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2
EDITORIAL ADVISORS

Rachel E. Barkow
Segal Family Professor of Regulatory Law and Policy
Faculty Director, Center on the Administration of Criminal Law
New York University School of Law

Erwin Chemerinsky
Dean and Distinguished Professor of Law
Raymond Pryke Professor of First Amendment Law
University of California, Irvine School of Law

Richard A. Epstein
Laurence A. Tisch Professor of Law
New York University School of Law
Peter and Kirsten Bedford Senior Fellow
The Hoover Institution
Senior Lecturer in Law
The University of Chicago

Ronald J. Gilson
Charles J. Meyers Professor of Law and Business
Stanford University
Marc and Eva Stern Professor of Law and Business
Columbia Law School

James E. Krier
Earl Warren DeLano Professor of Law
The University of Michigan Law School

Tracey L. Meares
Walton Hale Hamilton Professor of Law
Director, The Justice Collaboratory
Yale Law School

Richard K. Neumann, Jr.

Professor of Law
Maurice A. Deane School of Law at Hofstra University

Robert H. Sitkoff
John L. Gray Professor of Law
Harvard Law School

3
David Alan Sklansky
Stanley Morrison Professor of Law
Faculty Co-Director, Stanford Criminal Justice Center
Stanford Law School

4
5
Copyright © 2017 Alan R. Palmiter.

Published by Wolters Kluwer in New York.

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eISBN 978-1-4548-8867-3

Library of Congress Cataloging-in-Publication Data

Names: Palmiter, Alan R., author.

Title: Securities regulation / Alan R. Palmiter, Howard L. Oleck Professor of
Business Law, Wake Forest University.
Description: Seventh edition. | New York :Wolters Kluwer Legal & Regulatory
U.S. 2017. | Series: Examples & explanations | Includes bibliographical
references and index.
Identifiers: LCCN 2017010912 | ISBN 9781454881308
Subjects: LCSH: Securities—United States.
Classification: LCC KF1440 .P25 2017 | DDC 346.73/0922—dc23
LC record available at https://lccn.loc.gov/2017010912

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 About Wolters Kluwer Legal & Regulatory U.S.

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To Fabiola, still my companion

8
 Summary of Contents

Contents
Preface
Acknowledgments
Special Notice

Chapter 1 Introduction to Securities Markets and Regulation

Chapter 2 Definition of Security
Chapter 3 Materiality
Chapter 4 Registration of Securities Offerings
Chapter 5 Exemptions from Securities Act Registration
Chapter 6 Securities Act Liability
Chapter 7 Secondary and Other Postoffering Distributions
Chapter 8 Securities Exchange Act of 1934
Chapter 9 Rule 10b-5
Chapter 10 Insider Trading
Chapter 11 Regulation of Securities Industry
Chapter 12 Public Enforcement
Chapter 13 U.S. Regulation of Cross-Border Securities Transactions

Table of Cases
Index

9
 Contents

Preface
Acknowledgments
Special Notice

Chapter 1 Introduction to Securities Markets and Regulation

§1.1 Securities Markets and Participants

§1.1.1 Primary and Secondary Markets
§1.1.2 Functions of Securities Markets
§1.1.3 Participants in Securities Markets
§1.1.4 Interconnection Among Financial Markets
§1.1.5 New Technologies
Examples and Explanations
§1.2 Efficiency of Public Stock Markets
Examples and Explanations
§1.3 Federal Securities Regulation—Overview
§1.3.1 Securities Act of 1933
§1.3.2 Securities Exchange Act of 1934
§1.3.3 Specialized Securities Laws
§1.3.4 Securities and Exchange Commission
§1.3.5 Evaluation of Mandatory Disclosure
§1.4 Beyond Disclosure: Federal Incursions into Corporate Governance
§1.4.1 Sarbanes-Oxley Act of 2002
§1.4.2 Dodd-Frank Act of 2010
§1.5 State Securities Regulation—State Blue Sky Laws

Chapter 2 Definition of Security

§2.1 Implications of Definition

§2.2 Testing for a “Security”
§2.2.1 Investment Contracts—The Howey Test
§2.2.2 Risk Capital Test
§2.3 “Securities” in Varying Contexts
§2.3.1 Real Estate as Securities
§2.3.2 Business Interests as Securities
§2.3.3 Pension Plans as Securities
§2.3.4 Notes as Securities

10
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 §2.3.5 Bank Instruments as Securities
§2.3.6 “Stock” as Security
Examples and Explanations

Chapter 3 Materiality

§3.1 Definition of Materiality

§3.1.1 “Substantial Likelihood” Test
§3.1.2 Who Is a Reasonable Investor?
§3.1.3 Relationship of Materiality and Duty to Disclose
§3.2 Materiality—Types of Information
§3.2.1 Historical Information
§3.2.2 Speculative Information
§3.2.3 “Soft Information”
§3.2.4 Information About Management Integrity
§3.2.5 Social/Environmental Disclosure
§3.2.6 Materiality in Different Contexts
§3.3 Materiality in Context: “Total Mix” of Information
§3.3.1 “Total Mix” Test
§3.3.2 Safe Harbors for Forward-Looking Statements
Examples and Explanations

Chapter 4 Registration of Securities Offerings

§4.1 Distribution of Securities to Public Investors

§4.1.1 Types of Public Offerings
§4.1.2 Pricing and Commissions in a Public Offering
§4.1.3 Documentation in a Public Offering
Examples and Explanations
§4.2 Registration of Public Offerings
§4.2.1 Section 5: The Heart of the Securities Act
§4.2.2 Contents of Registration Statement
§4.2.3 Preparation of Registration Statement
§4.2.4 SEC Review (and Effectiveness) of the Registration Statement
§4.2.5 Purchases During Registration
§4.2.6 State Regulation of Public Offerings
Examples and Explanations
§4.3 Managed Disclosure During Registration— “Gun Jumping”
§4.3.1 Prefiling Period
§4.3.2 Waiting Period
§4.3.3 Posteffective Period

11
 §4.3.4 Summary of Gun-jumping Rules
Examples and Explanations

Chapter 5 Exemptions from Securities Act Registration

§5.1 Exempt Securities

§5.2 Transaction Exemptions
§5.2.1 Intrastate Offerings
§5.2.2 Private Placements
§5.2.3 Small Offerings
§5.2.4 Regulation D
§5.2.5 Crowdfunding
§5.2.6 Issuer Exchanges
§5.3 State Blue Sky Exemptions
§5.4 Summary Chart
Examples and Explanations

Chapter 6 Securities Act Liability

§6.1 Common Law of Misrepresentation

§6.1.1 Common Law Deceit
§6.1.2 Equitable Rescission
§6.2 Section 12(a)(1): Violations of §5
§6.2.1 Strict Liability
§6.2.2 “Statutory Sellers”
§6.2.3 Limitations Period
§6.3 Section 11: Misrepresentations in Registration Statement
§6.3.1 Section 11 Plaintiffs
§6.3.2 Section 11 Defendants
§6.3.3 Material Misinformation in Registration Statement
§6.3.4 Culpability—Defenses and Limitations on Liability
§6.3.5 Reliance
§6.3.6 Loss Causation
§6.3.7 Damages
§6.3.8 Periods of Limitations and Repose
§6.4 Section 12(a)(2): Misrepresentations in “Public” Offerings
§6.4.1 Coverage of §12(a)(2)
§6.4.2 Section 12(a)(2) Defendants
§6.4.3 Elements of §12(a)(2) Rescission Action
§6.4.4 Periods of Limitations and Repose
§6.5 Section 15: Liability of Control Persons

12
 §6.6 Section 4A(c): Liability in Crowdfunding
§6.6.1 New §4A(c) Action
§6.6.2 Unresolved Issues in §4A(c) Action
§6.7 Section 17(a): Liability in SEC Enforcement Action
§6.8 Liability Under State Blue Sky Laws
Examples and Explanations

Chapter 7 Secondary and Other Postoffering Distributions

§7.1 Definitions of Issuers, Underwriters, and Dealers

§7.1.1 Agent “for Issuer”
§7.1.2 Purchaser from Issuer “with a View” to Distribute
§7.1.3 Underwriter for “Control Person”
§7.2 Exemptions for Control and Restricted Securities
§7.2.1 Rule 144: Secondary Distributions in Public Markets
§7.2.2 Exemptions for Secondary Private Placements
§7.3 Corporate Reorganizations and Recapitalizations
§7.3.1 Issuer Exchanges
§7.3.2 Fundamental Corporate Transactions— Rule 145
§7.3.3 Downstream Sales and Spinoffs
§7.3.4 Warrants, Options, and Conversion Privileges
§7.4 Resales Under Blue Sky Laws
Examples and Explanations

Chapter 8 Securities Exchange Act of 1934

§8.1 Regulation of Securities Trading Markets

§8.1.1 Regulation of Stock Exchanges
§8.1.2 Regulation of Over-the-Counter Market
§8.1.3 Alternative Trading Systems
§8.1.4 Regulation of Collateral Market Participants
§8.2 Regulation of Market Practices
§8.2.1 Market Manipulation
§8.2.2 Short Selling
§8.2.3 Purchasing Securities on Margin
§8.3 Regulation of Public Companies
§8.3.1 Registration with the SEC
§8.3.2 Periodic Disclosure
§8.3.3 False or Misleading SEC Filings
§8.3.4 Oversight of Corporate Misconduct
§8.3.5 Corporate Governance Listing Standards

13
 §8.4 Proxy Regulation (A Summary)
§8.4.1 Mandatory Disclosure in Proxy Solicitation
§8.4.2 No Open-Ended Proxies
§8.4.3 Shareholder Access
§8.4.4 Liability for Proxy Fraud
§8.5 Regulation of Tender Offers (A Summary)
§8.5.1 Disclosure of 5 Percent Ownership
§8.5.2 Disclosure in Tender Offer
§8.5.3 Regulation of Substantive Terms of Tender Offer
§8.5.4 Liability for Deception in Tender Offers
Examples and Explanations

Chapter 9 Rule 10b-5

§9.1 Rule 10b-5 Overview

§9.1.1 History of Rule 10b-5
§9.1.2 Some Essential 10b-5 Pointers
§9.1.3 Private 10b-5 Actions and SEC Enforcement
§9.1.4 Typical 10b-5 Cases
§9.2 Scope of Private 10b-5 Action
§9.2.1 Purchasers and Sellers: 10b-5 Standing
§9.2.2 Primary Violators: 10b-5 Defendants
§9.2.3 Fraud “in Connection with” Securities Transactions
§9.3 Fraud Elements of Private 10b-5 Action
§9.3.1 Material Deception
§9.3.2 Scienter—“Manipulative or Deceptive Device or Contrivance”
§9.3.3 Reliance and Causation
§9.3.4 Damages
§9.3.5 Nature of 10b-5 Liability
§9.4 Defenses in Private 10b-5 Action
§9.4.1 Limitations and Repose Periods
§9.4.2 In Pari Delicto Defense
§9.4.3 Contribution and Indemnification
§9.5 Comparison to Other Securities Fraud Remedies
§9.5.1 Express Federal Remedies for Securities Fraud
§9.5.2 State Law Remedies
§9.5.3 Racketeer Influenced and Corrupt Organizations Act (Private RICO)
§9.5.4 Arbitration and Private Ordering
Examples and Explanations

Chapter 10 Insider Trading

14
 §10.1 Introduction to Insider Trading
§10.1.1 Classic Insider Trading
§10.1.2 Misappropriation of Information— Outsider Trading
§10.1.3 Theories for Regulation of Insider Trading
§10.2 Rule 10b-5 and Insider Trading
§10.2.1 Duty to “Abstain or Disclose”
§10.2.2 Insider Trading Primer
§10.2.3 Outsider Trading—Misappropriation Liability
§10.2.4 Remedies for Insider Trading
§10.2.5 Regulation FD and Selective Disclosure
Examples and Explanations
§10.3 Short-Swing Insider Profits: Disclosure and Disgorgement
§10.3.1 Coverage of §16
§10.3.2 Disgorging Short-Swing Profits— Mechanical Test
§10.3.3 Special Interpretive Issues
§10.3.4 Section 16(b) Litigation
§10.4 Regulation of Insider Trading Under Sarbanes-Oxley (Revised by Dodd-Frank)
§10.4.1 Insider Trading During Pension Plan Trading Blackout
§10.4.2 Reimbursement of Incentive Pay When Financials Misstated
Examples and Explanations

Chapter 11 Regulation of Securities Industry

§11.1 Capacities of Securities Professionals

§11.2 Broker-Dealer Regulation
§11.2.1 SEC and FINRA Supervision
§11.2.2 Regulation in Public Offerings
§11.2.3 Disclosure Responsibilities
§11.2.4 Standards of Conduct
§11.2.5 Enforcement of Customer Rights
§11.2.6 Insurance of Customer Accounts
§11.2.7 State Blue Sky Regulation
§11.3 Investment Adviser Regulation
§11.3.1 Definition of Investment Adviser
§11.3.2 Federal Regulation of Investment Advisers
§11.3.3 State Blue Sky Regulation
Examples and Explanations
§11.4 Mutual Fund Regulation
§11.4.1 What Is a Mutual Fund?
§11.4.2 Mutual Fund Costs
§11.4.3 Regulation of Mutual Funds

15
 §11.5 Private Fund Regulation
§11.5.1 What Are Private Funds?
§11.5.2 Regulation of Private Funds
§11.6 Regulation of Credit Rating Agencies
§11.6.1 Accountability of Credit Rating Agencies
§11.6.2 Internal Controls in Credit Rating Agencies
§11.6.3 Regulation of Credit Rating Agencies

Chapter 12 Public Enforcement

§12.1 SEC Investigations

§12.1.1 Investigations: Formal and Informal
§12.1.2 Investigative Powers
§12.2 SEC Administrative Enforcement
§12.2.1 SEC Administrative Enforcement Powers
§12.2.2 SEC Disciplinary Powers
§12.2.3 SEC Settlements and Consent Decrees
§12.3 Judicial Enforcement: Injunctions and Other Remedies
§12.3.1 Standard for Relief
§12.3.2 Types of Relief
§12.3.3 Effect of Injunction
§12.3.4 Modification or Dissolution of SEC Injunctions
§12.3.5 Statute of Limitations
§12.4 Enforcement Against Securities Professionals
§12.4.1 SEC Rules of Practice
§12.4.2 Accountant Discipline
§12.4.3 Lawyer Discipline
§12.4.4 Reporting “Up the Ladder”
§12.5 Criminal Enforcement
§12.5.1 Use of Criminal Law in Securities Enforcement
§12.5.2 Criminal Violations of Federal Securities Law
§12.5.3 Securities Activities Creating Criminal Liability
§12.5.4 Nonsecurities Criminal Law Applied to Securities Activities
§12.5.5 Sentencing of Individual and Corporate Offenders
§12.5.6 Parallel Enforcement
§12.6 State Enforcement
§12.6.1 New York’s Martin Act
§12.6.2 Enforcement Actions Against Securities Firms
Examples and Explanations

Chapter 13 U.S. Regulation of Cross-Border Securities Transactions

16
 §13.1 Offshore Offerings by U.S. Issuers (and Foreign Issuers)
§13.1.1 Regulatory Dilemma
§13.1.2 SEC Safe Harbors—Regulation S
Examples and Explanations
§13.2 Foreign Securities in the United States
§13.2.1 Public Offerings of Foreign Securities
§13.2.2 American Depositary Receipts (ADRs)
§13.2.3 Private Placements and Rule 144A
§13.2.4 Requirements for Foreign Issuers with U.S.-Traded Securities
Examples and Explanations
§13.3 Extraterritorial Reach of U.S. Securities Laws
§13.3.1 Securities Fraud Litigation
§13.3.2 Federal Government Enforcement
Examples and Explanations

Table of Cases
Index

17
 Preface

Securities Regulation earns the perennial accolade of being among the toughest courses in law and business
schools. This is not surprising. Its vocabulary is arcane and clubbish, its guiding principles nuanced and even
contradictory, its structure convoluted and layered. Like the illusions of an M.C. Escher print, the subject
flashes back and forth between two conceptual states—sometimes esoteric and sometimes prosaic. The subject
also builds on business and financial terminology that is new and mysterious to many students.
But for those who pass through its Byzantine gates, the study of Securities Regulation offers many
rewards: solving the anagram of statutory definitions and substantive prohibitions; contemplating the majesty
of the judge-made law of securities fraud; and discovering the many levels of public and private securities
enforcement.
All these matters and more are within your grasp—with some practice, some trial and error. That is the
idea of this “examples and explanations” book. Each chapter, after sketching the key concepts of U.S.
securities regulation, offers you a chance to compare your responses to concrete examples with my
explanations. You will discover it invigorating (and downright fun) to work through the securities statutes, to
analyze the accompanying rules and interpretive case law, and then to arrive at the same answers as
sophisticated securities practitioners.

March 2017
Alan R. Palmiter

18
 Acknowledgments

I appreciate the intellectual curiosity and encouragement from my Wake Forest students, as well as students
who have used the book in other schools. Their comments, questions, and insights continue to inspire this
book.
I give special thanks to Garrett Rogers (’18) and Dan Jouppi (’17) for their excellent research and
editorial help. Garrett reviewed the leading Securities Regulation textbooks to identify current topics and
materials for insertion in this new edition. Dan collected and reviewed various sources dealing with these
topics and made broad-ranging suggestions for updating the book. Their work was particularly challenging
given the ongoing de-regulatory changes put into motion by the JOBS Act of 2012. I also thank Jenna Coogle
(’17) for her terrific work as a teaching assistant in an online course that used a manuscript of this new edition
of the book.
I am also grateful to the many colleagues—in law and business schools here and abroad—who have
recommended the book to their students. In fact, it was the suggestion of a business school colleague that led
me to discover the book also can serve as the text for a business school course!

19
 Special Notice

Citation form. To reduce the distraction of citations, this book departs from standard citation form:

1. Dates. References to statutory sources and SEC rules are usually undated. All such references are to
compilations as of 2016, unless a different date is given.

2. Federal securities statutes. The book abbreviates the references to the major federal securities acts by
giving the section number of the act, but not the U.S. Code citation:
• Securities Act of 1933, at 15 U.S.C. §§77a et seq.
• Securities Exchange Act of 1934, at 15 U.S.C. §§78a et seq.
• Investment Company Act of 1940, at 15 U.S.C. §§80a-1 et seq.
• Investment Advisers Act of 1940, at 15 U.S.C. §§80b-1 et seq.
For example, section 15 of the Securities Exchange Act of 1934 is cited as “Exchange Act §15,”
without a cross-citation to 15 U.S.C. §78o. In addition, the book refers frequently to three important
legislative reforms—the Private Securities Litigation Reform Act of 1995 (cited as “PSLRA”), the
Sarbanes-Oxley Act of 2002 (cited as “Sarbanes-Oxley”), the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (cited as “Dodd-Frank”), and the Jumpstart Our Business Startups
Act of 2012 (cited as “JOBS Act”).

3. SEC rules and regulations. The book abbreviates the references to rules of the Securities and Exchange
Commission by giving the rule number, but not the Code of Federal Regulations citation. Rules
promulgated under the various federal securities acts can be found as follows:
• Securities Act of 1933, at 17 C.F.R. Part 230
• Securities Exchange Act of 1934, at 17 C.F.R. Part 240
• Investment Company Act of 1940, at 17 C.F.R. Part 270
• Investment Advisers Act of 1940, at 17 C.F.R. Part 275
The rules promulgated under the Securities Act are numbered sequentially from 100 to 1001, and
are divided into various regulations. For example, Regulation D contains Rules 501-508, which can be
found at 17 C.F.R. §§230.501-230.508. The rules promulgated under the Exchange Act are
numbered according to the section of the Act under which they are promulgated. For example, Rule
10b-5 is the fifth rule promulgated pursuant to Exchange Act §10(b), and the rule can be found at 17
C.F.R. §240.10b-5.

4. SEC regulations. The book also abbreviates the references to SEC regulations, which can be found as
follows:
• Regulation S-X (Qualifications and Reports of Accountants), at 17 C.F.R. Part 210
• Regulation Crowdfunding (General Rules and Regulations), at 17 C.F.R. Part 227
• Regulation S-B (Integrated Disclosure System for Small Business Issuers), at 17 C.F.R. Part 228

20
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 • Regulation S-K (Standard Instructions for Filing Forms), at 17 C.F.R. Part 229
• Regulation M-A (Mergers and Acquisitions), at 17 C.F.R. §§229.1000 et seq.
• Regulation S-T (Rules for Electronic Filings), at 17 C.F.R. Part 232
• Regulation M (Anti-Manipulation Rules), at 17 C.F.R. §§242.100 et seq.
• Regulation SHO (Short Sales), at 17 C.F.R. §§242.200 et seq.
• Regulation ATS (Alternative Trading Systems), at 17 C.F.R. §§242.300 et seq.
• Regulation AC (Analyst Certifications), at 17 C.F.R. §§242.500 et seq. Regulation FD (Selective
Disclosure), at 17 C.F.R. Part 243
• Regulation G (Disclosure of Non-GAAP Financial Measures), at 17 C.F.R. Part 244
• Regulation BTR (Blackout Trading Restrictions), at 17 C.F.R. Part 245

5. SEC releases. The book provides a basic citation (number and year) for SEC releases, which can also be
found on the SEC website, sec.gov. They are also reprinted in transfer binders of the Federal Securities
Law Reporter (CCH), as well as on Westlaw and Lexis-Nexis.

6. Case citations. For state cases, the book cites only to the West regional reports. The book typically does
not indicate subsequent case histories, such as certiorari denied or remanded on other grounds. For cases
decided by the U.S. Supreme Court, the book cites to the “U.S.” reports or, when not yet available, to
“Sup. Ct.” reporter.

Internet access. Most of the primary materials referred to in this book are now available online, including
on the SEC website, sec.gov. The federal securities laws and SEC regulations/rules, as well as links to
other useful sources, may be found at Securities Lawyer’s Deskbook (published by the University of
Cincinnati College of Law): http://lawblogs.uc.edu/sld/.

Specifically, SEC releases may be found on the SEC website: www.sec.gov/rules/final.shtml (final rules);
www.sec.gov/rules/interp.shtml (interpretive releases); and www.sec.gov/rules/proposed.shtml (proposed
rules).

Supreme Court decisions may be found at Legal Information Institute:

www.law.cornell.edu/supremecourt/text/home.

21
22
Securities regulation is about protecting investors—whether they buy securities from an issuer, trade on
securities markets, vote their shares, or sell in a tender offer. In the United States, securities regulation is
mostly a matter of federal law. Its premise is that mandatory disclosure (along with liability for fraud and
regulation of securities intermediaries) will equip securities investors and their advisers with the information to
evaluate the return and risk entailed in a securities investment—thus to move capital to its optimal uses, a
critical aspect of a healthy economy.
This chapter covers:

• an overview of the U.S. securities markets and their participants, as well as the effect of information
technologies like the Internet [§1.1]
• the hypothesis that U.S. public securities markets are “informationally” efficient and thus disclosure to
some participants in the market functions as disclosure to all (the efficient capital market hypothesis)
[§1.2]
• the basic framework and philosophy of federal securities regulation [§1.3]

§1.1 SECURITIES MARKETS AND PARTICIPANTS

§1.1.1 Primary and Secondary Markets

Securities transactions occur in two settings: sales of securities to investors by issuers seeking to raise capital
for their business (issuer transactions) and buy-sale transactions among investors of already-issued securities
(trading transactions). Whether buying in the primary market or trading in the secondary market, investors
depend on information to value the securities: the financial rights of the securities being transacted, the
issuer’s financial performance, the issuer’s prospects and management, competitive information, economic
trends, political news, consumer trends, ad infinitum.

23
Primary Market (Issuer Transactions)

Issuers can raise capital by selling their securities in public markets or in negotiated, private placements.
Private placements are the most prevalent and span the gamut:

• A closely held company issues ownership interests to its founding members.

• A start-up business issues preferred stock to venture capitalists who are willing to capitalize the
business in exchange for a preferred financial position and a management role.
• A public corporation issues trading-restricted securities (typically debt securities) to institutional
investors, such as pension funds.

Issuers that seek to raise capital from a larger pool of investors can make a public offering (primary
distribution). Raising capital from the public for the first time is called an initial public offering (IPO). For
example, in 2006, companies raised over $3.9 trillion by selling debt and equity securities in U.S. primary
markets, with $3.3 trillion coming from public offerings and $562 billion from private placements. Of the
public offerings, $3.2 trillion came from debt issues and $188 billion from equity issues, with $46 billion
raised in IPOs. (These figures declined significantly after the financial crisis of 2008, with debt and equity
offerings totaling only $1.5 trillion in 2011.)

Secondary Market (Trading Transactions)

Securities trading of already-issued securities does not raise capital for the issuer. Instead, investors get cash
for their investments by selling to other investors in privately negotiated transactions or in public trading
markets (such as through a stock exchange or computerized trading by securities firms). Secondary markets
provide liquidity to investors, which in turn invigorates primary markets. Securities trading on secondary
markets accounts for about 99 percent of all securities transactions.
There are two principal markets for public trading of securities in the United States: exchange markets
and over-the-counter markets. On the exchange markets buy and sell orders arrive at a centralized location
where “specialists” maintain a “book” of orders to match buyers and sellers—a continuous auction. The New
York Stock Exchange (NYSE) is the largest and most famous stock exchange.
In the over-the-counter (OTC) markets buying and selling occurs between securities firms that have access
through computer terminals and price sheets to information on bidding and selling prices offered by other
securities firms. The most famous OTC market is NASDAQ, an electronic “spider’s web” originally created
by the nonprofit National Association of Securities Dealers (NASD) to permit its members linked by
computers to quote prices and make trades with each other. (In 2001, the NASD divested NASDAQ, which
is now owned and operated by a for-profit corporation.) Securities firms that use NASDAQ act as
intermediaries (brokers) in matching customer orders or as principals (dealers) trading for their own account.
In addition to the NYSE and NASDAQ, computer-based trading systems allow investors (particularly
large institutional investors and securities firms) to trade directly without the need for additional
intermediaries. Known as electronic communication networks (ECNs), these alternative trading systems allow
their subscribers to trade privately and at less expense.

24
§1.1.2 Functions of Securities Markets

Securities markets serve three basic functions:

Capital formation Securities markets bring together capital-laden investors and capital-needy businesses,
whether through the issuance of equity securities (common stock and preferred stock) or
debt securities (bonds, debentures, notes, and commercial paper).
Liquidity Securities markets bring together investors wishing to sell (or liquidate) their investment
and new investors willing to buy. Liquidity, the ability to sell readily an investment
instrument, is an important attribute of securities, and its availability often determines
whether investors will invest in the first place.

Risk Securities markets permit investors to minimize risk by diversifying and hedging their
management investments. By purchasing a basket of securities with different risks, investors can create a
diversified portfolio whose overall risk is lower than the separate risks of its components.
By purchasing derivatives, investors can lock in investment gains and set floors on
investment losses. Derivatives are financial instruments whose price is derived from prices
of underlying securities—they are essentially side bets to reduce risk. On the other side of
a derivative are speculators willing to gamble that markets will behave differently than
anticipated.

Securities markets offer investors a rich variety of financial products to satisfy their investment strategies.
For example, investors who want a financial interest in a broad category of stocks, but with investment and
voting discretion consolidated in the hands of another, can buy a mutual fund. An investor who wants to limit
how much she might lose in her stock portfolio can buy a put option, which represents a promise by the option
seller to purchase stock, upon the exercise of the option by the buyer, on a specified date for a specified price;
with the option the investor can sell at a set price even if the market price falls below that. (A call option is the
converse, a promise by the option seller to sell stock, on the exercise of the buyer’s option.) Similarly, if an
investor who holds a portfolio representing a whole market wants to hedge against a falling market, he can
enter into a futures contract, a binding agreement to buy or sell a particular commodity at a fixed price on a
specified date in the future, typically with standard terms set by a clearinghouse that guarantees each side’s
obligation.
Securities markets also produce a collateral benefit—the revelation of prices for specific companies and
for the overall economy. Securities prices provide a scorecard of management performance, and they provide a
valuation for tax and other purposes. Yet despite their price transparency, U.S. securities markets remain
relatively opaque with respect to revealing who is setting the price. Surprisingly, there are almost no rules that
require traders (or intermediaries who process the trades) to reveal their identities as they trade.

§1.1.3 Participants in Securities Markets

25
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Crocodile, Timsa, karem
Hippopotamus, Nghroot
Many mosquitoes, Kantano n’gubboo
Hyena, Dela
Elephant, Kamāgun
Calf, Kena gana
Cow, Kena
Where are your shoes? Sononem daran
Where is your cap? Geaqua n’daran
A bad man, Koati dibbe
You are bad, Nema dibbe
Do you wish that Kamo ati rakami
woman?
Not that one? This I Ati waniski too raguski
wish,
Man, Kam
Woman, Kamo
A strong man, Kamqua
Two men, Kuandee
Two women, Kamundee
Camel, Kelgimmo
Camel’s saddle, Kantergue
Riding camel or Kelgimmo serdebee
maherhy,
Wear your cap; the sun Geaqua coutai kou
is strong, n’gubboo
My house, Fany
The house of me, Fatto kakai
I will come at night, Ou boone leniske
It is now night, Kerama boone
Why did you not come Afero biska issamy bah
yesterday?
I could not come, Issiskany
I am come to-day, Kou issisky
I am angry, Ou gergan iskana
Always, Zaar
I go on horseback, Kela furby linisky
Horse, Fur, or Pur
I go on foot, Sheenin linisky
Your house, Fanem
His house, Fansa
All their houses are one, Andi summa fanday telo
Give me this, Ougoaty orashe
A little, not much, Gana
Take care, Zebba
Now give me, Kormashee
Shut the door, Suganay tapah
Not now, Kormakany
By and by, Oo kanowaā
I will give you a Koulko angala
handsome shirt, noroweskin
I will dress you prettily, Kasamow angala
noroweskin
Hear me, I say, Fanimy
God bless you, Allah kabunsho
May you live for ever, Engoubourou dagah
God send you a happy Allah kiaro
old age, literally gray
hairs,
Bring water to wash my Inki coutai muskowy
hands, toliske
To wash your hands, Muskonem tolei
Like a Bornowy, Kanourin kalcal
Near, Karengha
A long way off, Kiento rinta
Why are you afraid? Afero ranimin
You come directly? Kurma ma duaree
The day after to-morrow, Wagoro
Eat you, Nema booy
I can read, Rageski karaengen
Can you read? Ne karanemin bah
I cannot, Karaniskin baco
I know, Ooma nongana
You know, Nema nonema
He knows, Shema nosena
We know, Amgaso nony-enna
Ye know, Ande amgaso
They know, Nony-enna
Every body knows, Amsemma nozana
Nobody knows, Ondooma nozana baco
Gazelle, Engry
Ducks, Enguddoo
Vulture, Quogoo
Monkey, Daggel
Buffalo, Zamouse
I will not go, Laniski baco
I will come, Lazusko
Is it necessary for you? Ragumba
It is necessary, Ragiski
Now, Kurma
Not now, but in a little, Kurmagany, laga toosiny
Why is your cap off? Afero geaquanem gogo
It fell off, Oogony konusko
My horse, Furny
Your horse, Furnem
His horse, Furnsa
My hut, Engiminy
Your hut, Engiminem
His hut, Engiminsa
Onions, L’bussel
Wheat, Gomah
Gussub, Arkum
Fan of ostrich feathers, Kergeaga
Ostrich, Nham
Feathers, Riesh
I wish a man who knows Ooroo kam angala sidi
the road to Waday, Waday nosena
Do you know all the Sidi Waday nony mabah
road?
All I know, Angaso nony ski
In the road, river great is Waday den komadagoo
there? kora beetche
There is, but not a great Beetche, gana laga
one,
And a great deal of N’gobboo gany inki enga
water, there is not,
Gussub is there plenty? Argum beetche
engubbooba
Rain little, and gussub Inki gana argum
not much, engubboo, gany
Last year rain plenty, Mindy inki engubboo
more than at this time, kerma koge
This year, Kimmindy
Last year, Mindy
Fish, Boony
Standard carried before Yerma
the Sultan of Bornou,
Fire bring, quick, quick, Kano coutai doua, doua
Fire bring, get supper, Kano coutai bree
deniskin
Mount, we will go, Neebamin baa lanyée
Now I will come, Kurma mai issisky
I do not wish, Wanisky, wangy
Wait a little, now he will Garany gana kurma
come, machin
Bring water, I will drink, Inki coutai yaskin
I will not come, Isiskin baco
Give grass to the horse Fena kajem furby zebbo
to eat,
Nose bag, Engerky
The nose bag for the Engerky furby coutai
horse bring,
Fill it with gussub, Fegana argum
Give it him to feed, Yeshery zebbo
Does he feed? Zebbe ra-watche
He feeds, A zebbena
Feed he will not, Zebbin baco watche
Take off the nose bag, if Zenney engerky
he will not, watchea
Take him to drink, Yeati inkero
Give him well to drink, Y’eshero angeloro tsaa
Bucket none, yesterday Kirfy baco biska creety
broke,
Go a bucket good buy, Lanee kerfy angala
belinefay
Take care thieves don’t Wata kaleny burbo
take it, gotzenu
I wish it, Oura kusku
Something I wish, Aqualaka oura kusku
What do you wish? Afferacum
Where are we going? Ainfera lanen
Near now we go? Karinga ateman lascia
Sunset before? Shall we Magrubo setteny?
stop? Zubtsayu bah
We shall stop, Zubtsayu
At sunset we shall not Mugrubbo kelten
stop, we shall go until zubtsay inde leesharo
Ashea; then we shall letzaya doo go
stop, zubtneia
Sunset before we shall Mugrubbo setteny doo
return, goo lanem
To-day go, to-morrow Kou lanemya bali arai
come,
You are very handsome, Neety angala engubboo
You than others I like Neety kamo gediro
best, rakuskin ago angalko
Speak true speeches, Mana gereby manany
It is necessary, I see the Kouroo garoubi ruguski,
well,
This is my town now, Ate bellany kurma
I wish to see, Raguski rusky
Will you buy anything? Neema eefamy bah
I wish to buy, Raguski effuskin
I do not wish to buy, Wankee effeesky baco
I will not sell, Wankee ladisky baco
 I wish to sell, Ragusky ladisky
Will you sell? Ladamin bah
My feet ache, Sheeny zow
Do your feet ache? Eenim zow bah
My legs, Shegul ny
My knees, Engurum grum kakai
My thighs, Dunomy
My loins, Duefurgy-ny
My belly, Suero-ny
My breast, Ingun geny
My neck, Dubboony
Woman’s breast, Tekkum
My mouth, Cheny
My nose, Kinoa-ny
My tongue, Telam-ny
My teeth, Teneeny
My cheeks, Gegaty
The eyes, Shem
The forehead, Engum
Eyebrows, Engum eshem
Ears, Summo
Head, Kla
This woman, her face is Kamo atteta feskansa
handsome, angala
Long gourd with a hole Zantoo
at each end, used by
Tibboo and Bornou as
a musical instrument,
Wrapper or petticoat, Zeneh
Eggs, Gubbel

FOOTNOTES:

[81]In the southern provinces of Bornou this is pronounced

Paro.
 No. XVIII.

Begharmi Vocabulary, taken from the mouth of the late Sultan’s son,
now a slave of the Sheikh of Bornou.

One, Keddy
Two, Sub
Three, Mattāh
Four, Soh
Five, Mee
Six, Meeka
Seven, Chilly
Eight, Marta
Nine, Doso
Ten, Dokemy
Eleven, Dokemy kar keddy
Twelve, Dokemy kar sub
Thirteen, Dokemy kar muttāh
Fourteen, Dokemy kar soh
Twenty, Doke sub
Twenty-one, Doke sub kar keddy
Twenty-two, Doke sub kar sub
Thirty, Doke muttah
Thirty-one, Doke muttah
Forty, Doke soh
Forty-one, Doke soh kar keddy
Fifty, Doke mee
Fifty-one, Doke mee kar keddy
Sixty, Doke muka
Sixty-one, Doke muka kar keddy
Seventy, Doke killy
Seventy-one, Doke killy kar keddy
Eighty, Doke marta
Ninety, Doke doso
One hundred, Arrou
One hundred and one, Arrou se keddy
Two hundred, Arrou sub
One thousand, Dooboo
Two thousand, Dooboo sub
Eyes, Kammo
Leaf of a plant, Kammo
Head, Geujo
Mouth, Tara
Door of a room, Tara be
Breast, Kājā
Sun, Kājā
Nose, Amo
Belly, Ngala
Thighs, Brinjee
Knees, Kejee
Legs, Kersha
Feet, Njanja
Flesh, Nja debe
Ox, Mungho
Flesh of an ox, Nja mungho
Sheep, Batta
Goat, Angha
Water, Mane
Flour, Jumo
Bread, Tabaka
No kinds of fruit known,
all plants different.
Onions, (Good, great.) Bussara
Honey, (Quantities Tejee,
eaten.)
Elephant, Keejee
Horse, Soudah
Mule, El Feddrah
Ass, (plenty), Krow
Dog, (many), Besee
Lion, (plenty), Tobio
Lioness, Tobiony
Leopard, Nugo
Gazelle, Ngria
Rabbit, Omo
Fowls, Kenja
Cock, Kla
Father, Babma
Mother, Konuma
Brother, Monnjema
Sister, Monnjum
Son, Wonma
Daughter, Wonum
Woman, Née
Man, Gaba
Wife, Neema
Favorite, Mandama
Noon, Dooro
Night, Njow
Sleep, Tonangy
Awake, Ingra
I am hungry, Bow
I am thirsty, Mane mukago
My friend, Kaffama
Your friend, Kaffaily
Bring supper, Du gesa
Come here, Da lullo
Go away, Abey
Hot, Kaisungoh
Cold, Kooloo
Fat, Booboo
Too hot, Kaigocho
Very cold, Koolo ognio
Wind, Leélee
Rain falls, Manet kudy
Boat, large, Toko
Small boat, Toko bassa
River, Bah
Great river, Bah nungolo
Near, Bony
Distant, Aouo
Very distant, Aouo killa hudder
Bad, Kussu
I have something, Congassa saikilly
I have nothing, Ngasskoto semki
Good man, Kab
Bad man, Kab-kussu
Young, N’bussa
Old, Kaddah
Handsome woman, Nein
Ugly woman, Nein kussu
Take that, Dibena magi
Merchant, Maly ocho
Slave, Baly
Woman slave, B’llow
White man, Kab n’jaffy
Slaves, Bakee
White woman, Nee njaffy
I will not, Gaily
To kill, Tolly qua
My house, Bema
Your house, Beay
To wound, Noyalee
Wheat, Gkal kumba
Gussub, Tenghoo
Dates, Depenow
Saddle, Serdee
Fire, Peddoo
Wood, Cheree
Bring some wood quick, Den cheree, keske,
 keske
I am ill, Mungaly
Are you ill? Gegony
Do you wish physic? Talem kourgoonoo
Come with me, Dejab kow
I am your friend, Ma kafai
I am your servant, Ma manai
Always, Njan
All, Petta
After, Belti
Before, Dencha
Mid-day, Kaisung-oo
Gafooly, Wah
Meloheiœ, Gongonbelto
Bridle, Al jemmo
Halter, Kabboomoo
Grass straw, Moo
Teeth, Nganah
 No. XIX.

Mandara Vocabulary, taken from the mouth of Achmet Mandara, a

slave of the Sheikh of Bornou.

One, Mtaque
Two, Sardah
Three, Kighah
Four, Fuddah
Five, Elibah
Six, N’quaha
Seven, Vouyah
Eight, Teesah
Nine, Musselman
Ten, Klaou
Twenty, Kulboa, kulla boa
Thirty, Kullo kegah
Forty, Kullo fuddah
Fifty, Kullo elibah
Sixty, Kullo N’quaha
Seventy, Kullo Vouga
Eighty, Kullo Teesa
Ninety, Kullo Musselman
One hundred, Drimka
Two hundred, Dibboo
Water, Yowah
Bring water, Sensa yowah
Meat, Souah
Gussub, Mudjuga
Man, Geela
Woman, Mug’sa
Girl, Gala
Handsome girl, Shugra
Ugly girl, Mowgwa
Good man, Zeeriah
Mother, Mama
Father, Dada
Brother, Malay
Sister, Koudray
Mountains, Ouvra
River, Gouah
Well, Souah
Spring, Pooshay
Great, Yeakay
Little, Chequah
Great mountains, Ouvre yeakay
Little sister, Koudray Chequah
Meal, breakfast, or Dafah
supper,
To eat, Zuzie
Bring to eat, Senga dafah
I will not, Wyanga
Sultan, Tsuksa
I am tired, Yaluffa luffa
Good bye, N’gea dha
Day, Vechea
Night, Véggea
I must go, Amindala
Come here, Souah sokena
My wife, Muksanga
Your wife, Muksarwa
Good road, Oungala shrugra
Bad road, Oungala mangoua
Rice, Acheiah
Butter, Wyay
Honey, Ammah
Eyes, Echey
Nose, Ukteray
Mouth, Okay
Ears, Shimmah
Head, Erey
Female slave, Quatana
Male slave, Affee
Handsome slave, Quatana mugray
Grass, Massah
My country, Uksarwa
Your country, Uksangra
I wish to sleep, Wenwyah yeksentia sah
I am your friend, Tukkatarwa
Horse, Bilsah
Ox, Tsah
Tiger-cat, Oobellah
Tiger’s skin, Ogzo oobellah
Ass, Anzouwah
Sheep, Keoay
Rich man, Tallowah
Poor man, Tszuah
 No. XX.

Timbuctoo Vocabulary.

Come, Kaa
Go, Koey
Quickly, Tumba
Give me to eat, Kata mung-ha
Give me to drink, Katahary mungenee
I am thirsty, Hamai egowei
I, or me, Ei
You, Ee
Him, Wo
They, Oo
Good, Abooree
Bad, Affootoo
Man, Harree
Woman, Weey
Girl, Izowy
Boy, Ezahary
Handsome woman, Weey tienta
Bad man, Harree footoo
Two eyes, Moh inka
Mouth, Mey
Beard, Kabi
Head, Bong-o
Horse, Barree
Camel, Yeo
Ass, Furka
Dog, Hanshe
Sheep, Fagee
An ox, Hou foh
Oxen, Hou bobo
Meat, Hum
Sweet milk, Wah gana
Sour milk, Wah coutoo
Sultan, Gabee coin
Bread, Takoola
River, Issa
Boat, Hee
House, Hoo
Slave, Bunneea
Female slave, Kong-o
Fire, Jarree
Night, Keegee
Day, Noony
Wood, Togoolee
Elephant, Turcondu
Water, Hary
Blood, Koorie
Knife, Hoorie
Gold, Oorah
Silver, N’zurfa
Turban, Tabbai
Tobe, Tilleby-kai
Breeches, Seeby
Sandals, Tarno
Cap, Foolah
Clouds, Beenee
Earth, Gunda
Mountain, Foudee
Well, Bungo
A ghrazzie, Wongo
Spear, Yagy
Mat, Tangaree
The truth, Keemy
That man lies, Wahareeagoothangany
Eat, Ngha
Foot, Kay
Hand, Kambah
One, Affoo
Two, Nahinka
Three, Nahinza
Four, Attakee
Five, Aggoo
Six, Iddoo
Seven, Ea
Eight, Yaha
Nine, Yugga
Ten, Auwy
Eleven, Auwy kindofoo
Twelve, Auwy kindoohinka
Thirteen, Auwy kindohinza
Fourteen, Auwy kindotakee
Fifteen, Auwy kindaggoo
Sixteen, Auwy kindo iddoo
Seventeen, Auwy kindoea
Eighteen, Auwy kindo yaha
Nineteen, Auwy kindoyugga
Twenty, Warunka
Twenty-one, Warunka kindofoo
Thirty, Warunza
Thirty-one, Warunza kindofoo
Forty, Waytakkee
Forty-one, Waytakkee kindofoo
Fifty, Wayaggoo
Fifty-one, Wayaggoo kindofoo
 ZOOLOGY.

No. XXI.

Having been requested by the authors of the preceding narrative

to describe the Zoological subjects collected during their journey, we
think it right, in the first place, to notice the difficulties attending their
acquisition and preservation. The European traveller, who is
transported with equal comfort over the rugged heights of Mont
Cenis, or along the level plains of Holland, can have little conception
of the privations and distresses which attend the wanderer in the
desert. The most feeble and timid may encounter the first task
without fatigue or fear; but the robur et æs triplex of a strong
constitution, persevering patience, and undaunted courage, must
fortify his resolution who directs his daring course through the sands
of the Sahara.
Having arrived at the farthest point of their route, our travellers
were occupied no less than five months in their return to Tripoli,
pursuing their “weary way” almost wholly through deserts, and
suffering severely by sickness and all sorts of privations. Their
means, too, of skinning and preserving the animals they procured
were of the slightest kind; the only cutting instrument they possessed
being a penknife belonging to Major Denham, and a little arsenical
soap, left from the stores of the late Mr. Ritchie, their sole antidote to
protect the skins from moth and corruption. Such, however, was their
ardour in the pursuit of Zoological subjects, that in spite of all the
difficulties and drawbacks that beset them, they succeeded in
collecting and bringing home upwards of a hundred specimens, and
some of them in exceedingly good condition and of peculiar interest;
though we regret to say, that less than a third of that number is all
that have come into our hands, many of the subjects having fallen
into utter decay.
 Classis. Mammalia. Auct.
Ordo. Carnassiers. Cuv.
Tribus. Carnivores. Cuv.
Stirps. Digitigrades. Cuv.
Genus. Fennecus. Lacep.

Species 1.—Fennecus Cerdo.

Fennec. Bruce, vii. 231. (8vo). pl. 28.

Animal Anonyme. Buff. Supp. iii. 128. pl. 19. (1776).
Zerda. Penn. Quad. pag. 248. pl. 28.
Canis Cerdo. Gmel. Linn.
Fennecus Brucii. Desm. Mamm. pl. 108. f. 4.
Canis Megalotis. Griff. An. King.
This beautiful and extraordinary animal, or at least one of this
genus, was first made known to European naturalists by Bruce, who
received it from his drogoman, whilst consul general at Algiers. It
was brought from Biscara by a Turkish soldier, from whom the
janizary bought it, and who said it was not uncommon at that place,
but was more frequently met with in the date territories of Beni
Mezzab and Werglah, where these animals are hunted for their
skins, which are afterwards sold at Mecca, and thence exported to
India. Bruce kept his animal alive for several months, and took a
drawing of it in water colours, of the natural size; a copy of which, on
transparent paper, was clandestinely made by his servant. On
leaving Algiers, Bruce gave the animal to Captain Cleveland, of the
Royal Navy, who made a present of it to Mr. Brander, the Swedish
consul. Mr. Brander, according to Sparman, as quoted by Bruce,
gave an account of the animal in “some Swedish Transactions,” but
refused to let the figure be published, the drawing having been
unfairly obtained. Bruce asserts that this animal is described in many
Arabian books, under the name of El Fennec, by which, he adds,
that it is known all over Africa; he conceives the appellation to be
derived from the Greek word φοινιξ, a palm, or date tree.
Drawn by Major Denham. Engraved by E. Finden.

FENNECUS CERDO.
Published Feb. 1826, by John Murray, London.

After Bruce left Algiers, he met with two other Fennecs, one of
which had been brought by the caravan of Fezzan to the Island of
Gerba, from whence it was carried to Tunis, where Bruce saw it; the
other he bought at Sennaar, but where it came from he knew not;
though it seems probable that it was a native of the date villages in
the desert of Selima. These animals exactly resembled the one first
seen at Algiers, and were known by the name of Fennec, and by no
other.
The favourite food of Bruce’s Fennec was dates, or any sweet
fruit; but it was also very fond of eggs: when hungry it would eat
bread, especially with honey or sugar. His attention was immediately
attracted if a bird flew near him, and he would watch it with an
eagerness that could hardly be diverted from its object; but he was
dreadfully afraid of a cat, and endeavoured to hide himself the