Chapter 2 Flashcards
SEC
— is an independent, federal government agency that’s responsible for protecting investors, maintaining fair and orderly securities trading markets and facilitating capital formation in the primary market
— the SEC has jurisdiction over securities transactions that are executed on an interstate basis ( across state borders)
— The SEC may investigate potential securities law violations though its Division of Enforcement which prosecuted cases on behalf of the Commision
— the SEC may also bring civil actions
— if criminal activity is discovered by the Commission, the case falls under the jurisdiction of the Department of Justice (DOJ)
Federal Government divisions
- The SEC
- Department of Treasury
- IRS
— responsible for identifying and investigating illegal activities that have occurred or may occur within the financial markets (ex: money laundering)
— the IRS also provides guidance to investors concerning the tax implications of holding, buying, selling various types of securities
Federal Reserve
— the Federal Reserve or the Fed is an independent agency of the federal government that functions as the US Central Bank
— the Feds Board of Governors, also referred to as the Federal Reserve Board is responsible for controlling the nations monetary policy: Money Supply and Interest Rates
— the Fderal Reserve Board (FRB) mandate is to create conditions which will result in maximum employment and stable prices
— the FRB controls or sets the discount rate, reserve requirements, margin requirements on securities purchases
— in order to influence the rate that member banks charge each other on overnight loans (which is referred to as the federal funds rate) the Fed will buy and sell securities
Federal Deposit Insurance Corporation (FDIC)
— is an independent agency that was created by the congress
— FDICs role is to maintain stability and public confidence in the nations financial system
— the FDIC insures banking deposits and examines financial institutions for both safety and soundness in an effort to protect the nations financial system
— the current FDIC insurance coverage limit is $250k per depositor, per FDIC-insured bank
Self-Regulatory Organizations (SROs)
— is the creation and enforcement of day to day rules that brokerage firms must follow
These include:
— Financial Industry Regulatory Authority (FINRA)
— Municipal Securities Rulemaking Bord (MSRB)
— Chicago Options Exchange (CBOE)
— the primary purpose of these SROs/different self-policing organizations is to promote fair and equitable trading practices
— since SROs are not part of the US government, they lack the power to arrest or in prison any person who violates their rules
— financial service firms (ex: broker dealers are require to join an SRO and are referred to as Member Firms and the employees of these memeber firms are referred to as associated persons
The Securities Act of 1933
— was the 1st federal legislation to cover securities industry and its main focus is the Primary Market
— covers the new issue or Primary Market
— this act demands that investors be provided with full and fair disclosure so that they’re able to make informed investment decisions
— the act also provides specific rules for the conduct of both issuers and the investment bankers (underwriting firms)
I. Scope of the Law:
— provide “full and fair disclosure”
— prospectus must precede or accompany any solicitation of a new issue
II. Requires SEC Registration of New Issues
III. Liability
— conditional for the Underwriters that are required to perform :
Reasonable Investigation and “Due Dilligence”
The Securities Exchange Act of 1934
— establishes rules for activities which are conducted in the Secondary Market
— the 2 most recognized secondary markets are the NYSE and Nasdaq
— this 1934 Act created the SEC and have it preeminent regulatory authority over domestic securities dealings in both the primary and secondary markets
— additionally, the Act of 1934 gave the Fed regulatory oversight regarding the extension of credit (use of margin) in the securities industry
I. Scope of the Law
— to regulate the secondary market
— created the SEC to enforce Federal Securities Laws
— SEC utilizes Self-Regulatory Organizations (SROs)
II. Specific Provisions of the Act — Margin Requirements (Regulation T) — Registration Requirements — Trading Regulations — Insider Regulations
Investment Company Act of 1940
— regulates companies that are formed to pool together money from investors and invest the funds in securities
— the most popular are the open-end investment companies which are more commonly referred to as mutual funds
The Investment Advisor Act of 1940
— regulates firms that are established as Investment Advisors (IAs)
— to meet an investment advisor definition, a firm must satisfy all three parts of an ABC test:
- Advice — provides advice about securities, including asset allocation
- Business — operating as a regular business
- Compensation — receives compensation for the advice
Following persons are excluded from the Investment Advisor:
— broker dealers that receive commissions only
— banks, savings institutions and trust companies
— specific professionals who give incidental advice: Laweyers, Accountants, Teachers, Engineers (L,A,T,E)
— Publishers of Newspapers and Periodicals
The Securities Investor Protection Act of 1970 (SIPA)
— SIPA enabled the creation of the Securties Investor Protection Corporation (SIPC)
— an industry funded, non-profit insurance entity
— SIPC provides insurance coverage for the customers of brokerage firms in the event that the firms become insolvent (bankrupt)
— however, it does not protect the customers against market losses or employee misconduct
— SIPC Coverage: provides coverage for each separate customer (retail and institutional) to a maximum of $500k — of which no more than $250k may be for cash holdings. If a customer maintains both a cash and a margin account with the same brokerage firm, the accounts are combined when determining SIPC coverage
To be considered an investment adviser, what are the three parts of the ABC Test?
A — advice
B — business
C — compensation
What is the price at which the bidder is willing to sell?
Ask or offer price
Who controls the money supply and interest rates?
Federal Reserve Board
Who is responsible for supervising registered representatives?
Principal
Who insures bank depositors?
FDIC
