of legal protections as well. This was first addressed in a major way in the Trust Indenture Act of 1939. This law was passed to provide certain protections that enhanced the rights of bond investors.
- Investment Company Act of 1940: Enforced by the SEC, the Investment Company Act regulates open-end mutual funds, closed-end funds, and other complex financial companies. It puts many legal requirements on investment companies, including disclosure requirements, registration requirements and restriction on what types of investments they can engage in.
- Investment Advisers Act of 1940: Last, but certainly not least, the Investment Advisers Act was enacted to regulate brokers and brokerage firms. This law did many different things to protect the rights of investors, including clearly defining the role and legal responsibilities of broker-dealers.
Notably, since these laws have been passed, they have all been amended many different times. In fact, for the most part, when federal securities regulations are changed, it is done through amending one of these five New Deal era laws. For example, in the early 2000s, two U.S. companies (Enron and WorldCom) were involved in two of biggest corporate accounting scandals in world history.
In response to the widespread corporate fraud, Congress passed Sarbanes-Oxley, a law created to protect shareholders and the public from accounting mistakes and intentional fraud with public companies; and to increase the accuracy and reliability of corporate disclosures.
While Sarbanes-Oxley is often referred to as its own piece of legislation, it is technically an amended section of the Securities Exchange Act and other pre-existing securities laws.
The SEC and Agency-Based Regulations
In large part, the U.S. legal system relies on the federal agencies to enforce the laws. Within the securities industry, the Securities and Exchange Commission (SEC) is the key federal agency. However, there are federally mandated bodies, such as the Commodity Futures Trading Commission (CFTC) and the Securities Investor Protection Corporation (SIPC) that play an important role as well.
Agencies do not write the law. Instead, their role in the legal process is to carry out the wishes of Congress. That being said, since enforcing legislation is extremely complex, federal agencies have been granted considerable rule making authority. Essentially, rules made by agencies are known as regulations under the law.
For example, SEC Rule 10b-5 is one of the single most important legal rules in the securities industry. Rule 10b-5, which was crafted by the SEC pursuant to the authority granted to the agency under the Securities Exchange Act, makes it unlawful to defraud securities investors, either directly through false statements or indirectly through an act of omission. This rule is the main tool that lets the SEC investigate and stop stockbroker fraud.
There are many other important SEC rules as well, including SEC Rule 17a-4. This regulation compels all registered brokers and brokerage firms to retain all records related to securities transactions for at least six years. This requirement provides vital protections for investors, as it gives them an avenue to obtain information to make their claim should they sustain illegitimate investment losses.
State-Based Regulators Still Play an Important Role
The United States is a federalist system. Essentially, that means that political power is divided between the national government in Washington D.C. and the individual state governments in the 50 capitals throughout our country. As securities are regularly sold across state lines, federal regulation plays a key part in every securities transaction.
That being said, state-level securities regulators play a very important role as well. Agencies like the Florida Office of Financial Regulation and the New York Investor Protection Bureau have considerable responsibilities to oversee the industry and to protect investors in their respective state. For example, these agencies:
- Enforce an individual state’s securities laws;
- Oversee the licensing of stockbrokers and brokerage firms;
- Ensure legal compliance by all firms operating within the state; and
- Work to educate investors and provide helpful tools to promote informed decisions;.
Self-Regulation: The Financial Industry Regulatory Authority (FINRA)
Finally, one of the most important parts of the U.S. securities industry is the Financial Industry Regulatory Authority. FINRA is a non-governmental body that has been created to self-regulate the securities industry. The agency has the legal authority to take enforcement action against bad acting brokers and broker-dealers, and it oversees the general dispute resolution process.
For the most part, under the current legal structure, securities disputes between brokers and investors are resolved through FINRA’s arbitration process. Indeed, every year, thousands of investor claims are required to go before FINRA arbitration panels. You can think of FINRA arbitration as being similar to a speedy, more efficient trial. Of course the process also has its own rules and evidence standards.
FINRA has developed a large number of industry rules and standards to regulate registered brokers and brokerage firms. These rules ensure compliance with other securities laws as well as market fairness. For example, one of FINRA’s most prominent regulations is Rule 2010, which compels all FINRA members and associated persons to uphold high standards of commercial honor and just principles of trade.
There are many other FINRA rules as well. These rules regulate a wide variety of issues, both broad and narrow. For example, FINRA Rule 3240 regulates borrowing and lending between customers and their individual investment advisors. To remain active in the securities industry, brokers and broker-dealers must comply with all of FINRA’s rules and regulations.
Did You Lose Money Because of a Securities Law Violation?
If your registered investment adviser or brokerage firm violated any securities regulations, whether a federal law or a FINRA rule, and you sustained significant financial losses as a result, you have a right to take legal action to seek full and fair compensation for your damages. Generally, your path to recover compensation will be through a FINRA arbitration proceeding. Though, in some cases, other legal avenues may be available or necessary.
Ultimately, if you were a victim of securities fraud or securities broker negligence, you need to get your claim into the hands of an experienced attorney as soon as possible. Your attorney will be able to review the individual aspects of your case in order to determine exactly what you need to do to hold your broker accountable and obtain the full financial compensation that you deserve.
Get Securities Fraud Help Today
At the Sonn Law Group, we have extensive experience handling all aspects of securities law and investment fraud claims. If you sustained significant losses due to the misconduct of your broker or brokerage firm, we can help.
To schedule a free, no-obligation review of your case, please do not hesitate to call us today at 844-689-5754 or to reach out to us directly through our website. From our primary office in South Florida, we represent securities fraud victims nationwide and around the world.