Chapter 2: Securities Law
| Library | Comparative Securities Law |
| Pages | 15-27 |
| Author | Abdullah Alshebli |
The first chapter of this book set out a brief introduction to the various types of securities. It looked at what securities are, the benefits of securities, and the risks in trading them, as well as the various types of securities available or on offer in the UK, the US, and Kuwait. This chapter focuses on the various types of legislation surrounding securities and trading in securities in these countries.
At the outset, this chapter discusses the main aim of securities laws. In view of the wide definition of securities and the ease with which they can be traded, various laws are needed to regulate their sale or trade. These laws seek to protect both the buyer and/or investor, as well as the seller and/or issuer to ensure an orderly process. Many of these laws seek to ensure that companies accurately report their assets, financial status, and other relevant information needed by investors, but also to ensure that stockbrokers, traders, and investors abide by the rules of the trading process to stabilise the financial markets.
Securities laws can be classified according to the following categories:
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Transactional securities laws : aim to regulate the purchase and sale (offer/acceptance) of securities. -
Regulatory securities laws : focus on regulating the information prepared by companies that is used by investors when deciding to make an offer or purchase. -
Litigation securities laws : focus on disputes between investors and companies issuing securities. -
Administrative securities laws : most of these types of laws aim at alternate dispute resolution processes to avoid litigation in securities matters.
The subject of securities law differs from other fields of study such as commercial law in that it only relates to the sale and/or trade of securities, whereas other laws have a wider application. In addition, company and accounting law covers listed and unlisted companies but not foreign listed companies, while securities law covers all listed companies whether foreign or national (but not unlisted national companies).
Furthermore, the methods of enforcing, supervising, and policing compliance with securities law are also different. Governmental agencies such as the UK Financial Conduct Authority (FCA), the US Securities and Exchange Commission (SEC), and the Kuwaiti Capital Markets Authority (CMA) are responsible for the enforcement and supervision of compliance with securities laws.
Despite the differences with other types of laws, securities laws do not operate in isolation from them. Most legal systems around the world are complex systems of inter-related laws that work together to form an orderly and functional society. For example, in the UK, securities laws include the Financial Services and Markets Act 2000 (FSMA) and the Financial Services Act 2012 (FSA). However, there are other laws and standards which affect securities activities, such as laws covering bribery, fraud, company law, and accounting law. In addition, financial reporting standards such as the Generally Accepted Accounting Principles (GAAP) in the UK also play a role in securities laws.
Securities law includes all laws applicable to the issuing and trading of the various securities.
After the US stock market crash in the late 1920s, governments realised the need for greater control over these trades and enacted several important pieces of legislation. Some countries, such as the UK, regulate securities as a part of the entire financial system referred to as ‘financial regulation'. In other countries, such as Kuwait and the US, the regulation of securities forms part of a separate and special field of law called ‘securities laws'.
Securities markets, including stock exchanges, are important for the financial system as a whole because they represent the arteries that feed the national economy with enough money to function properly. 1 There is also an overlap between the banking sector and capital markets: both have an effect on economic development, as through them savings turn into productive investments. 2 Securities markets and the banking system complement each other, and both should be promoted to have appropriate resources for financial investments. 3 It is important to regulate the securities market because of its potential impact on the entire economy.
There is also a need for special regulation of securities because of their nature. For example, shares are intangible. The holder owns future entitlements, rights, or benefits, such as dividends, voting rights, and the return of capital, the value of which can go up or down. They are not pieces of tangible property that can be used or consumed, such as land or goods. As a result, special requirements and conditions are needed. 4 Commercial law, which encompasses the statutory regulation of commercial activities, cannot provide sufficient protection in investment markets because of the importance of having timely and full information presented in a fair way. There are also systemic risks in investment markets which bring various types of risks. 5
There are important differences between the securities market and the traditional market for goods and services 6 as shown in
The UK has a single regulatory authority that is responsible for the regulation of the whole financial system, 7 including the protection of consumers of financial products and services. 8 The UK legislation gives the Financial Conduct Authority (FCA) considerable power and broad scope.
The most important pieces of legislation regulating securities in the UK are the Financial Services and Markets Act 2000 (FSMA) and the Financial Services Act 2012 (FSA). This law is supplemented by rules and regulations set up by the Financial Conduct Authority (FCA) and set out in the FCA Handbook, namely:
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Listing rules : rules related to the admission of securities to the ‘Official List', which is maintained by the FCA on its website. -
Prospectus rules : implement the EU Prospectus Directive in the UK and set out the content requirements for prospectuses. -
Disclosure and transparency rules : implement sections of the EU Transparency Directive and make other rules concerning the transparency of and access to information in the UK financial markets including aspects of the EU Market Abuse Regulation (MAR).
In the US, the banking system is regulated at both the federal and state level. There are separated securities, commodities, and insurance regulatory agencies – separate from the bank regulatory agencies – at the federal and state level. Banking regulations address privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury lending, and the promotion of lending to lower-income populations.
The Federal Reserve System is the central banking system of the United States. It was established in 1913. The three main functions of the Federal Reserve are as follows:
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To conduct the nation's monetary policy.
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To supervise and regulate the banking institutions.
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To maintain the stability of the financial system and provide financial services to depository institutions, the US government, and foreign official institutions.
The Securities and Exchange Commission (SEC) is mandated with applying the various rules and laws pertaining to securities exchanges. What follows is a brief discussion of the most relevant laws and rules that the SEC needs to follow and apply.
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Securities Act 1933 : the Act has two basic aims:It requires that investors receive financial and other significant information which enables them (not the government) to make informed judgements about whether to purchase a company's securities. This information includes a description of the company's properties and business, a description of the security to be offered for sale, information about the management of the company, and financial statements certified by independent accountants.
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It prohibits deceit, misrepresentations, and other fraud in the sale of securities.
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It requires that investors receive financial and other significant information which enables them (not the government) to make informed judgements about whether to purchase a company's securities. This information includes a description of the company's properties and business, a description of the security to be offered for sale, information about the management of the company, and financial statements certified by independent accountants.
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It prohibits deceit, misrepresentations, and other fraud in the sale of securities.
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Securities Exchange Act 1934 :Section (4)(a) of the Act created the Securities and Exchange Commission (SEC). The Act empowers the SEC with broad authority over all aspects of the securities industry.
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The Act requires disclosure of important information by anyone seeking to acquire more than five per cent of a company's securities by direct purchase or tender offer.
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The Act requires a variety of market participants to register with the Commission, including exchanges...
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