Securities Regulations Overview
Understanding the regulatory framework is essential for anyone selling investment products. The U.S. securities industry operates under a multi-layered system of federal and state laws, each designed to protect investors and maintain fair markets.
The Foundation: Federal Securities Laws
Securities Act of 1933 (The "Paper Act")
The Securities Act of 1933 was the first major federal legislation regulating securities. Often called the "truth in securities" law, it has two primary objectives:
- Full disclosure — Require issuers to provide investors with material information about securities being offered
- Anti-fraud — Prohibit deceit, misrepresentations, and fraud in the sale of securities
The '33 Act governs the primary market (new issuances). When a company wants to sell securities to the public, it must register them with the SEC and provide a prospectus to investors.
Exam Tip: Think "1933 = Paper/Prospectus" — this act requires the prospectus document for new securities offerings.
Securities Exchange Act of 1934 (The "People Act")
The Securities Exchange Act of 1934 regulates the secondary market (trading of existing securities) and created the SEC. Key provisions include:
- Registration of broker-dealers, exchanges, and securities
- Ongoing reporting requirements for public companies
- Anti-fraud provisions (including the famous Rule 10b-5)
- Regulation of insider trading
Exam Tip: Think "1934 = People/Trading" — this act regulates the people and markets involved in trading.
Investment Company Act of 1940
The Investment Company Act of 1940 is critical for Series 6 because it specifically regulates the products you'll sell: mutual funds, closed-end funds, and UITs.
Key requirements include:
| Requirement | Description |
|---|---|
| Registration | Investment companies must register with the SEC |
| Board Composition | At least 40% independent directors |
| Custody | Securities must be held by a qualified custodian |
| Pricing | NAV must be calculated at least daily |
| Prospectus | Must be delivered to investors before or at time of sale |
Investment Advisers Act of 1940
The Investment Advisers Act of 1940 regulates investment advisers — those who provide advice about securities for compensation. While Series 6 focuses on products rather than advice, understanding this distinction is important:
- Broker-dealers are primarily regulated under the '34 Act
- Investment advisers are primarily regulated under the Advisers Act
- Many firms are registered as both
Regulatory Bodies
Securities and Exchange Commission (SEC)
The SEC is the primary federal regulator of the securities industry. It:
- Enforces federal securities laws
- Oversees SROs (like FINRA)
- Reviews and approves new securities registrations
- Brings enforcement actions against violators
Financial Industry Regulatory Authority (FINRA)
FINRA is a self-regulatory organization (SRO) that regulates broker-dealers and their registered representatives. As of 2024, FINRA oversees:
- Over 3,300 brokerage firms
- Nearly 150,000 branch offices
- Approximately 612,000 registered representatives
State Regulators
States regulate securities through Blue Sky Laws. The term comes from early efforts to protect investors from fraudulent schemes that had "no more basis than so many feet of blue sky."
- Each state has its own securities administrator
- State registration may be required in addition to federal registration
- Coordinated through the North American Securities Administrators Association (NASAA)
Which federal law primarily regulates mutual funds and other investment companies?
The Securities Act of 1933 primarily regulates which market?
What is FINRA's role in the securities industry?
1.2 FINRA Rules and Structure
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