Common Securities Law Issues to Manage for Transaction Attorneys | Attorney at Law Magazine (2023)

Once an SEC investigation or action is underway, it is a one-way street, with the SEC controlling the speed and information along the way. Securities cases typically involve high stakes and sensitive matters that could derail more than a transaction. Here, I will share some issues to be aware of and manage for transaction and business attorneys.

Securities cases typically involve high stakes and sensitive matters. Securities claims present the risk of substantial damage awards and adverse publicity and may bear little relation to the true merits of the claims.

The U.S. Securities and Exchange Commission (SEC) investigations stem from a range of actions such as routine reviews of new registrants to in-depth reviews of registrant affiliates. Investigations spin out of private lawsuits by investors seeking damages or state enforcement actions. Media reports, referrals from other government agencies and irregularities identified using market and trading surveillance technology can all result in inquiries.

Once the SEC starts digging, what they find may have little to no bearing on where they started. A routine exam of a new registrant could uncover ownership of a real estate development company that raised money for commercial real estate projects through Regulation D offerings. The development company activities could open up the registrant to added scrutiny, an investigation or even federal court action alleging securities violations.

Regardless of how the SEC learns of potential violations of the securities laws, once an investigation or action is underway, it is a one-way street, with the SEC controlling the speed and information along the way. The results can morph into any number of detours, with the SEC pursuing inquiries of both an SEC registered company and any of its affiliates.

These typically sensitive, complicated matters can disrupt business and upset due diligence efforts for transaction and business attorneys. When actions come in the form of a letter or subpoena from the SEC, keeping requests in perspective, anticipating risk, and knowing how to proceed can be critical.

SEC inquiry

Notifications from the SEC typically seek documents, testimony and interviews on a voluntary basis. If the party who has been requested to provide documents by the SEC is not a registrant, the matter is likely voluntary, and the party can refuse to produce documents.

A registrant receiving a voluntary request must produce the documents. Any stonewalling or delay in producing those documents can lead to the conversion of the examination or inquiry into a formal order for investigation, giving the SEC subpoena power to compel document production and sworn witness testimony.

SEC enforcement actions are initiated either in a federal district court or before an administrative law judge (ALJ). ALJs are appointed and compensated through the SEC, giving the ALJ significant homecourt advantage. This agency-appointed ALJ can stack the deck against defendants in proceedings, where the success rate of prosecution is exceedingly high within the SEC’s home court.

The district court system generally provides defendants with a fairer fight by virtue of the neutral Article III judge. Although the SEC’s success rate is lower in federal district court, potential success needs to be weighed against potential damage to reputation, shareholder support, stock price, and registration or licensure suspension or revocation resulting from a public lawsuit.

There are notable differences in the standards used and remedies available in both forums. Administrative proceedings are governed by SEC Rules of Practice. Appeals go to the Commission. By comparison, judicial proceedings are governed by the Federal Rules of Civil Procedure and Federal Rules of Evidence. District courts provide a right to jury trial and appeals are taken to the appropriate U.S. Court of Appeals. The remedies available to defendants in both forums largely overlap. But the judicial system offers the Commission remedies including freezing of assets, restitution and damages related to investor losses, and the appointment of a receiver.

Recently, in Jarkesy v SEC, 34 F.4th 446 (5th Cir. 2022), the court reversed an SEC ALJ decision finding the constitutional violations with the SEC’s use of ALJs in a fraud and damages case. The Fifth Circuit held that the ALJs denied Jarkesy the right to a jury trial guaranteed by the Seventh Amendment.The result may be that the SEC may be more apt to pursue civil penalties or claims of fraud to the district courts.

The SEC’s decision was vacated, and the case remanded for further proceedings consistent with the appellate court’s opinion (see Jarkesy v. SEC: What is its potential impact?). Practitioners now should consider whether to seek judicial review of the Commission’s ability to even bring the case before ALJ, depending on the remedies the SEC is seeking.

Where issues arise

The SEC pursues a broad range of actions, often prioritized each year by the Commission based on where alleged violations of federal securities laws are occurring. In 2022, significant focus areas included private funds, environmental, social and governance investing, retail investors, security controls, emerging technologies and crypto-assets.

The SEC teases out various types of violations in a wide variety of ways against an extensive list of market participants. This includes broker-dealers, investment advisers, funds and pools, investment companies, and unregistered parties, particularly those raising money from private investors. Overwhelmingly, violations stem from the obligation to provide full information and not misrepresent information in connection with the offer and sale of a security. The most common violations are misrepresentations or omissions as part of an offer in the sale of securities, and violations of Sections 10(b) and 17(a).

Private party cooperation

The decision to cooperate with the SEC must be based on the specific facts and circumstances as well as scope and types of materials requested. Rarely will the recipients of a notice know the focus or extent of what the SEC is hunting. Most companies cooperate with even the most onerous requests, preferring not to get off on the wrong foot with an organization as powerful as the SEC. It is not until the SEC is taking sworn testimony as part of their investigation that a defendant can develop an idea of the SEC’s concerns. At that late date, a company or individual who chose not to cooperate may find itself in the worst possible position to prevail.

Attorneys responding to the inquiries with their clients have the opportunity to ask the SEC for clarification in an effort to sort through what could be afoot. Although the SEC is under no obligation to confide to the company the focus of their investigation, this phone call and the requests themselves can provide an attorney with some insights into what the SEC is targeting.

After initiating an investigation, the SEC may issue a Wells Notice, which states that the SEC believes there has been a violation of the federal securities laws and cites which laws. This fairly nebulous, boilerplate notice recites statutory provisions that the SEC suspects have been violated without any factual description. The SEC may describe facts to support its Notice in a subsequent meeting or conference call that its staff believes give rise to the violations of securities laws.

Because the target of an investigation does not get to direct how an investigation proceeds, what information the SEC requests, or any subsequent action, responding to the Wells Notice is the first opportunity a client has to tell its side of the story. The response should take the form of a legal brief written by attorneys to point to facts and legal authority the Commission investigators may have missed.

Prior to responding, clients and lawyers should discuss the value proposition of the response. This includes isolating the particular issues that might get traction with the SEC and whether it makes sense to persuade the SEC not to bring action at all, effectively truncating or paring down the case, controlling the factors in play and influencing where the fight might go. Depending on the volume of documents and the type of violations and conduct at issue, it can be an expensive proposition to prepare a Wells response.

Client management

Client management is key to determining whether and when to settle an issue. Clients can get worked up over what started an investigation when they should be more concerned with how to handle the investigation. Once an investigation has started, it can take on a life of its own and go off in all kinds of directions.

Settling a Commission action is a fairly complicated affair. Consideration of any settlement offer must take into account potential private litigation and follow-on actions at the federal or state level. In some cases, fighting to the bitter end, and winning, can forestall private litigation. Settling early could give private investors a leg up on follow-on litigation, depending on the details of the settlement, the findings in the case, and whether a party has taken responsibility for securities violations.

Disclosing an SEC matter

Client questions about whether to disclose an investigation internally or publicly are common (see Disclosure or non-disclosure: Governmental Investigation of Securities-related Activity). Companies and individuals do not necessarily know how an SEC investigation will unfold or how it may be used against individuals and entities. Early disclosure sometimes allows companies to prepare and control its response to the disclosure, which may affect potential securities actions against them. It is a decision best directed by a securities attorney, who will be attentive to the specific circumstances and potential consequences inherent in disclosures of securities investigations and actions.

Often the answer to whether to disclose depends on how the investigation proceeds. At the inquiry level, disclosure may be unnecessarily damaging. At the point subpoenas are issued, disclosure may be advisable, even though it may not be legally required. Once the SEC takes action either in federal court or an ALJ proceeding, disclosure has probably become necessary.

This information is not intended as legal advice. Readers should seek specific legal advice before acting with regard to the matters addressed above.

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What falls under securities law? ›

It can take the form of shares of stock, bonds, a package of loans or mortgages offered for sale by a financial institution or a financial instrument representing investment in a company or an international project.

What is a securities attorney? ›

A securities lawyer is an attorney that specializes in the often complex and changing laws and regulations that apply to financial investments. These specialists can provide significant benefits to you both in planning your investments as well as in recovering any losses from wrongdoing.

What is the purpose of securities regulation? ›

The three core objectives of securities regulation are: The protection of investors; • Ensuring that markets are fair, efficient and transparent; • The reduction of systemic risk. The three objectives are closely related and, in some respects, overlap.

What is the overview of US securities regulation? ›

The federal securities laws govern the offer and sale of securities and the trading of securities, activities of certain professionals in the industry, investment companies (such as mutual funds), tender offers, proxy statements, and generally the regulation of public companies.

What are the 4 major categories of securities? ›

The four types of security are debt, equity, derivative, and hybrid securities.

What assets are not securities? ›

Assets such as art, rare coins, life insurance, gold, and diamonds all are non-securities. Non-securities by definition are not liquid assets. That is, they cannot be easily bought or sold on demand as no exchange exists for trading them. Non-securities also are known as real assets.

Who can issue securities? ›

Securities are issued by the companies to the investors. Securities are exchanged between buyers and sellers, and stock exchanges facilitates the trade. The securities are all issued at one price for all investors participating in the offering. Securities are exchanged at the market price.

What is the meaning of securities? ›

The term "security" is defined broadly to include a wide array of investments, such as stocks, bonds, notes, debentures, limited partnership interests, oil and gas interests, and investment contracts.

Who handles securities? ›

The Securities and Exchange Commission oversees securities exchanges, securities brokers and dealers, investment advisors, and mutual funds in an effort to promote fair dealing, the disclosure of important market information, and to prevent fraud.

Who regulates securities in us? ›

The SEC protects investors, promotes fairness in the securities markets, and shares information about companies and investment professionals to help investors make informed decisions and invest with confidence.

What is the securities Contract regulation Act? ›

The Securities Contracts (Regulation) Act, was enacted in the year 1956. It is also referred to as the SCRA and is one of the first few rules and regulations or legislations made in the Indian capital markets. The SCRA regulates the contracts executed in the Indian securities markets and stock exchanges.

Why does the federal government regulate securities? ›


We protect investors by vigorously enforcing the federal securities laws to hold wrongdoers accountable and deter future misconduct. We provide investor education and resources through our Office of Investor Education and Advocacy.

What are the three US government securities? ›

The United States Treasury offers five types of Treasury marketable securities: Treasury Bills, Treasury Notes, Treasury Bonds, Treasury Inflation-Protected Securities (TIPS), and Floating Rate Notes (FRNs).

What are US securities examples? ›

Some of the most common examples of securities include stocks, bonds, options, mutual funds, and ETFs. Securities have certain tax implications in the United States and are under tight government regulation.

What are the different securities acts? ›

These acts include the Securities Act of 1933,1 the Securities Exchange Act of 1934,2 the Investment Company Act of 1940,3 and the Investment Advisers Act of 1940.

What are the most common securities? ›

Stocks, bonds, preferred shares, and ETFs are among the most common examples of marketable securities. Money market instruments, futures, options, and hedge fund investments can also be marketable securities.

What are the two most common types of securities? ›

Securities are fungible and tradable financial instruments used to raise capital in public and private markets. There are primarily three types of securities: equity—which provides ownership rights to holders; debt—essentially loans repaid with periodic payments; and hybrids—which combine aspects of debt and equity.

What is the difference between a bond and a security? ›

Bonds and stocks are both securities, but the major difference between the two is that (capital) stockholders have an equity stake in a company (i.e. they are owners), whereas bondholders have a creditor stake in a company (i.e. they are lenders).

Is 401k considered a security? ›

While these mutual funds may be marketable, the 401(k) is just a type of retirement account and is not a security at all.

What securities are not exempt? ›

A non-exempt security is one that does not have an exemption based solely upon what it is. Most securities, including the vast majority of stocks, are non-exempt. These are the exempt transactions covered in the Uniform Securities Act (USA): Private placements.

Is crypto an asset or security? ›

The Securities and Exchange Commission's primary theory on whether a cryptoasset is a security appears to be based upon whether the blockchain project associated with a cryptoasset is, at any point in time, “sufficiently decentralized.”[2] If so, the cryptoasset is not a security.

Who Cannot issue securities? ›

Can Private Company Issue Securities? It is apparent from the above that private firms can offer securities and have representatives and shareholders, but they cannot sell their shares on stock markets. The public initial offer would not question private sector shares (IPO).

What is the difference between issues and securities? ›

An issue is a process of offering securities in order to raise funds from investors. Companies may issue bonds or stocks to investors as a method of financing the business.

Can an individual issue securities? ›

Sole proprietorships are not prohibited from issuing bonds. In practice, however, only large corporations and government institutions issue bonds. Bond issuance requires compliance with and adherence to a number of federal regulations.

What is securities another name for? ›

In the investing sense, securities are broadly defined as financial instruments that hold value and can be traded between parties. In other words, security is a catch-all term for stocks, bonds, mutual funds, exchange-traded funds or other types of investments you can buy or sell.

Are securities an asset? ›

Key Takeaways. Investment securities are a category of securities—tradable financial assets such as equities or fixed income instruments—that are purchased with the intention of holding them for investment.

Which are common mistakes people make when investing? ›

  • Buying high and selling low. ...
  • Trading too much and too often. ...
  • Paying too much in fees and commissions. ...
  • Focusing too much on taxes. ...
  • Expecting too much or using someone else's expectations. ...
  • Not having clear investment goals. ...
  • Failing to diversify enough. ...
  • Focusing on the wrong kind of performance.

Who does the securities Act apply to? ›

Securities laws apply to any issuer, regardless of whether they are incorporated or listed on a stock exchange. Securities laws apply to all issuers from the moment of their incorporation or formation. Forming an organization usually involves issuing securities to the owner(s) or founder(s).

Do banks own securities? ›

The Secondary Mortgage Market Enhancement Act of 1984 (SMMEA) amended 12 USC 24(7) and allows national banks to purchase and hold “mortgage related securities” without any statutory limitation.

What is the 73 291 federal law? ›

The Securities Exchange Act of 1934 (P.L. 73-291, 48 Stat. 881) was the first federal legislative initiative specifically intended to regulate stock exchanges and publicly held companies that have distributed securities (i.e., stocks and bonds) to the public.

What is the difference between the 33 Act and the 34 Act? ›

The Securities Act of 1933 differs from the Exchange Act of 1934 in that the former focuses on governing securities issued by companies in what is known as the primary market, while the 1934 Act deals mainly with the regulation of secondary trading, which occurs between parties unrelated to the issuing companies, such ...

What is Rule 19 of securities contract regulation Act? ›

(1) No person shall, except with the permission of the Central Government, organise or assist in organising or be a member of any stock exchange (other than a recognised stock exchange) for the purpose of assisting in, entering into or performing any contracts in securities.

What is Rule 15 of the Securities Contracts regulation Rules 1957? ›

Books of account and other documents to be maintained and preserved by every member of a recognised stock exchange. 15. (1) Every member of a recognised stock exchange shall maintain and preserve the following books of account and documents for a period of five years : (a) Register of transactions (Sauda book).

What is Rule 19 of the Securities Contracts regulation Rules 1957? ›

Rule 19A of the Securities Contracts (Regulation) Rules, 1957 provides for maintenance of minimum public shareholding and its attainment within a specified period. Extract of Rule 19A: 1. Every listed company (other than PSU) shall maintain public shareholding of at least 25%.

What does the Securities Act of 1934 do? ›

The Securities Exchange Act of 1934 regulates secondary financial markets to ensure a transparent and fair environment for investors. It prohibits fraudulent activities, such as insider trading, and ensures that publicly traded companies must disclose important information to current and potential shareholders.

What are the 5 functions of SEC? ›

5 Functions of the U.S. Securities and Exchange Commission
  • Looking Toward the Future. Protection continues to become more important as more first-time investors enter the market. ...
  • Creating Fair Markets. ...
  • Ensuring Corporate Disclosure. ...
  • Protecting Investors. ...
  • Enforcing the Law.

What is a major function of the securities markets? ›

The primary function of the securities markets is to enable to flow of capital from those that have it to those that need it. Securities market help in transfer of resources from those with idle resources to others who have a productive need for them.

What are the safest government securities? ›

U.S. Treasury securities ("Treasuries") are issued by the federal government and, because they're backed by the "full faith and credit" of the U.S. government, are considered to be among the safest investments you can make.

What is the primary use of US Treasury securities? ›

U.S. Treasury Securities are debt instruments. The U.S. Department of the Treasury issues Securities to raise the money needed to operate the federal government.

What is a treasure bond? ›

Treasuries are debt obligations issued and backed by the full faith and credit of the US government. Because they are considered to have low credit or default risk, they generally offer lower yields relative to other bonds.

What are the three classified securities? ›

There are primarily three types of securities: equity—which provides ownership rights to holders; debt—essentially loans repaid with periodic payments; and hybrids—which combine aspects of debt and equity. Public sales of securities are regulated by the SEC.

What is under the Securities Act of 1934? ›

The Securities and Exchange Act of 1934 regulates secondary financial markets to ensure a transparent and fair environment for investors. It prohibits fraudulent activities, such as insider trading, and ensures that publicly traded companies must disclose important information to current and potential shareholders.

What products are considered securities? ›

In the investing sense, securities are broadly defined as financial instruments that hold value and can be traded between parties. In other words, security is a catch-all term for stocks, bonds, mutual funds, exchange-traded funds or other types of investments you can buy or sell.

What are the most common types of securities? ›

Stocks, bonds, preferred shares, and ETFs are among the most common examples of marketable securities. Money market instruments, futures, options, and hedge fund investments can also be marketable securities.

What are the two major asset classes of securities in the United States? ›

Many investment funds are composed of the two main asset classes, both of which are securities: equities (stocks) and fixed-income (bonds).

What are the three 3 types of securities issued by the federal government? ›

Government securities come in a variety of forms, but the best-known types are the ones issued by the U.S. Treasury—Treasury bonds, bills, and notes.

What is Section 10 of the Securities Act? ›

Pleading Requirements. Section 10(b) makes it unlawful to “use or employ, in connection with the purchase or sale of any security” a “manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe.” 15 U.S.C. § 78j(b).

What is the 10 B Exchange Act? ›

Section 10(b) of the Securities Exchange Act of 1934 (as amended) (Exchange Act), which prohibits fraud in the purchase or sale of securities (15 U.S.C. § 78j(b)). Securities and Exchange Commission (SEC) Rule 10b-5, which contains the general, catch-all, anti-fraud provision of the federal securities laws (17 C.F.R.

What is 13 a of the Exchange Act? ›

Section 13(a) of the Exchange Act requires all issuers with securities registered under Section 12 of the Exchange Act to file such periodic reports as the Commission shall prescribe by its rules and regulations. Rules 13a-1 and 13a-13 require issuers to file annual reports and quarterly reports, respectively.

What is 11 of the Securities Act? ›

Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, provides investors with the ability to hold issuers, officers, underwriters, and others liable for damages caused by untrue statements of fact or material omissions of fact within registration statements at the time they become effective.

What is 15 of the Securities Act? ›

Section 15 aids investors by making "control persons," or persons who "control" defendants liable under Sections 11 and 12 by owning stock or under agency principals, jointly and severally liable.

What is 17 A of the Securities Act? ›

Section 17A of the Act, and the rules promulgated thereunder, contain requirements for registered transfer agents relating to, among other things, processing securities transfers, safekeeping of investor and issuer funds and securities, and maintaining records of investor ownership.

Are assets considered securities? ›

A security is a financial instrument, typically any financial asset that can be traded. The nature of what can and can't be called a security generally depends on the jurisdiction in which the assets are being traded.

What asset class are securities? ›

Equities (stocks), bonds (fixed-income securities), cash or marketable securities, and commodities are the most liquid asset classes and, therefore, the most quoted asset classes.


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