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Securities Market Regulation and Supervision Essay

Generally, markets are regulated in a competitive environment to counteract or prevent market failure (Niemeyer, 2001, p.5). Moloney (2002, p.6) posits that the major preoccupation of securities regulation has to do with asymmetries of information and externalities which are typical market failures in the securities market.

  1. Rules and Regulations Regarding Corporate Stocks, Bonds and Securities Regulation: The cornerstone of securities regulation in the United States of America is the Securities Act 1933. The 1933 Act regulates the sale of corporate stocks, bonds and other forms of securities. The main ethos of the 1933 Act is to make available to investors, financial information and other important information relating to a security that is being tendered for public sale, and to prevent fraud, deception or misrepresentation (U.S. Securities and Exchange Commission, n.d.).

Registration of a bond, stock or security is a foundational prerequisite before it can be tendered for public sale. Section 10 of the Securities Act 1993 lays down rules and regulations on matters relating to information provided during registration of bonds, stocks or securities(U.S. Securities and Exchange Commission, n.d.). Disclosure of vital information is foundational in registering a bond, stock or security.

This requirement is evidently for the purpose of protecting investors from misrepresentation or falsification of information provided in a company’s prospectus. The Securities and Exchange Commission (S.E.C.) is thus empowered to “at any time issue an order preventing or suspending the use of a prospectus … if it has reason to believe that such prospectus has not been filed … or includes any untrue statement”. (Securities Act 1933 section 10b)

Information provided during registration must also describe the company’s business and assets, the security being tendered for sale, information concerning the company’s management, and the company’s financial statements that must be certified by independent accountants. The S.E.C. also requires companies whose assets are more than $10 million and who have owners holding more than 500 securities, to make public annual and periodic reports.

Rules against ‘insider dealing’ or insider trading are also crucial in the regulation of company stocks, bonds and securities. Under the S.E.C.’s ‘Full Disclosure’ rule, companies are obliged to concurrently, make public any material non-public information that it intentionally divulges to one person. It is thus unlawful for anyone with material non-public information to make use of that information to purchase or sell securities or to inform others to do the same (United States of America v. Martha Stewart and Peter Bacanovic ).

Also as established by the Supreme Court in United States v. Carpenter (1986), one cannot exploit a fiduciary position for personal profit if that position makes one privy to special information. Use of that privileged special information to trade is thus akin to insider trading.

  1. Summary of Facts Relating to the Imclone and Martha Stewart Situations:
  2. Imclone was due to receive information from the Foods and Drugs Administration on its new cancer drug and Samuel Waksal, C.E.O. of Imclone had information that the report was not going to be good and this would logically have a negative effect on the company’s stocks (Astarita, n.d.).
  3. Martha Stewart received a phone call from her stock broker at Merrill Lynch (Peter Bacanovic) that the C.E.O of Imclone, was selling all his shares in the company held at Merrill Lynch, and she also acted on that information and sold all her shares in Imclone, avoiding a loss of £45,673.

iii. The stock broker disclosed special non-public and confidential information about another client to Martha Stewart.

Bacanovic abused his fiduciary role at Merrill Lynch when he passed on confidential non-public information about the activity of another client of Merrill Lynch. By passing on an ‘inside’ information to Martha Stewart and she acting on it to trade, she became an accessory to Bacanovic unlawful conduct and thus was also culpable of using material non-public information to trade.

  1. The Future of American Business Ethics: Chapter 46 (Uniforms Securities Act) makes provisions that regulate issues relating to companies’ stocks, bonds and securities. Article 1 makes it unlawful for anyone to use a fraudulent scheme, untrue statement or the use of deceit in the course of an offer, a sale or purchase of a security.

Chapter 46 also regulates advisory activities and makes it illegal for one who advices another concerning the value of securities to employ any fraudulent scheme in their advisory role.

As can be realised from the above presentation, the securities market thrives on information. The integrity and validity of information made public is crucial in maintaining investor confidence and ethical conduct by companies who tender shares for public trading in crucial in this direction.

The dichotomy between public information provided by a company when registering a stock, bond or security and other special information that an ‘insider’ uses to trade or special information used in trading by one with fiduciary responsibilities has to do with the issue of asymmetries of information. For the securities market to operate in a fair and ethical manner, there should be a level playing field for all investors with regards to accessibility to information.


Astarita, M. J. (n.d.) ‘The Story of Martha and the Phone Call’, Retrieved October 12 2007 from http://www.seclaw.com/docs/marthastewartindictmentseccivil0603

Moloney, N., (2002) EC Securities Regulation, Oxford: Oxford University Press

Niemeyer, J. (2001) ‘An Economic Analysis of Securities Market Regulation and Supervision: Where to Go after the Lamfalussy Report?’, SSE/EFI Working Paper Series in Economics and Finance, No. 482, December 14, 2001

U.S. Securities and Exchange Commission, (n.d) ‘The Laws that Govern the Secirities Industry’, Retrieved October 12 2007 from http://www.sec.gov/about/laws.shtml

United States of America v. Carpenter (1986)

United States of America v. Martha Stewart and Peter Bacanovic

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