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An Introduction to the Legal Landscape Protecting Investors from Fraud

May 19, 2015 Blog

As one might expect, there are numerous laws and regulations that apply to the sale of stocks and other investment opportunities. While most of these laws are intended – in one way or another – to protect the interests of individual investors, understanding them and the ways they interact to form the legal landscape requires years of study and a full-time dedication to practicing in this complex area of law.

That said, as an investor, it is important to have at least a basic understanding of the laws that govern brokers, investment advisors and the financial markets. The more knowledge you can retain, the better able you will be to make informed decisions and take action should you fall victim to investment fraud.

For most investors, the key federal statutes are: the Securities Act of 1933, the Securities Exchange Act of 1934, and the Sarbanes-Oxley Act of 2002.

The Securities Act of 1933

Upon being signed into law, the Securities Act of 1933 (the “1933 Act”) introduced two critical concepts that continue to underpin the U.S. financial markets to this day:

  • Registration of securities as a means of providing investors with sufficient information to make informed investment decisions; and,
  • The illegality of misrepresentations, deceit and other forms of fraud in connection with the sale of securities.

The idea behind the 1933 Act was to give investors the tools they need to invest with confidence – and the remedies they need in the event such confidence is betrayed. While certain securities offerings are exempt from registration, the 1933 Act’s (and other statutes’) prohibitions on fraudulent conduct apply broadly to transactions involving investment opportunities.

The Securities Exchange Act of 1934

The Securities Exchange Act of 1934 (the “1934 Act”) introduced the world to the Securities and Exchange Commission (SEC). The 1934 Act gives the SEC broad authority to regulate the securities industry, including brokers, clearinghouses and the public securities exchanges. The SEC also has authority over the Financial Industry Regulatory Authority (FINRA), which provides the arbitration forum for securities fraud claims.

In addition, the 1934 Act requires annual and periodic corporate reporting, prohibits insider trading, and further solidifies the 1933 Act’s protections against other forms of fraudulent activity.

The Sarbanes-Oxley Act of 2002

At the time of its enactment, President Bush declared that the Sarbanes-Oxley Act of 2002 (known as “SOX”) represented “the most far reaching reforms of American business practices” since the 1940s. With SOX, public companies became subject to strict – and exceedingly complex – requirements designed to increase corporate responsibility and prevent the fraudulent accounting practices that plagued the turn of the century. Companies that violate SOX face severe government penalties and potential damages in whistleblower litigation.

Together, these three landmark statutes provide the foundation for investors to protect themselves from unreasonable risk and improper practices. While the onus remains on you to be diligent and enforce your rights, the 1933 Act, 1934 Act and SOX serve as important tools for taking action against fraudulent conduct.

Zamansky LLC | Dedicated Investment Fraud Attorneys

The attorneys at Zamansky LLC have more than 60 years of combined experience representing whistleblowers and victims of investment fraud. For more information, or to schedule a free initial consultation, call (212) 742-1414 or contact us online today.