As shown above, the 2003 settlement rates in securities class actions by federal circuits is just an example of why regulation in this area can increase protection to corporate shareholders and macroeconomics
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Securities Litigation Uniform Standards Act of 1998
Former U.S. President Bill Clinton signed into law the Securities Litigation Uniform Standards Act (SLUSA) in 1998. Its purpose is to decrease the number of frivolous class-action lawsuits brought in state courts that threaten the ability of companies to raise capital and disseminate information. Primarily, the law protects “forward looking” statements made by officials of public companies that are designed to encourage investment and inform investors about their companies’ prospects. This protection should “promote dissemination of financial information to analysts and investors, and improve market efficiency”. Encouraging the provision of quality investment information facilitates capital accumulation.
Are there any problems regarding implementation?
One common argument is that effects of this legislation could be the reverse of those intended, in that the act could ‘go "far beyond curbing merit-less lawsuits to all but legalizing securities fraud." The Act could allow companies to induce investment with unsubstantiated statements, which could ultimately erode investors' faith in the information they receive and harm capital formation’.
Plaintiffs are alleging accounting fraud and insider trading more frequently than before the passing of the act.
Supporting an Efficient Market
While some may view this legislation as unnecessary - sops to the 'wealthy' and 'powerful', the truth of the matter is that those who benefit most are the staples of the American economy: The consumer and the shareholders. The business world is always seeking efficiency, and that added value will be delivered to shareholders in the form of greater Capital gains, Dividend issues or Stock buybacks. We call it the CDS system, and it benefits you even if you do not own stock, just because of the macroeconomics involved. When corporations are regulated more closely, cash flows and trades can not be made which adversely effect, for example, a common, low-volume shareholder, for the benefit of the bulge-bracket shareholder with the information and/or access to make the transaction. Corporations are gradually learning that shareholders can determine their success or failure in great part, and that providing them with more than the essential information means a two-way benefit.