Congress Must Learn to Surf the Internet if it Ever Wants to Catch the Next Wave of Securities Fraud


Ted A. Smith


VOL. XVII • Winter 1999 • NO. 2 (table of contents)

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17 John Marshall J. of Comp. & Info. Law 589


Despite the popularity in the area of securities trading and all of the new challenges the Internet brings to the area of securities fraud, Congress has not chosen to react with new legislation. Instead, Congress has chosen to remedy the problems through the use of existing laws that were written over fifty years ago. This decision by Congress is at odds with other decisions it has made with respect to other areas of law that have been impacted by the Internet. Congress reacted to the effects of the Internet on gambling with proposed legislation aimed specifically at problems the Internet creates for this area of law. Given the enormous impact securities law has on the nation's economy it seems that Congress would want to create laws that are aimed specifically at the issues surrounding securities trading over the Internet. But instead of adopting a new legislative remedy, Congress has elected to rely on laws that were written long before anyone conceived of a tool as powerful as the Internet. It seems that Congress adopted a "wait and see" approach in this area of the law. Perhaps Congress could learn by taking a closer look at the proposed laws to stop Internet gambling. It appears that the solutions to the potential problems the Internet introduces to the area of securities trading may lie in proposed legislation such as The Gambling Prohibition Act.

The SEC has taken positive action toward protecting investors from fraud occurring over the Internet. The SEC has initiated a program that enables it to use anti-fraud weapons to directly attack new methods of committing fraud that may arise in the future. This anti-fraud program is a great step forward in the policing efforts of securities regulations. However, the question remains as to how effective these programs will be without changes to the present legislation governing securities law. The Securities Act of 1933 ("Securities Act") and The Securities Exchange Act of 1934 ("Exchange Act") are two pieces of legislation which currently govern securities law. These Acts were written to protect securities traded through conventional paper transactions. The Sessions of Congress which wrote these Acts could not have conceived of an electronic medium like the Internet being used for securities trading. Despite the differences between the conventional paper transactions and the modern electronic transactions, neither the SEC nor Congress has proposed new legislation to help protect Internet investors.

This Comment analyzes the unique problems associated with securities trading on the Internet. Part II of this Comment provides an overview of the Securities Act and the Securities Exchange Act and their relationship with traditional securities fraud. In addition, Part II examines the current developments of online trading and the SEC's regulatory responses to these issues, while exploring potential future developments in online trading. Part III examines current state and federal securities laws and explains why these laws do not adequately address the unique problems associated with Internet trading. Finally, Part IV of this Comment concludes with two propositions. First, that the federal and state governments cannot effectively regulate securities trading without the help of Congress; and second, that Congress must realize the need and urgency for changes of existing laws to preserve the integrity of the markets for the next millennium.

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