2. Present Federal Law

6

The Securities Act of 19332 was enacted to protect investors in securities by requiring registration of securities with the Securities and Exchange Commission and to assure accuracy and completeness in prospectuses used in the sale of registered securities. Under section 5 of the Act it is unlawful to use any means or instruments of transportation or communication in interstate commerce or the mails to sell an unregistered security, to transmit a prospectus relating to a registered security if the prospectus does not meet the requirements of section 101 of the Act, or to offer to sell or buy an unregistered security or a security as to which the registration statement is subject to a refusal order or stop order, or before the effective date of the registration statement under section 8.5 Section 17(a) makes it unlawful to use the mails or interstate commerce in the fraudulent sale of, or offer to sell, securities. Section 17(b) bars the use of the mails or interstate commerce for publication or circulation of a description of a security which does not purport to be an offer for sale but for which description consideration is received, unless disclosure of that receipt is made. Section 23 makes it unlawful to represent that the filing of a registration statement or the nonexistence of a stop order indicates a finding by the Commission of the truth and accuracy of the registration statement or an indication of the merits of the registration statement. Under section 24,9 a "willful" violation of a provision of the Act or the rules and regulations under it, is a five-year felony. In addition the willful making of an untrue statement of a material fact in a registration statement filed under the Act or omission from the registration statement of a material fact required to be stated in it or necessary to make the statements in it not misleading is also punishable by up to five years in prison.

11

The Trust Indenture Act of 1939 10 safeguards the purchasers of debt securities by requiring the registration and qualification of trust indentures for public offerings of debt securities in the aggregate amount of one million dollars or more. Under section 306(a), it is unlawful to use the mails or a means of transportation or communication in interstate commerce to sell a security not registered under the Securities Act of 1933 and to which the subsection applies, unless the security is issued under an indenture and an application for qualification is effective as to the indenture. Under section 306(b),12 it is unlawful to use the mails to transmit a prospectus relating to such a security unless the prospectus contains the information prescribed in rules and regulations of the Commission to be disclosed as to an analysis of specified provisions of the indenture, or to sell or deliver securities after sale unless the required information is attached or precedes the delivery or sale. Section 306 (c) 13 prohibits the offer for

2 15 U.S.C. 77a et seq.

3 15 U.S.C. 77e.

4 15 U.S.C. 77j.

515 U.S.C. 77h.

615 U.S.C. 77q (a).

715 U.S.C. 77q (b).

815 U.S.C. 77w.

915 U.S.C. 77x.

10 15 U.S.C. 77aaa et seq.

11 15 U.S.C. 77fff (a).

12 15 U.S.C. 77fff (b).

13 15 U.S.C. 77fff (c).

14

sale of unregistered securities for which no registration statement has been filed unless there is an indenture and an application for qualification has been filed as to the indenture, or where the application is the subject of a refusal order or a stop order or, prior to qualification, public proceedings, or examination by the Commission under section 307 (c). Section 324 of the Act 15 prohibits a person offering, selling, or issuing a security from falsely representing that action or failure to act of the Commission indicates the approval of the Commission to a trustee, indenture, or security, or falsely representing that action or inaction of the Commission with regard to a statement or report filed with or examined by the Commission indicates the truth and accuracy of the statement or report. Under section 325,16 it is a five-year felony "willfully" to violate a provision of the Act, or a rule, regulation, or order issued thereunder, or "willfully" to make an untrue statement in an application, report, or document filed or required to be filed under the Act, or omit a material fact required to be stated or necessary to make the statements not misleading.

19

The Securities Exchange Act of 1934 17 expands the coverage of the Federal securities laws to regulate trading on national securities exchanges and over-the-counter markets.18 Section 7 prohibits extension of credit for purchase of stock in violation of the rules and regulations of the Board of Governors of the Federal Reserve System and the receipt of such a loan if the loan is prohibited.20 Section 9 (a) describes certain unlawful practices used to manipulate stock prices by creating a false impression of the state of the market in a security. Section 10(a) 21 prohibits short sales or employment of stop-loss orders with respect to a security registered on a national securities exchange in contravention of the rules and regulations of the Securities and Exchange Commission. Section 10 (b) 22 prohibits stock manipulation in connection with the purchase or sale of such securities in contravention of Commission rules and regulations. Rule 10b-5 of the rules and regulations issued under the Securities Exchange Act of 1934 23 prohibits the use of the mails or interstate commerce or a facility of a national security exchange to defraud, to make an untrue or misleading statement, or to engage in a deceitful or fraudulent practice in connection with the purchase or sale of a security. Under section 14(a),24 it is unlawful to solicit proxies in contravention of the rules and regulations issued by the Commission. Rule 14a-9 25 prohibits false or misleading statements in solicitations for proxies and false representation of approval by the Commission of a proxy statement or other material relating to proxy solicitation.

Section 14 (c) of the Act 26 requires that if the management of the issuer of securities has not solicited proxies from the holders of those securities, it must submit to those holders prior to any annual or other

14 15 U.S.C. 77ggg(c).

15 15 U.S.C. 77xxx.

16 15 U.S.C. 77yyy.

17 15 U.S.C. 78a, et seq.

18 15 U.S.C. 78b.

19 15 U.S.C. 78g (c) and (d).

20 15 U.S.C. 78g(f).

21 15 U.S.C. 78j (a).

215 U.S.C. 78j (b).

23 17 C.F.R. § 240.10b-5. 24 15 U.S.C. 78m (a).

25 17 C.F.R. § 240.149-9.

26 15 U.S.C. 78n (c).

meeting of the stockholders the same material which the management would have been required to submit in conjunction with a solicitation of proxies. Rule 14c-6 27 prohibits false or misleading statements in the information statements sent to stockholders and false representation of approval of an information statement by the Commission. Section 16(a) of the Act 28 requires the beneficial owner of more than ten percent of a registered security, and the directors and officers of the issuers of such securities, to file periodic reports of the amount of all equity securities of the issuer he owns. Section 16 (c) 29 prohibits certain short sales of securities by beneficial owners of more than ten percent of a security and by the officers and directors of the issuers of equity securities. Section 32 (a) 30 provides that "willful" violation of a provision of the Act or a rule or regulation thereunder is a two-year felony, except that a violation by an exchange is subject to a penalty of $500,000 rather than the penalty of $10,000 applicable to others. A willful and knowing false or misleading statement in an application, report, or document required to be filed under the Act or a rule or regulation thereunder or in an undertaking contained in a registration statement filed under section 15(d) 1 is also a two-year felony, with a violation by an exchange subject to a penalty of $500,000.

The Public Utility Holding Company Act of 1935 regulates gas and electric utility holding companies and the financing of such companies. Section 12 (h) 33 prohibits political contributions by registered holding companies. Section 17 (a) 34 requires that officers and directors of registered holding companies file periodic statements of their holdings of stock in the registered holding company and subsidiaries thereof. Under section 29,35 a "willful" violation of the Act or a rule, regulation, or order thereunder, or the "willful" making of a false or materially misleading statement in an application, report, document, account, or record filed or kept or required to be filed or kept under the Act or a rule, regulation, or order thereunder, is a two-year felony, except that the fine for a holding company which is not an individual is $200,000 rather than $10,000.

The Investment Company Act of 1940 36 regulates companies engaged in the business of investing, reinvesting, and trading in the securities of other companies. Section 7 (a) prohibits transactions by unregistered investment companies in securities issued by the investment company or by another person. Section 7 (b) prohibits transactions by depositors, trustees, and underwriters of unregistered investment companies in a security of the company.37 Section 7 (c) 38 prohibits the promoter of a proposed investment company from using the mails or interstate commerce to offer for sale, sell, or deliver after sale, in connection with a public offering, a preorganization certificate of subscription for a proposed investment company. Section 7 (d) 39 bars the use of the mails or

27 17 C.F.R. § 240c-6.

28 15 U.S.C. 78p(a). 29 15 U.S.C. 78p (c).

30 15 U.S.C. 78ff (a).

31 15 U.S.C. 780 (d), which requires the filing of a registration statement by any issuer having total assets of $1,000,000 or more, or at least five hundred shareholders of any

class of its stock.

32 15 U.S.C. 79 et seq.

33 15 U.S.C. 791(h).

34 15 U.S.C. 79g(a).

35 15 U.S.C. 79-3.

36 15 U.S.C. 80a-1 et seq.

37 15 U.S.C. 80a-7 (a) and (b).

38 15 U.S.C. 80a-7 (c).

2015 U.S.C. 80a-7 (d).

interstate commerce by foreign investment companies or a depositor, trustee, or underwriter of such a company, for sales of securities in the company unless the Commission issues an order permitting registration of the company after finding that the provisions of the Act can be legally and practically enforced against the company. Section 17(a) 40 prohibits certain transactions such as stock purchases and loans between persons affiliated 1 with a registered company and the company or a company controlled by the registered company.

Section 17(d) 42 prohibits an affiliated person with a registered company or an underwriter of such company from acting as principal to effect a joint or joint and several transaction with the registered company or a company controlled by it. Section 17 (e) 43 prohibits receipt of compensation, other than salary or wages, for the sale or purchase of property by an affiliated person for a registered company, and prohibits such person, in acting as a broker, from receiving more than the specified commissions in connection with the sale of securities to or by the registered company. Section 21 44 prohibits loans by registered management companies if they are in violation of the investment policies of the company or if the recipient of the loan is the controller or under common control with the registered company. Section 30(f) 45 makes applicable (1) to the beneficial owners of more than ten percent of a class of outstanding securities issued by a registered closed-end company, and (2) to the officers, directors, members of advisory boards, investment advisors, and affiliated persons of an investment advisor of such a company, the provisions of section 16 of the Securities Exchange Act of 1934.46 Section 34 (b) 47 makes it unlawful for a person to make an untrue statement of a material fact, or to omit a material fact, in a registration statement, application, report, account, record, or other document filed or transmitted pursuant to the Act. Under section 49,48 "willful" violation of the Act or a rule, regulation, or order thereunder is a two-year felony. "Willfully" making a material false statement or omitting a material fact in a document filed or required to be kept under the Act is also a two-year felony.

51

The Investment Advisers Act of 1940 49 is designed primarily to protect against conflicts of interest by investment advisers by a regulatory scheme similar to the Securities Exchange Act of 1934 scheme for registration of brokers. Sections 206 (1) and (2) 50 prohibit fraud by investment advisers. Section 206 (3)1 prohibits sales by investment advisers involving apparent conflict of interest without disclosure to the client whose account is involved and without obtaining the consent of the client. Under section 217,52 a "willful" violation of the Act or a rule, regulaton, or order under the Act, is a two-year felony.

40 15 U.S.C. 80a-17 (a).

41 The term "affiliated person" is defined in 15 U.S.C. 80a-2(a) (3) in terms of the amount of voting security held by a person in another person or vice versa, or the degree of common control of the two persons; it also includes an officer, director, partner, copartner, or employee of the other person, or a member of an advisory board of an investment adviser, or a depositor of an unincorporated investment company with no board of directors.

42 15 U.S.C. 80a-17 (d).

43 15 U.S.C. 80a-17(e).

44 15 U.S.C. 80a-21.

45 15 U.S.C. 80a-29 (f).

48 15 U.S.C. 78p.

47 15 U.S.C. 80a-17(e).

48 15 U.S.C. 80a-48.

49 15 U.S.C. 80b-1 et seq.

50 15 U.S.C. 80b-6 (1) and (2).

51 15 U.S.C. 80b-6 (3).

52 15 U.S.C. 80b-17.

2. The Offense

Subsection (a) (1) lists all those offenses which are graded as Class D felonies in subsection (c). These offenses include:

(A) Registration Offenses:

(i) The sale of unregistered securities in violation of section 5 of the Securities Act of 1933; 53 and

(ii) The sale of unregistered debt securities without qualified trust indentures in violation of section 306 of the Trust Indenture Act of 1939; 5+

(B) Fraud:

(i)) Fraud in the offer and sale of securities in violation of section 17 of the Securities Act of 1933; 55 and

(ii) Fraud in the purchase and sale of securities in violation of Rule 10b-5 of the rules and regulations under the Securities Exchange Act of 1934; 56

(C) False Representation of Commission Approval:

(i) Of a registration statement because of the filing of a registration statement or the nonexistence of a stop order under the Securities Act of 1933; 5 and

57

(ii) Of a trustee, indenture, or security under the Trust Indenture Act of 1939; 58 and

(D) Manipulation of the price of securities on a national securities exchange.59

The term "violates" is defined in section 111 to mean to engage in conduct which is proscribed, prohibited, declared unlawful, or made subject to a penalty. Under section 303 (d) (1) (A), no mental state need be proved as to the fact that particular conduct violates a statute, or a regulation, rule or order issued pursuant thereto. Hence, the use of the term "violates" effectively incorporates all the elements of the offenses (including culpability elements) contained in title 15. Those offenses now use the terms "willfully" or "willfully and knowingly." These have given rise to conflicting interpretations, although in nearly all cases the courts have not construed the terms to require proof of an evil motive or bad purpose or to require proof that the defendant knew that he was violating the law.61

60

As previously indicated, the term "willfully" has been eliminated from the definition of the offenses in the conforming amendments and has been replaced by "knowingly." The Committee believes that this

53 15 U.S.C. 77e.

54 15 U.S.C. 77fff.

55 15 U.S.C. 77q.

56 17 C.F.R. § 240.10b-5.

57 15 U.S.C. 77w.

58 15 U.S.C. 77xxx.

59 15 U.S.C. 78i (a) (1) through (5).

60 E.g., United States v. Tarvestad, 418 F. 2d 1043, 1047 (8th Cir. 1969), cert. denied. 397 U.S. 935 (1970). and cases cited therein; United States v. Custer Channel Wing Corp., 376 F. 2d 675, 680 (4th Cir.), cert. denied, 389 U.S. 850 (1967); United States v. Peltz, 433 F. 2d 48, 54-55 (2d Cir. 1970), cert. denied, 401 U.S. 955 (1971); United States v. Schwartz, 464 F. 2d 499, 508-510 (2d Cir. 1972), cert. denied, 409 U.S. 1009 (1973): United States v. Simon, 425 F. 2d 796, 808-810 (2d Cir. 1969), cert. denied, 397 U.S. 1006 (1970).

61 The confusion has been compounded by provisions in some of the securities laws permitting lack of knowledge of the existence of a statute to be a defense, see 15 U.S.C. 792-3; 15 U.S.C. 80a-48, or to preclude a sentence of imprisonment, see 15 U.S.C. 78ff (a). These latter provisions have been deleted in the conforming amendments, and henceforth securities offenses, like all others, will be subject to the defense in section 521 as to mistake of fact or law.