In the United States, securities transactions are governed by the Federal Securities Act of 1933, the Federal Securities Exchange Act of 1934，the rules made by the SEC pursuant to these two Acts, and state security regulation laws collectively referred to as blue sky laws.

The two federal acts were part of the program to help the United States overcome the Great Depression of the 1930，s and to restore the public’s faith in the stock market* They were originally designed to provide potential investors with adequate financial information so that they can make intelligent investments. Although disclosure of vital information remains important, the scope of the two acts has been expanded over the years to ensure the honest nature of all security transactions.

The Securities and Exchange Commission (SEC)4 was created in 1934 to enforce the two federal acts. - It is an administrative agency with quasi-legislative and quasi-judicial powers.

The 1933 Act governs the initial sales of securities. It is essentially a disclosure law requiring the filing with the SEC of a “registration statement” and the delivery to the purchasers of a “prospectus” containing financial information related to the issuer. Under this law it is illegal to sell a security before the completion of the registration process or to use the mails or means of interstate commerce to sell securities without disclosing the required financial information to potential investors.5 The act provides for equitable remedy of injunction as well as criminal and civil liabilities for violation of the act.

The 1934 Act regulates transfer of securities after the initial sale. It was intended to remedy the many abuses in securities trading involving securities exchanges, brokers, and dealers. This act makes it illegal to sell a security on a national exchange unless a registration filed with the SEC and with the applicable stock exchange is effective for the security. It prohibits the use of the mails or any instrument of interstate commerce to sell securities unless the broker or the dealer is registered. The SEC, pursuant to this act, also requires that issuers file periodic reports and report significant developments which would affect the value of the security.

Section 10(b) of the 1934 Act, and Rule 10(b)-5 made by the SEC pursuant to this act, are of far reaching importance. These two provisions, referred to as the anti-fraud provisions of the 1934 Act, make it unlawful to use the mails or any instrument of interstate commerce or any national securities exchange to defraud any person in connection with the purchase or sale of any security. They provide a private remedy for the defrauded investor against any person who defrauded him in the purchase or sale of securities. Most of the litigation under the 1934 Act is brought under these provisions. The defendants in these cases tend to fall into four general categories t 1) insiders i 2) broker-dealers 3) corporations whose stock is purchased and sold by the plaintiff and 4) those, such as accountants ,who conspire with a party who falls into one of the above mentioned categories.

To recover damages under these provisions, a plaintiff must establish 1) material misrepresentation or omission made in connection with the purchase or sale of a security, 2) scienter—knowledge of the falsity of the representation by the defendant» 3) the plaintiff’s reliance and due diligence 4) damage as a result of the reliance.

Fraud, as defined in Section 10(b>, includes not only untrue statements of material facts but also omissions of material facts that amount to misleading half-truths * failure to correct a false impression or silence where there is a duty to speak.

Section 16 of the 1934 Act prohibits any insiders to earn short-swing profits. An insider is defined as a person who owns more than 10 percent of any security or is a director or officer of the issuer of the security. Insiders must make proper filings with the SEC. Profits earned from security transactions within any six-month period should go to the issuer or to the investor with whom the insider has made the transaction.

Answer the following questions:
1. What is a security in a broad sense?
2. What are the laws regulating transactions in securities?
3. Which institution is responsible for enforcement of the federal laws regarding securities regulation?
4. Tell what you know about the historical background of the 1933 and 1934 Acts.
5. What is the 1933 Act about?
6. What does the 1934 Act regulate?
7. Explain Section 10(b) of the 1934 Act and rule 10(b)-5. Why is it the most important provision of the act?
8. What does a plaintiff have to prove in order to establish fraud in securities transaction?
9. What is the definition of insider under Section 16 of the 1934 Act?
10. How does Section 16 of the 1934 Act regulate insider trading?