Financial Service Industry Regulation Flashcards
Securities Act of 1933 or “Truth in securities law”.
Requires that investors receive financial and other significant information concerning securities being offered for public sale; and
Prohibits deceit, misrepresentations, and other fraud in the sale of securities.
Should all securities be registered by SEC
Not all offerings of securities must be registered with the Securities and Exchange Commission. Some exemptions from the registration requirement include:
private offerings to a limited number of persons or institutions
offerings of limited size
intrastate offerings, and
securities of municipal, state, and federal governments.
Securities act of 1934
With the Securities Act of 1934, Congress created the Securities and Exchange Commission (SEC). The Act empowers the SEC with broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee:
brokerage firms- firms that charge a fee or commission for executing buy and sell orders submitted by another individual or firm,
transfer agents- person or company who maintains the records of registered securities,
clearing agencies- facilitate the validation, delivery and settlement of securities transactions, and
the nation’s securities Self Regulatory Organizations (SRO) - An SRO is an organization accountable to the SEC for the enforcement of federal securities laws within an assigned area. The various stock exchanges, such as the New York Stock Exchange, American Stock Exchange, and the National Association of Securities Dealers (NASDAQ) are SROs. FINRA, the Financial Industry Regulatory Authority, formerly NASD, is also an SRO since it is the largest non-governmental regulator for all securities firms in the US.
The Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 gave the SEC even more authority to regulate an even larger group of professionals, including overseeing the activities of the auditing profession and lawyers. The law mandates corporate responsibility and enhanced financial disclosures to combat corporate and accounting fraud.
Structure of the SEC
The SEC is comprised of five presidentially-appointed Commissioners, six Divisions and 25 Offices. With approximately 4,500 staff, the SEC is small by federal agency standards. Headquartered in Washington, DC, the SEC has 11 regional and district offices throughout the country.
Investment Company Act of 1940
This Investment Company Act of 1940 regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations. The Act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis. The focus of this Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations. It is important to remember that the Act does not permit the SEC to directly supervise the investment decisions or activities of these companies or judge the merits of their investments.
FINRA (Financial Industry Regulatory Authority)
FINRA is a self-regulatory body that operates subject to Securities and Exchange Commission oversight, which oversees approximately 4,100 brokerage firms, 160,000 branch offices and more than 636,000 registered securities representatives. This membership includes virtually every broker/dealer in the nation that handles securities business with the public.
State Regulation of Securities
An offering of securities must be registered under both the federal Securities Act of 1933 (“Securities Act”) and applicable state securities laws, unless an exemption from registration is available. This dual system of federal-state regulation has existed since the Securities Act was adopted. The first modern laws applicable to the regulation of securities offerings were passed by the state of Kansas in 1911. The nickname for state regulations is “Blue Sky Laws” because of a Kansas Supreme Court justice who wanted regulation to protect against “speculative schemes that have no more basis than so many feet of blue sky”.
Blue Sky Law
Every state has its own securities laws, commonly referred to as “Blue Sky Laws,” that are designed to protect investors against fraudulent sales practices and activities. While these laws can vary from state to state, most laws typically require companies making small offerings to register those offerings before they can be sold.
The laws also license brokerage firms, their brokers, and investment adviser representatives. State-registered investment advisers are also subject to federal regulation in areas such as:
Insider trading
Performance fees
Fraudulent or deceptive practices, and
Assignment of advisory contracts.
Gramm-Leach-Bliley Act
On November 12, 1999, the President Clinton signed the Gramm-Leach-Bliley Act (“GLBA”) into law. The GLBA represents the culmination of more than 30 years of Congressional efforts aimed at reforming the regulation of financial services. The GLBA changed federal statutes governing the scope of permissible activities and the supervision of banks, bank holding companies, and their affiliates. The GLBA lowers (although does not altogether eliminate) barriers between the banking and securities industries erected by the Banking Act of 1933 (popularly known as the “Glass-Steagall Act”) and between the banking and the insurance industries erected by the 1982 amendments to the Bank Holding Company Act of 1956 (the “Bank Holding Company Act”). As a result, banks are able to affiliate with securities firms and insurance companies within the same financial holding company. Some have described the GLBA as the most important piece of federal banking legislation since the Depression.
