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Security Market Efficiency and Returns > Market Regulation
Market Regulation
• Securities Act of 1933
• Securities Exchange Act of 1934
• Securities Acts Amendments of 1975
• Sarbanes–Oxley Act of 2002
• Global Research Settlement
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Security Market Efficiency and Returns > Market Regulation
Securities Act of 1933
• The Act's objectives are to provide investors with material financial and other
corporate information about issuers of public securities.
• The primary purpose of the 1933 Act is to ensure that buyers of securities receive
complete and accurate information before they invest.
• Among other things, registration forms call for: a description of the securities to be
offered for sale; information about the management of the issuer; information
about the securities (if other than common stock); and financial statements
certified by independent accountants.
• Rule 144, promulgated by the SEC under the 1933 Act, permits, under limited
circumstances, the sale of restricted and controlled securities without registration.
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• Regulation S is a "safe harbor" that defines when an offering of securities is
deemed to be executed in another country and therefore not be subject to the
registration requirement under section 5 of the 1933 Act.
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Security Market Efficiency and Returns > Market Regulation
Securities Exchange Act of 1934
• The Securities Exchange Act of 1934 is a law governing the secondary trading of
securities in the United States of America. The Act and related statutes form the
basis for the regulation of the financial markets and their participants in the United
States.
• One area subject to 34 Act regulation is the actual securities exchange: New York
Stock Exchange, the American Stock Exchange, and regional exchanges like the
Cincinnati Stock Exchange, Philadelphia Stock Exchange and Pacific Stock
Exchange.
• The '34 Act also regulates broker-dealers without a status for trading securities. A
telecommunications infrastructure was developed to provide for trading without a
Securities Exchange Act of 1934
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physical location.
• In 1938 the Exchange Act was amended by the Maloney Act, which authorized
the formation and registration of national securities associations to supervise the
conduct of their members subject to the oversight of the SEC.
• In the last 30 years, brokers have created two additional systems for trading
securities. The alternative trading system, or ATS, is a quasi exchange where
stocks are commonly purchased and sold through a smaller, private network of
brokers, dealers, and other market participants.
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Security Market Efficiency and Returns > Market Regulation
Securities Acts Amendments of 1975
• The 1975 amendments, also called the National Exchange Market System Act,
directed the securities and exchange commission to work with the industry toward
establishing a national market system together with a system for the nationwide
clearance and settlement of securities transactions.
• The National Market System (NMS) is the national system for trading equities in
the United States.
• A national market system plan (or NMS plan) is a structured method of
transmitting securities transactions in real-time.
• In 2005, the rules promoting the national market system were consolidated into
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REG NMS.
• The order protection rule has generated controversies since it requires traders to
transact on a trading venue at the lowest price rather than on a venue that offers
the quickest execution or the most reliability.
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Security Market Efficiency and Returns > Market Regulation
Sarbanes–Oxley Act of 2002
• As a result of SOX, top management must now individually certify the accuracy of
financial information. In addition, penalties for fraudulent financial activity are
much more severe.
• SOX increased the independence of the outside auditors who review the accuracy
of corporate financial statements, and increased the oversight role of boards of
directors.
• The bill was enacted as a reaction to a number of major corporate and accounting
scandals including those affecting Enron, Tyco International, Adelphia, Peregrine
Systems, and WorldCom.
• Opponents claim it has reduced America's international competitive edge against
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foreign financial service providers; Proponents say that SOX has been a
"godsend" for improving the confidence of fund managers and other investors with
regard to the veracity of corporate financial statements.
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Security Market Efficiency and Returns > Market Regulation
Global Research Settlement
• The Global Settlement was an enforcement agreement reached on April 28, 2003
between the SEC, NASD, NYSE, and ten of the United States's largest
investment firms to address issues of conflict of interest within their businesses.
• The central issue at hand that had been previously decided in court was the
conflict of interest between the investment banking and analysis departments of
ten of the largest investment firms in the United States.
• As part of the settlement decision published on December 20, 2002, several
regulations designed to prevent abuse stemming from pressure by investment
bankers on analysts to provide "favorable" appraisals were instantiated.
• Other than these regulatory actions, the firms involved in the settlement were also
Payments
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to pay fines to their investors, to fund investor education, and to pay for
independent third-party market research.
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Appendix
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Security Market Efficiency and Returns
Key terms
• boards of directors A board of directors is a body of elected or appointed members who jointly oversee the activities of a
company or organization.
• clearance In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is
settled. Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying
transaction.
• conflict of interest A conflict of interest (COI) occurs when an individual or organization is involved in multiple interests, one of
which could possibly corrupt the motivation for an act in the other.
• conflicts of interest A conflict of interest (COI) occurs when an individual or organization is involved in multiple interests, one of
which could possibly corrupt the motivation for an act in the other.
• IPOs An initial public offering (IPO) or stock market launch is a type of public offering where shares of stock in a company are
sold to the general public, on a securities exchange, for the first time.
• NASDAQ The National Association of Securities Dealers Automated Quotations; this is an electronic stock market.
• off-balance-sheet Off-balance sheet (OBS), or Incognito Leverage, usually means an asset or debt or financing activity not on
the company's balance sheet.
• private placements Private placement (or non-public offering) is a funding round of securities which are sold not through a
public offering, but rather through a private offering, mostly to a small number of chosen investors.
• SEC The U.S. Securities and Exchange Commission (frequently abbreviated SEC) is a federal agency[2] which holds primary
responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options
exchanges, and other electronic securities markets in the United States.
• settlement Settlement of securities is a business process whereby securities or interests in securities are delivered, usually
against (in simultaneous exchange for) payment of money, to fulfill contractual obligations, such as those arising under
securities trades.
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Security Market Efficiency and Returns
SEC Building
SOX was enacted as a reaction to a number of major corporate and accounting scandals.
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Security Market Efficiency and Returns
Securities Exchange Act of 1934
Act of 1934 governs the secondary trading of securities.
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Security Market Efficiency and Returns
SEC
The amendments are direct SEC to enable the establishment of a National Market System.
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Security Market Efficiency and Returns
US SEC
The U.S. Securities and Exchange Commission (frequently abbreviated SEC) is a federal agency, which holds primary responsibility for enforcing the
federal securities laws and regulating the securities industry
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Security Market Efficiency and Returns
Payments
The table shows the payments of each company
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Security Market Efficiency and Returns
Which of the following is a restriction imposed on market actors by
the Securities Act of 1933?
A) A company does not have to register if the issue in question is less
than 10% of the outstanding stock.
B) A security does not have register if the sale occurs outside the US and
the issuer does not engage in "directed selling efforts."
C) Most securities sold in the US must be registered by filing a
registration statement with the SEC.
D) All of these answers.
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Security Market Efficiency and Returns
Which of the following is a restriction imposed on market actors by
the Securities Act of 1933?
A) A company does not have to register if the issue in question is less
than 10% of the outstanding stock.
B) A security does not have register if the sale occurs outside the US and
the issuer does not engage in "directed selling efforts."
C) Most securities sold in the US must be registered by filing a
registration statement with the SEC.
D) All of these answers.
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Security Market Efficiency and Returns
Which of the following is an element of the Securities Exchange
Act of 1934?
A) The Act requires that companies that have publicly traded stock
provide financials.
B) All of these answers.
C) The Act authorized the formation and registration of national securities
associations.
D) The Act establishes the regulatory rules that apply to security
exchanges.
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Security Market Efficiency and Returns
Which of the following is an element of the Securities Exchange
Act of 1934?
A) The Act requires that companies that have publicly traded stock
provide financials.
B) All of these answers.
C) The Act authorized the formation and registration of national securities
associations.
D) The Act establishes the regulatory rules that apply to security
exchanges.
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Security Market Efficiency and Returns
Which rule provides intermarket price priority for quotations that
are immediately and automatically accessible?
A) Order Protection Rule.
B) Access Rule.
C) Sub-Penny Rule.
D) Distribution and Display Rules.
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Security Market Efficiency and Returns
Which rule provides intermarket price priority for quotations that
are immediately and automatically accessible?
A) Order Protection Rule.
B) Access Rule.
C) Sub-Penny Rule.
D) Distribution and Display Rules.
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Security Market Efficiency and Returns
Which of the following correctly pairs a standard created by
Sarbanes-Oxley with its title?
A) Title VIII describes criminal penalties for manipulation of financial
records.
B) Title III establishes standards for external auditor independence.
C) Title II mandates that senior executives take individual responsibility
for financial reports.
D) Title X increases the criminal penalties associated with white-collar
crimes and conspiracies.
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Security Market Efficiency and Returns
Which of the following correctly pairs a standard created by
Sarbanes-Oxley with its title?
A) Title VIII describes criminal penalties for manipulation of financial
records.
B) Title III establishes standards for external auditor independence.
C) Title II mandates that senior executives take individual responsibility
for financial reports.
D) Title X increases the criminal penalties associated with white-collar
crimes and conspiracies.
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Security Market Efficiency and Returns
Which of the following restrictions were imposed on investment
firms as part of the Global Research Settlement?
A) All of these answers.
B) Banking and analysis departments must be insulated from each other.
C) The IPO quiet period was increased to 40 days.
D) Research analysts are prohibited on going on pitches and roadshows
that promote an IPO.
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Security Market Efficiency and Returns
Which of the following restrictions were imposed on investment
firms as part of the Global Research Settlement?
A) All of these answers.
B) Banking and analysis departments must be insulated from each other.
C) The IPO quiet period was increased to 40 days.
D) Research analysts are prohibited on going on pitches and roadshows
that promote an IPO.
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Security Market Efficiency and Returns
Attribution
• Wikipedia. "Global Settlement." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Global_Settlement
• Wikipedia. "IPOs." CC BY-SA 3.0 http://en.wikipedia.org/wiki/IPOs
• Wiktionary. "conflict of interest." CC BY-SA 3.0 http://en.wiktionary.org/wiki/conflict+of+interest
• Wikipedia. "Regulation NMS." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Regulation_NMS
• Wikipedia. "National market system plan." CC BY-SA 3.0 http://en.wikipedia.org/wiki/National_market_system_plan
• Wikipedia. "National Market System." CC BY-SA 3.0 http://en.wikipedia.org/wiki/National_Market_System
• Wikipedia. "Securities Industry Automation Corporation." CC BY-SA 3.0
http://en.wikipedia.org/wiki/Securities_Industry_Automation_Corporation
• Wiktionary. "settlement." CC BY-SA 3.0 http://en.wiktionary.org/wiki/settlement
• Wikipedia. "clearance." CC BY-SA 3.0 http://en.wikipedia.org/wiki/clearance
• Wikibooks. "US Corporate Law/Securities." CC BY-SA 3.0
http://en.wikibooks.org/wiki/US_Corporate_Law/Securities#Securities_Act_of_1933
• Wikipedia. "Securities Act of 1933." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Securities_Act_of_1933
• Wikipedia. "SEC." CC BY-SA 3.0 http://en.wikipedia.org/wiki/SEC
• Wikipedia. "private placements." CC BY-SA 3.0 http://en.wikipedia.org/wiki/private%20placements
• Wikibooks. "UNIX Computing Security/Principles and policies." CC BY-SA 3.0
http://en.wikibooks.org/wiki/UNIX_Computing_Security/Principles_and_policies#Sarbanes-Oxley
• Wikipedia. "Sarbanes–Oxley Act." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Sarbanes%25E2%2580%2593Oxley_Act
• Wikipedia. "off-balance-sheet." CC BY-SA 3.0 http://en.wikipedia.org/wiki/off-balance-sheet
• Wikipedia. "conflicts of interest." CC BY-SA 3.0 http://en.wikipedia.org/wiki/conflicts%20of%20interest
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Security Market Efficiency and Returns
• Wikipedia. "boards of directors." CC BY-SA 3.0 http://en.wikipedia.org/wiki/boards%20of%20directors
• Wikibooks. "US Corporate Law/Securities." CC BY-SA 3.0
http://en.wikibooks.org/wiki/US_Corporate_Law/Securities#Securities_Exchange_Act_of_1934
• Wikipedia. "Securities Exchange Act of 1934." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Securities_Exchange_Act_of_1934
• Wiktionary. "NASDAQ." CC BY-SA 3.0 http://en.wiktionary.org/wiki/NASDAQ
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