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- The Role of the States in Regulating Securities Markets
Because corporate governance issues are a matter exclusive to the states, states regulate securities issued by the
corporations. And if states regulate corporations, they also regulate what type of securities they issue, how they issue
them, what rights they confer, the legal form of the securities and how to transfer them. And this is exactly what the
established state jurisdiction covers.
- SEC Statement, May 2007
"While the Commission has sought to use its authority in a manner that does not conflict with the primary role
of the states in regulating corporate governance, some observers have expressed concern that federal
regulation increasingly intrudes upon corporate matters that historically have been the province of state law."
uniform federal securities laws. But to date, with very modest exceptions, it has not chosen to do so. Congress has
left the law governing the internal affairs of our corporations and their stockholders to the states. Similarly, Congress
has explicitly left certain areas concerning the regulation of securities solely to the states as well
Because of this, and in order to solve the paper work and financial crisis, it was necessary for the SEC to get all 50
states to adopt the UCC and amend it, as it was in 1994, in order to permit book entry movements of securities on a
national level, because the states have jurisdiction in required areas that the SEC does not.
Lower courts and the U.S. Supreme Court have all repeatedly agreed and ruled that corporate governance issues
are reserved for the states. As the US Supreme Court observed:
- "Corporations are creatures of state law, and
- investors commit their funds to corporate directors on
the understanding that, except where federal law expressly
requires certain responsibilities of directors with respect to
stockholders, state law will govern the internal affairs of
the corporation."
Bottom line, is that states define securities, their form, the rights they confer and how they can be transferred and
completely regulate certain other securities (uncovered securities). Due to the state jurisdiction, it was required to
propose and then the adopt and amend the UCC (Uniform Commercial Code) by all 50 states, so that securities could
be transferred via book entry form. Here is where the form "securities entitlements" was coined. The purpose of
"securities entitlements" is to allow securities to be transferred via book entry and credit them to customers as if they
were the real security - before the real security is actually delivered. And there is a time limit attached to "securities
entitlements", and that time limit is the settlement date, no later.
However, the SEC and Wall Street firms have misused "securities entitlements" by using them as if they had no time
limit and could be used indefinitely and beyond the settlement date. But this is not the proper or legitimate use of
"securities entitlements" or even their purpose. For their purpose is to facilitate the transfer of securities, not to cover
up the fact they have not been transfered.
Limits of The SEC's Authority
Regulations must be based on more than a mere assertion that they would further the aims of federal law. The
Commission maintains that its rule making authority is "sweeping." But it is not unlimited, and the invocation of
"underlying purposes" cannot be used to override those limits. The Supreme Court repeatedly has made this clear.
"The 1934 Act cannot be read 'more broadly than its language and the statutory scheme permit,"' the Court
explained in Chiarella v. United States.
More recently, in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, the Court observed, "....the issue
.... . .....is not whether imposing private civil liability on aiders and abettors is good policy but whether aiding and
abetting is covered by the statute."
Put differently, "the rule making power granted to an administrative agency charged with the administration of a
federal statute is not the power to make law." "Rather, it is 'the power to adopt regulations to carry into effect the will
of Congress as expressed by the statute.' . . . [The scope of the rule] cannot exceed the power granted the
Commission by Congress." Thus, in American Bankers Association v. SEC, the D.C. Circuit invalidated a rule of the
Commission that it found improperly had redefined the term "bank" in the Exchange Act: "The SEC cannot use its
definitional authority to expand its own jurisdiction and to invade the jurisdiction" of others, the court explained,
particularly where the agency interpretation is in direct conflict with the language of the Exchange Act.
No provision of the Exchange Act authorizes the Commission to regulate the internal affairs of
corporations. The Supreme Court has repeatedly made clear that agency authority will not be implied
when it is not expressly authorized by statute.
Thus, states have exclusive jurisdiction to regulate,
1. The Form of Securities
2. The Transfer of Securities
3. The Rights Securities Confer (Voting and other rights)
4. Regulate Uncovered Securities (Those not covered by section 18 of the Securities Act of 1933)
Neither the SEC nor any other federal agency or SRO has this jurisdiction.
See Also:
Determining Voting Rights
SEC's Limited Authority