Federal Laws that Firms and Their Brokers must Follow

In 2003, a stockholder of the biopharmaceutical company ImClone Systems was convicted of insider trading due to her selling of her stocks after a broker at Merrill Lynch informed her that the chief executive officer (CEO) of ImClone Systems sold all of his company shares. The convicted stockholder made an early sale, selling 4,000 shares of her stocks which saved her losing as much as $45,673. Punishments for her conviction included payment of a $30,000 fine and five months imprisonment.

The crime insider trading refers to the unfair practice of making investment decisions based on undisclosed (not yet made public) information about a company’s securities or stocks. An insider has access to valuable non-public information on stocks or other securities of the corporation. It can either be a person (like a broker, a client, a key employee, an executive, a director or a major owner of stocks) or an entity (such as bank, a law firm or a government institution). There are two reasons why insider trading is illegal: it gives tipped individuals market advantage over common investors (this weakens the sense of fairness in investing); and, it violates the trust investors place in the securities market.

Not all acts of insider trading are illegal, though. Its legal version is when corporate insiders, officers, directors, employees and large shareholders, buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC.

To determine illegal insider trading activities, the SEC monitors the trading volumes of stocks. Volume of stocks usually increases after information on company securities is released to the public. If volumes increase dramatically, however, even when no substantial information has been released, this will be interpreted by the SEC as a warning flag. This will then be investigated by the SEC to find out if illegal insider trading was committed.

According to securities fraud lawyers of Erez Law, the Securities and Exchange Commission (SEC) and other organizations set federal regulations for brokers, investment advisers, and firms in the United States. A few of the federal laws that firms and their brokers must follow include:

  • Securities Act of 1933. This act requires brokers to give financial and other significant information about securities offered for public sale. It also prohibits misrepresentation, deceit, and fraud in the sale of securities.
  • Securities Exchange Act of 1934. This act created the SEC. The SEC has the power to oversee and regulate brokerage firms, ensuring they abide by the rules.
  • Investment Company Act of 1940. This act minimizes conflicts of interest between companies that engage in securities trading. It requires companies to disclose their investment policies and financial status to investors on a regular basis.
  • Investment Advisers Act of 1940. This act regulates investment advisers, requiring that any firm or sole financial adviser compensated for giving advice about securities investments be registered with the SEC.

These four acts describe a few of the dozens of laws that people and companies in the securities industry must follow. In addition to federal securities laws, every state enacts their own securities law. An attorney who specializes in broker misconduct will have a comprehensive list of all laws and regulations that brokers and brokerage firms must follow and can help you explore all your legal avenues. Contacting an attorney about your losses will give you a better idea of your recovery options.

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