Securities Law and Cross Border Regulations

Securities Law and Cross Border Regulations

Author: Divya Bothra, VITSOL, Chennai.


This research paper provides an overview of commercial law that deals with securities law and cross-border regulation. The article deals with securities law that talks about the history of the U.S federal system. The article conveys the Securities and Exchange Commission (SEC) that enforced the securities law. The article also discusses the regulations of cross border and cross-border enforcement to facilitate cross border transactions.


The word ‘securities’ is a broad term of art that basically describes any form of ownership or beneficial interest in a company. The securities law also contains sale or transfer of these business interests that include common investment, like stocks and bonds. Prior to the Great Depression, the United States did not have a vigorous federal system of securities regulation. In the 1920s, the development of federal securities law was spurred by the stock market crash 1929. Investors were tempted by promises of large profits where $50 billion were offered during the decade. With thousands of investors buying up stocks in hopes of huge profits due to which it led to a large part of overselling and fraudulent practices. In October 1929, the market crashed as investors sold off their investment in mass and public confidence in the U.S. capital markets plummeted.

The federal government enacted a new regulatory law to promote fair and full disclosure of all material information relating to the markets to restore investor’s confidence in legitimate companies and to prevent misconduct. The federal securities are comprised of a series of statutes, which approves a series of regulations propagated by the government agency with general oversight responsibility for the securities industry, the Securities and Exchange Commission.


In response to the financial chaos, the federal system has investigated ways of rectifying the problems that inundated the financial market. The exchange act created the SEC, a federal agency with the authority to control the securities industry. It has powers to propagate rules pursuant to the federal securities act, to enforce federal laws and its own rules. Under the Exchange Act, the SEC has the authority to register, regulate and discipline broker-dealers, regulate the securities exchanges, and review actions of the securities exchanges’ self-regulatory organizations (SROs)[2]. Thus, they created the Securities and Exchange Commission (SEC) and tasked it with a variety of principles. The commission consists of five members, who have a staggered five-year term. Every June 5, the tenure of one of the commissioners expires. During the term of office, the President cannot remove the members as he does not have the power to designate the chairman from among the sitting members. The SEC receives bipartisan approval which involves not more than three commissioners from the same political party.

Its primary task is to bring enforcement proceedings when there is a violation of the law in securities and to investigate complaints that have occurred. It is authorized to conduct information inquiries, examine brokerage records, interview witnesses, etc. If the request is denied, it can issue court order and seek amenability in federal court. The complaints are usually from the investors and the general public, while it has the authority to conduct inspections of the books and records of broker and dealer. The SEC imposes securities laws through two main primary statues in the federal securities law: The Securities Act of 1933 and The Securities Exchange Act of 1934


The securities act of 1933 is generally referred to as the “the securities act” or the “33 Act”. This act governs the issue of securities by companies as it is said to be the fundamental “truth in securities” law. First, the objective is to promote the fair and full disclosure of all material information relating to the markets and specific securities transaction that includes all aspects of market trading as well as financing. To meet the primary means of these goals is the requirement of registration.

Second, before the securities subject to the act is offered to the public, the issuer must undergo certain procedures like the issuer must file registration and prospectus with the SEC, laying out relevant details and material information about the offerings that lay down in various schedules to the act. After this, the SEC approves the registration statement, the issuer must then provide any prospective purchaser with the prospectus.

Finally, since the SEC does not pass on the fairness of price or other terms of the offering, it is unlawful to state or imply in the prospectus that the commission has the power to disapprove securities for lack of merit, thereby suggesting that the offering is meritorious. The penalties under Section 24 of the Securities Act of 1933 provides for fines not to exceed $10,000 and a prison term not to exceed five years, or both, for wilful violations of any provisions of the act. This section makes these criminal penalties specifically applicable to anyone who “wilfully, in a registration statement filed under this title, makes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading[3].


The Securities Exchange Act 1934, which is also known as the “Exchange Act” or “34 Act” governs the trading, purchase, and sale of those securities. The Exchange Act represents two primary objectives. First, it ensures that there is a uniform securities transaction throughout the U.S. Second, it adopts transparent, fair, and orderly markets. These goals are accomplished in several ways.

First, the Securities and Exchange Commission was created by the Exchange Act. The primary market of securities transactions in the U.S is the Securities and Exchange Commission. To regulate the secondary market, the federal government enacted the Securities Exchange Act 1934. The Exchange Act provides SEC with broad authority for the aspects of the securities industry.  This includes the power to register, regulate, and oversee issuers, brokerage firms, and exchanges. It also includes the power, when authorized by Congress, to enact specific, technical rules to accomplish Congress’ broader objectives.[4]

Second, public companies are required to issue an annual report and quarterly report to keep the financing public informed as to the current state of the company. These reports must disclose the company’s current financial status, business outlook, and major risks as they exist at the time. The penalties under the logic of the Borak case (discussed in Section 24.1.3 “Securities Act of 1933”) also applies to this act, so that private investors may bring suit in federal court for violations of the statute that led to financial injury. Violations of any provision and the making of false statements in any of the required disclosures subject the defendant to a maximum fine of $5 million and a maximum twenty-year prison sentence, but a defendant who can show that he had no knowledge of the particular rule he was convicted of violating may not be imprisoned. The maximum fine for a violation of the act by a person other than a natural person is $25 million. Any issuer omitting to file requisite documents and reports is liable to pay a fine of $100 for each day the failure continues[5]


In cross-border setting that is the information, witness, and assets typically exist in outside the regulators jurisdiction. As a result, regulators are often constrained by information shortfalls, jurisdictional complexities, and legal limitations. Thus, cross-border enforcement differs from enforcement within a single regulatory system in that it requires cooperation between regulators operating in different and seemingly incompatible legal systems. Recent increases in the number of cross-border transactions suggest a growing need for better cooperation and more effective cross-border enforcement[6]

After September 11 2001, the necessity to eliminate violence related financing and money laundering obliged regulators in the International Organisation of Securities Commission (IOSCO) to standardize mutual cooperation via agreement called the Multilateral Memorandum of Understanding (MMoU). The MMoU is the signatory regulators that addresses the scope, confidentiality and the use of information. For these regulators, the MMoU is a conduit designed to increase information flows (e.g., transfers of brokerage and beneficial ownership records, depositions, and testimony) and extend enforcement capabilities (e.g., restraining orders that freeze assets, reduce defendant flight risks, force the identification of accounts, and prohibit destruction of critical documents). The MMoU is a mutual agreement structured as a statement of intent. The MMoU can neither be sanctioned by national legislatures nor approved by executive branch. The US Securities and Exchange Commission’s enforcement of US listed foreign firms are linked to the SEC by the MMoU. Despite its lack of legal force, the MMoU helps catalyse enforcement.

First, as market globalize it illuminates cross-border enforcement of securities law. Identifying cross-border frictions and friction is critical for those regulator’s management and due to confidentiality, the provisions of MMoU and the opaqueness of regulators are empirically challenging. Historically, the SEC’s tactics have been limited due to the cross-border frictions. The matter for bonding literature, which sights a U.S. listing as promoting better oversight but struggles to determine whether increased oversight actually occurs.

Second, the MMoU is linked with large, measurable reductions in transaction costs. These reductions in transaction cost vary from country to country and there is an impact in MMoU as the conditions explore the factors. There is an evidence that country-level legal paradigms (e.g., common vs. code law), laws (e.g., blocking statutes), and economic factors (e.g., economies of scale, and reciprocity) influence the magnitude of the liquidity improvement in predictable ways. These analyses demonstrate that the effect is broader than just the US (and the UK)—which indicates that the MMoU is an effective global instrument. The results offer new insights and reinforce the conclusion that cross-border cooperation, made possible by the MMoU, is a key determinant of the cost of liquidity provision[7].

Third, by the events of 9/11, the MMoU have been politically motivated and is debatably exogenous to the firms and perhaps even to the securities regulators themselves. This property, together with the within-country staggered design, makes this an attractive setting for studies seeking exogenous variation in regulatory enforcement.

Finally, the MMoU’s association with enforcement suggests that it is an effective policy tool, despite being legally nonbinding. On the surface, this association might seem unsurprising, since enhanced enforcement is the MMoU’s aim. But because cooperation is entirely unenforceable, there exists considerable scepticism regarding the MMoU’s effectiveness. Thus, the MMoU’s association with enforcement is relevant to parties seeking new soft law transnational regulatory networks, enhanced cooperation, or policy convergence[8].


There is a lack of consensus in the literature where the public oversight can affect contracting and monitoring cost. When the oversight is considered in the cross-border, there is a discussion that centres on the bonding hypothesis which views cross-listing in the US as a way to credibly signal to investors a firm’s commitment to enhanced disclosure, governance, and minority shareholder protection. Other literature questions the benefit of regulation and the legitimacy of the bonding hypothesis. Several papers contend that public regulators are unnecessary, incapable, corrupt, or swayed by powerful industries and lobbyists. If anything, regulatory shortcomings are magnified in cross-border contexts. More recently, bonding-theory critics have acknowledged valuation benefits associated with secondary listings in the US, but ascribe them to factors other than legal protections, mainly because they view cross-border enforcement as too rare and dysfunctional to provide benefits[9].


  This article evaluates the securities law and cross-border cooperation between                 regulators under IOSCO’s MMoU. Under the securities law, the federal government enacted a new regulatory law to promote fair and full disclosure of all material information relating to the markets to restore investor’s confidence in legitimate companies and to prevent misconduct which is the best lesson learned out of the U.S Depression. The cross-border has recently witnessed an increase in the number of cross-border transactions suggest a growing need for better cooperation and more effective cross-border enforcement. Thus, the cross-border regulators need to develop greater access to information which can easily execute enforcement tactics.


  1. May 2 2019
  2. April-May 2020,
  3. Federal securities law











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