Securities Law Basics


What Are Securities?

The term securities references documents indicating ownership or creditorship, such as notes, stocks, treasury certificates or bonds. The owners of securities obtain certain rights in relation to the earnings and assets of the issuer, or from associated voting power.

Why Are Securities Regulated?

Securities are regulated to help ensure that investors have accurate information about the securities and their value, to facilitate the trading (purchase and sale) of securities, to help maintain the integrity of the trading system, and to prevent securities fraud. This is achieved through regulation of the conduct of those who issue securities, regulation and licensure of brokers and dealers who facilitate the trade of securities, and even regulation of the conduct of individual investors.

Securities may be traded "over the counter" or through a stock exchange. If a security is traded through a stock exchange, the exchange will impose rules on the securities beyond those imposed by law or government regulation, as well as providing a system of rules and procedures for the trading of the securities. These rules are subject to oversight from the Securities and Exchange Commission (SEC). All other securities transactions occur through the "over the counter" or "residual" securities market.

Federal Securities Law

Federal securities laws regulate the manner in which securities may be offered for sale to the public ("public offerings"), and the manner in which securities are traded in interstate commerce. The agency with primary responsibility for administering federal securities law is the Securities and Exchange Commission (SEC). The SEC has regulatory power over securities, which it may exercise to help prevent manipulative or deceptive trading practices made by means of interstate commerce.

In very general terms, the Securities Act of 1933 regulates the issuance of securities, and the Securities Exchange Act of 1934 regulates the trading of those securities. The Securities and Exchange Commission (SEC) was created by the 1934 Act.

State Securities Law (Blue Sky Laws)

State securities laws usually include registration or licensure requirements for securities brokers and dealers, registration requirements for securities to be traded within the state, and anti-fraud provisions. Most states appoint a "Securities Commissioner" or similar official to oversee their securities laws and regulations. There can be significant variation in state securities laws, and in the manner in which they are interpreted.

Some securities and securities transactions are exempt from state laws and regulations. The National Securities Markets Improvement Act of 1996 created a broad class of "covered securities" which are exempted from most state laws and regulations when traded through licensed brokers and dealers. However, even in relation to those "covered securities", that Act preserves the states' rights to investigate and legislate against fraud.

Private Regulation

As previously noted, any securities which are exchanged through a stock exchange are subject to the regulations imposed by that exchange. Similarly, most securities brokers and dealers are members of private organizations, such as the National Association of Securities Dealers, Inc. (NASD). Securities brokers and dealers voluntarily subject themselves to the rules of the organizations they join and the stock exchanges in which they are members, and violations of those rules can result in loss of membership.

Copyright © 2004 Aaron Larson, All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you use a quotation, excerpt or paraphrase of this article, except as otherwise authorized in writing by the author of the article you must cite this article as a source for your work and include a link back to the original article from any online materials that incorporate or are derived from the content of this article.

This article was last reviewed or amended on Jan 17, 2015.