Compliance with securities laws: Overview, definition, and example
What is compliance with securities laws?
Compliance with securities laws refers to the adherence to the regulations and legal requirements governing the issuance, trading, and reporting of securities (such as stocks, bonds, and other financial instruments). Securities laws are designed to protect investors, maintain fair and efficient markets, and promote transparency in financial reporting. Companies, brokers, and other market participants must follow these laws to ensure that their activities are legal and that investors are protected from fraud, insider trading, and other illegal practices.
In the United States, the main securities laws include the Securities Act of 1933, which regulates the offering and sale of securities, and the Securities Exchange Act of 1934, which governs trading activities and requires companies to disclose financial information to the public. Other regulations, such as the Sarbanes-Oxley Act, also impose requirements for financial transparency and corporate governance.
Why is compliance with securities laws important?
Compliance with securities laws is important because it ensures that market participants follow established rules that protect investors and promote trust in the financial system. Without strict compliance, markets would be at greater risk of fraud, manipulation, and insider trading, undermining confidence in the financial markets. For businesses, non-compliance can result in severe penalties, including fines, legal actions, and reputational damage. Adhering to securities laws also helps ensure transparency, which is crucial for investors making informed decisions based on accurate and timely information.
Understanding compliance with securities laws through an example
Imagine a company, Company A, decides to issue new shares of stock to raise capital. Before issuing the shares, Company A must comply with securities laws by registering the offering with the relevant regulatory authorities, such as the Securities and Exchange Commission (SEC), unless the offering qualifies for an exemption. Company A must provide detailed financial disclosures, including audited financial statements and information about the risks involved in the investment.
Once the shares are issued, Company A must continue to comply with ongoing securities laws by filing regular reports, such as quarterly earnings and annual reports, to keep investors informed. Additionally, if insiders (such as executives) trade the company's stock, they must comply with insider trading laws, which prohibit buying or selling based on material non-public information.
In another example, an investment firm, Company B, acts as a broker-dealer and buys and sells securities on behalf of clients. Company B must ensure compliance with securities laws by registering with the SEC, following rules related to market conduct, ensuring fair treatment of clients, and avoiding any conflicts of interest.
An example of compliance with securities laws clause
Here’s how a compliance with securities laws clause might appear in a contract or agreement:
“The Company agrees to comply with all applicable securities laws and regulations in connection with the offering, sale, and trading of its securities. The Company will file all necessary reports and provide any disclosures required by the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as comply with any other applicable regulations.”
Conclusion
Compliance with securities laws is critical for ensuring that financial markets operate fairly, transparently, and efficiently. It protects investors from fraud and manipulation, ensures accurate reporting, and maintains the integrity of the financial system. For businesses, adhering to securities laws is essential not only to avoid legal and financial penalties but also to foster trust and confidence with investors and other market participants.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.