SECURITIES REGULATION SPRING 2006 January 10, 2006

Administrative Matters Dorothy Vinski Office Hours - Tuesday and Thursday 7:15 to 8:00 p.m., or individual appointment Class Procedures Required Texts Syllabus

Administrative Matters Outside reading not required Study aids: 1.Ratner’s Securities Regulation Nutshell (West, 4th ed. 1992) 2.Hazen’s Securities Regulation Hornbook (West 1990 edition) 3.Palmiter’s Examples and Explanations Financial News - Wall Street Journal

Administrative Matters Attendance and Participation - up to 3 points (both plus and minus) Taping Policy Final Exam - open code exam

Scope of Course Class Syllabus Reading Assignments - to be distributed for each unit Course is cumulative - later classes presume understanding of earlier classes Corporations

Syllabus Part I Chapter 1 - pp.1-16 and Chapter 3 - pp Key terms and concepts that are essential to understanding future chapters are set forth in Syllabus - Part I Modern financial markets - this course focuses on the Securities Market Regulatory bodies that oversee financial markets: SEC, SRO’s and state Blue Sky administrators Federal Securities Laws - the six statutes that are collectively known as federal securities laws

U.S. Capital Markets Markets that we will NOT cover: –Money Market –Government Securities Markets –Municipal Securities Markets –Corporate Debt Market - Bond Market –Derivative Market

Securities Market Distinguish between Distribution (primary) Markets vs. Trading (secondary) Markets Distribution (primary) market is where the issuer or corporation raises capital through a public offering of securities Trading (secondary) market involves purchases and sales of outstanding securities among investors –“Secondary offering” is a public offering in which existing stockholders sell their shares –Regulated by Securities Act of 1933, even though does not raise capital for issuer

Overview of Federal Securities Laws Investment Company Act –Mutual fund is most common form of investment company –Act requires registration of investment companies, unless exempted, and disclosures to be made on regular basis by investment company and its managers –Includes an antifraud provision

Overview of Federal Securities Laws Investment Advisors Act –Covers individuals who are not broker- dealers but who are in business of providing investment advice –Act requires registration and periodic reports to SEC, and disclosures to client

Overview of Federal Securities Laws Trust Indenture Act –Long term corporate debt generally issued under Trust Indenture Act –Specifies form of indenture - the contract Public Utility Holding Act Company –Regulates interstate holding companies with subsidiaries that are electric utilities or distribute natural gas

Overview of Federal Securities Laws The Securities Act of 1933 –Regulates offers and sales in the Distribution (primary) market The Securities Exchange Act of 1934 –Covered in Corporations class (bar exam) –Originally designed to extend disclosure and antifraud requirements to Trading (secondary) market

Exchange Act of 1934 Reporting Companies under 1934 Act –Companies that have a class of securities listed on a national exchange (Section 12(b)) –Companies that have assets in excess of $10 million and that have a class of equity securities held by at least 500 persons (Section 12(g) and Rule 12g-1) –Companies that have filed a 1933 Act registration statement that has become effective (Section 15(d))

Exchange Act of 1934 Periodic and Current Filing Requirements (Section 13) –Annual reports on Form 10-K, quarterly reports on Form 10-Q and Form 8-K –Integrated disclosure - reporting companies registering securities under the 1933 Act may satisfy the 1933 Act’s disclosure requirements by incorporating into the registration statement information from their Exchange Act filings.

Exchange Act of 1934 Proxy Regulations (Section 14) –Required to provide full disclosure of material facts when soliciting stockholders’ proxies (elections of directors, approval of corporation action) –Preliminary proxy statement –Shareholder proposals may be submitted to be included on management proxy statement for vote at annual meetings Regulation of Trading –Insider Trading provisions (Section 16(b) and Rule 10b-5)

Exchange Act of 1934 Insider trading under Section 16 –Section 16(b) prohibits an insider (defined as an officer, director or beneficial owner of 10% outstanding securities) from purchasing and selling within six months, must disgorge any profits to the company Insider trading under Section 10(b) and Rule 10b-5

Exchange Act of 1934 –Section 10 and Rule 10b-5 is general anti- fraud provision as to any securities transaction (not just reporting companies) and by anyone (not just insiders) Activity must involve interstate commerce and deception/manipulation as defined by SEC and Supreme Court interpretations Involves a purchase or sale (contrast to Section 17 of the 1933 Act which is its anti-fraud provision - only applies to offers and sales)

Exchange Act of 1934 Other provisions of 1934 Act –Tender Offers (Section 14(d), (e) and (f)) Williams Act Full disclosure required of all material information by anyone trying to acquire 5% or more of shares –Margin Trading (Section 7) Investors may buy stock on credit Federal Reserve Board limits amount of credit that may be extended

Exchange Act of 1934 Registration of Exchanges, or SRO’s (Sections 5 and 6) –NYSE, AMSE and regional exchanges –NASD - organized under Section 15A

Sarbanes-Oxley Act of 2002 –Enacted in response to accounting irregularities or, worse, fraudulent financial disclosures - Enron, Tyco, WorldCom and HealthSouth –Federal securities laws generally remain intact –Establish compliance programs and document those procedures (code of conduct, written revenue recognition policy, internal controls) –Enhance financial reporting (financial staff and internal controls structure for information gathering and dissemination and to allow CEO and CFO to make certifications under shortened deadlines) – Improve corporate governance practices