What is the purpose of banking laws and regulations?
Banking laws and regulations protect consumers interacting with powerful financial institutions. Banks are not allowed to provide loans and mortgages with abusive or unfair terms, or to exploit their customers’ lack of knowledge and sophistication. They also must take certain measures to protect the privacy of their customers. States may impose regulations beyond those at the federal level.
How does a mortgage work?
A mortgage allows a buyer to purchase property when they cannot pay the full purchase price from their own funds. The buyer offers the property as security for a loan from the bank, which is paid off in installments. If the buyer does not keep up with their payments, the bank can proceed with a foreclosure or repossession. This means that the bank can take possession of the property and sell it to recoup the loan. Sometimes a buyer will finance a purchase with multiple mortgages.
How does a company go public?
A company goes public by making an initial public offering, which means that it offers shares of its stock to the public for the first time. A bank usually will underwrite the sale and help determine how much the shares should cost and how much of the company should be sold. It will buy those shares and sell them to investors. The company and the bank can meet with investors after the necessary paperwork is filed to announce the terms of the IPO and take orders for shares. Once the initial shares are allocated, the company can start trading on a securities exchange.
What is the UCC?
The UCC is the Uniform Commercial Code, which was devised to promote uniformity among state laws that govern commercial transactions. Although it is not a binding law, it has served as a model for state laws, and all states have adopted a version of the UCC with certain modifications. Many of the sections in the UCC, which are known as articles or chapters, govern loans or other secured transactions. In these arrangements, a borrower designates an asset as collateral for a loan, and the lender can take possession of the asset used as collateral if the borrower cannot pay the loan. Among other things, the UCC provides requirements for perfecting a security interest, which can prevent disputes involving the priority of lenders when multiple lenders have secured interests in the same asset.
Why were securities rules developed?
Securities rules were developed in response to the Great Depression of the 1930s. To prevent a similar disaster in the future, Congress created the Securities and Exchange Commission under the Securities Exchange Act of 1934. This federal law requires securities to be registered with the SEC before they can be sold, and it requires sellers of securities to disclose information about securities to investors. When a violation of the Securities Exchange Act or another federal law is suspected, the SEC may investigate the circumstances and pursue an enforcement action.
Can an investor sue for a securities violation?
Yes, an investor can sue for a securities violation under rules such as SEC Rule 10b-5. This federal rule allows a private party to bring a lawsuit against a person or entity that engaged in fraud, deception, misrepresentations, or other violations in connection with the purchase or sale of a security. State securities laws, sometimes known as Blue Sky laws, also may provide a private right of action for securities violations. Some of these laws may be more favorable to investors than federal laws.
What is FINRA arbitration?
The Financial Industry Regulatory Authority (FINRA) provides rules, standards, and practices for securities brokers. One of its most notable rules is Rule 12200, which governs all disputes related to the business activities of securities brokers. The rule provides that a dispute between a securities broker and an investor must proceed to arbitration if the broker and the investor agree to arbitration, or if the investor requests it. Other FINRA rules define arbitration procedures, including the selection of arbitrators and the structure of hearings. Decisions in FINRA arbitration are usually final and binding.
What are some common types of securities fraud?
Common types of securities fraud include misrepresentations, account churning, unauthorized trading, and Ponzi schemes. Misrepresentations often occur when a broker misleads a client about the risk of an investment. Account churning occurs when a broker executes unnecessary trades to generate more commissions. Unauthorized trading occurs when a broker completes transactions without getting permission from the investor. A Ponzi scheme involves a promise of high returns in exchange for an initial investment. The perpetrator pays earlier investors with the initial investments made by later investors, rather than actual returns, creating a cascade effect.
What is the difference between fraud and negligence involving securities?
Fraud usually involves intentional misconduct, while negligence usually involves careless conduct. A claim based on fraud sometimes can be challenging to prove because it requires showing an element of intent or at least recklessness. By contrast, a claim based on negligence requires only proof that a securities broker or firm failed to use the appropriate care under the circumstances. In either situation, an investor must show that the fraud or negligence resulted in quantifiable losses. This often involves calculating the projected value of their account had the broker or firm acted appropriately.
What are the risks and rewards of venture capital investments?
Venture capital investments typically involve unsecured loans to startups that cannot raise funds through other means. If the startup fails, the venture capitalist will lose their investment. If the startup successfully goes public or gets acquired by an established company, however, the investor could receive substantial returns. Venture capitalists usually expect a significant role in overseeing operations in exchange for the higher level of risk. These investments are best suited to situations in which the investor can afford to wait for their return, and when the company has developed a groundbreaking concept or product.