' Securities Trading Regulation

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 Trading Legislation
  • This segment describes legislation pertaining to securities-related litigation and securities trading fees.

    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.

  • In the period 1998-2001, there is a noticeable decrease in the number of class-action lawsuits filed relative to the number of companies listed on the major stock indexes from 2.7% to 2.3% .

    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’.

  • However, issuance of securities and other financial instruments in a less regulated market will always have some issues with fraud, and any investor in any market is aware of this fact. However, in a more highly-regulated securities market, businesses will fear releasing any qualitative information for investors because of liability issues. Therefore, deregulation can position firms to release meaningful information, thus increasing supply and demand for securities and aiding capital formation. The need to reverse severe damage to capital accumulation supercedes the risk that all investors are aware of before they make an investment in the first place. Larger firms are being sued less frequently than before passage of the SLUSA. As a result, in 1999 the stock market experienced a substantial increase in value with much of the market strength centered on the most well capitalized issuers (of information regarding corporate prospects).

    Plaintiffs are alleging accounting fraud and insider trading more frequently than before the passing of the act.

  • However, the fact that only 6.5% of cases involving publicly traded companies for “false forward-looking information” suggests that the high pleading standards of the SLUSA affect which actions plaintiffs are wishing to file in federal court. If the allegations truly hold weight, they should not be mired in state courts, rather they should be heard by federal courts.

    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.


    Works Consulted
    Tech Law Journal – Clinton Signs Securities Litigation Reform Bill, phttp://www.techlawjournal.com/seclaw/19981105.htm] Stanford Law School Securities Class Action Lawsuit Clearinghouse - Ten Things We Know and Ten Things We Don't Know About the Private Securities Litigation Reform Act of 1995 - Joint Written Testimony of Joseph A. Grundfest and Michael A. Perino before the Subcommittee on Securities of the Committee on Banking, Housing, and Urban Affairs, United States Senate, on July 24, 1997 - Litigation Activity Indices, [http://securities.stanford.edu/research/articles/19970723sen1.html]
    Chitwood and Harley, LLP: Securities Reform: Its Effect on Litigation and Capital Formation - [http://classlaw.com/CM/Articles/articles12.asp] 1