The Securities Exchange Act of 1934 is a law that governs that sale of securities (stocks, Bonds & Debenture s) in the secondary markets within the United States of America. The 1934 law established The Securities Exchange Commission (SEC), which is the government agency that enforces the United States federal securities law.
The Securities Exchange Act of 1934 is an extension of the disclosure requirements derived from the Securities Exchange Act of 1933 . It was established to cover many issues including insider trading, corporate reporting, Tender Offer s etc... The Act requires publicly traded companies to file a (Form 10K) on an annual basis, (form 10Q) on a quarterly basis, and a (Form 8K) on a monthly basis if the company has more than a certain number of shareholders and have a certain amount of assets (500 shareholders, above $10 million in assets, per Act sections 12, 13, and 15). The reports are available at EDGAR. As stated, one of the most relevant issues that the act covers is insider trading. Illegal insider trading is when someone buys or sale shares with the knowledge of undisclosed information. One section of the 1934 act deals with illegal insider trading by executives, large shareholders, officers and directors while another section deals with insider trading done by an outsider who has obtained insider information. The goal behind this act is to prevent insiders from taking an unfair advantage over investors who are not as informed.
Registration and Disclosure
Who must register & what must be disclosed?
Initial Registration
Who is the registrant?
The Issuer if regulated & the publicly traded company
What Information must be disclosed?
The nature of the business, financial structure, the directors and executive officers, financial statements
Filing Date
Must file within 120 days of becoming a reporting company
Purpose of Disclosure
Accurate disclosure of important facts regarding the securities that are to be publicly traded.
Periodic Reporting
Who is the registrant?
The Issuer if regulated & the publicly traded company
What Information must be disclosed?
Annual, quarterly or current report updating information disclosed in the initial registration.
Filing Date
Annual: within 90 days after year’s end, Quarterly: within 45 days after the quarter’s end, Current: Within 15 days after any material change
Purpose of Disclosure
To update any information disclosed in the initial registration
Insider Reporting
Who is the registrant?
Statutory insiders (directors, officers, and stockholders holder 10% or more of the shares)
What Information must be disclosed?
Initial statement of beneficial ownership of Equity securities, Changes in beneficial ownership.
Filing Date
Within 10 days of becoming a statutory insider; or the end of the month in which the ownership took place
Purpose of Disclosure
To prevent to unfair use of information that insiders would have access to
Purpose of Disclosure
Full disclosure of material information; Facilitation of shareholder proposal
Tender Offer
Who is the registrant?
5% stockholders, tender offeror, or issuer
What Information must be disclosed?
Identity and background Terms of transaction, sources of funds, intentions.
Filing Date
5% stockholders: within 10 days after acquiring 5% or more of a registered security. Tender Offeror: before tender offer is made, Issuer: before offer to repurchase.
Purpose of Disclosure
Adequate and accurate disclosure of material facts, Opportunity to reach uncoerced decision.
Proxy - A proxy is a signed statement authorizing another shareholder to represent their votes at specific company meetings.
Proxy Statement - A proxy disclosure statement is required when proxies (shareholder votes) are being solicited. Firms are required to file a proxy statement with the SEC prior to the shareholder’s annual meeting. This statement discloses information on matters that will be voted on at the next annual shareholder’s meeting such as changes in directors, executive salaries etc… The statement is provided voting procedures, background information on board directors and possible Conflict of Interest , board compensation, executive compensation (salary, stocks, options etc…), who is on the audit committee and the fees paid to the auditor.
Tender Offer A tender offer is a term used in corporate finance to denote a takeover bid. The tender offer is an offer to purchase all or some of a shareholder’s shares at a specified price during a specified time. Tender offers can be either friendly or hostile. The price offered is often at a premium over the market price of the stock to induce shareholders to sell their shares. For example, if a stock sells for $25, the offer may be to purchase the stock for $30, so there would be a $5 premium. Any Corporation or individual acquiring 5% or more of a company’s stock is required to disclose the offer to the SEC, the underlying company and the exchange that the stock is traded on. The information that is required to be disclosed is the identity of the offeror, the terms of the offer, the source of funds and the intentions of the offer.
Rule 10-b-5
Rule 10b–5 - makes it unlawful to (1)¬employ any device, scheme, or artifice to defraud; (2)¬make any untrue statement of a material fact; (3)¬omit to state a material fact; or (4)¬engage in any act that operates as a fraud
Requisites of Rule 10b–5 - recovery requires (1)¬a misstatement or omission, (2)-materiality, (3)¬scienter (intentional and knowing conduct), (4)¬reliance, and (5)¬connection with the purchase or sale of a security.
Insider Trading - “insiders” are liable under Rule 10b–5 for failing to disclose material, nonpublic information before trading on the information. Express insider trading Liabilities are imposed on any person who trades securities of which he or she hold insider information. Civil penalties for insider trading can be up to 3 times the amount the liable party made or avoided losing.
Parties that are forbidden to trade on insider information
Officers, Directors, Employees & Agencies
Underwriters, Accountants, Lawyers & Consultants
Tippees if (1) The insider has breached insider information & (2) The tippee is aware or should be aware that there has been a breach.
Misleading Proxy Statement - If a party discloses a misleading proxy statement then that party is liable to the investors who suffered losses in result of the misleading proxy statement.
Fraudulent Tender Offers - Under Section 14(e) civil liability is imposed for false an material statement or any omission of fraudulent of deceptive practices in connection with any tender offer.
Sanctions
AntiBribery Provisions of FCPA (Foreign Corrupt Practices Act) – If someone is found guilty of prohibited bribery fines and/or imprisonment may be imposed on them.
Criminal Sanctions - Those found guilty of violating the Securities Exchange Act of 1934 are subject to fines not more than $1 million and/or imprisonment not more than 10 years.
