Financial Services Industry Regulation Requirements Flashcards
The Principles of the Securities Industries Act of 1933
Requiring that investors receive financial and other significant information concerning securities being offered for public sale
Prohibiting deceit, misrepresentations, and other fraud in the sale of securities.
Registration Process
A description of the company’s properties and business,
A description of the security to be offered for sale,
Information about the management of the company, and
Financial statements certified by independent accountants.
Exemptions from registration with the SEC
Private offerings to a limited number of persons or institutions
Offerings of limited size
Intrastate offerings
Securities of municipal, state, and federal governments.
The Securities Act 1934 empowers the SEC to regulate, register 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
Self Regulatory Organizations (SROs): A 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, and American Stock Exchange are SROs. FINRA, the Financial Industry Regulatory Authority, formerly National Association of Securities Dealers (NASD), is also an SRO since it is the largest non-governmental regulator for all securities firms in the US.
Investment Company Act 1940
The 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.
Investment Advisers Act
The Investment Advisers Act of 1940 (also referred to as the “Advisers Act”) regulates investment advisers. To be considered an investment adviser under this Act, a three-prong test must be met:
The individual or firm advises as to the value of securities, or as to the advisability of investing in or selling securities, through publications or writings and, in fact, they hold themselves out to the general public as providing such advice.
Advice includes not only particular investment recommendations but also analyses or evaluation of securities or the security market in general.
The individual or firm is engaged in the business of advising others, by providing general or specific advice or issues reports about securities.
Engaged in the business means securities advice must be given on a frequent and regular basis.
The individual or firm receives compensation for advisory services.
Compensation includes any economic benefit received for providing advisory services such as commissions, separate advisory fees and indirect economic benefits.
Professions excluded from the definition of Investment Adviser
A bank, or any bank holding company as defined in the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.) which is not an investment company
Any lawyer, accountant, teacher, or engineer, whose performance of such services is solely incidental to the practice of his or her profession
Any broker or dealer whose performance of such services is solely incidental to the conduct of his or her business as a broker or dealer and who receives no special compensation
SEC Registration Requirements
A small adviser with less than $25 million of AUM is prohibited from SEC registration if its principal office and place of business is in a state that regulates advisers (currently all states except Wyoming).
A mid-sized adviser with between $25 million and $100 million of AUM:
Is required to register with the SEC if its principal office and place of business is in New York or Wyoming, unless a registration exemption is available, e.g., exemption for certain advisers to private funds.
Is prohibited from SEC registration if its principal office and place of business is in any state except New York or Wyoming, and the mid-sized adviser is required to be registered in that state. If the mid-sized adviser is not required to be registered in that state, then the adviser must register with the SEC, unless a registration exemption is available.
An adviser approaching $100 million of AUM may rely on a registration “buffer” that ranges from $90 million to $110 million of AUM. The adviser:
May register with the SEC when it acquires $100 million of AUM;
Must register with the SEC once it reaches $110 million of AUM, unless a registration exemption is available; and
Once registered with the SEC, is not required to withdraw from SEC registration and register with the states until the adviser has less than $90 million of AUM.
A large adviser with at least $110 million of AUM is required to register with the SEC, unless a registration exemption is available.
Brochure Rule
Rule 204-3 under the Investment Advisers Act, commonly referred to as the “brochure rule,” generally requires every SEC Registered Investment Adviser to deliver to each prospective advisory client a written disclosure statement, or “brochure”, describing the adviser’s business practices and educational and business background.
FINRA
Established under authority granted by the 1938 Maloney Act Amendments to the Securities Exchange Act of 1934, the National Association of Securities Dealers (NASD®) was a self-regulatory organization of the securities industry. NASD was responsible for the regulation of The NASDAQ Stock MarketSM as well as the vast over-the-counter securities market and the many products traded in it. In July 2007 NASD merged with the regulatory arm of the New York Stock Exchange, to create the Financial Industry Regulatory Authority (FINRA).
FINRA Membership
Membership in the FINRA allows a firm to participate in the over-the-counter and investment banking securities business, to distribute shares of investment companies sponsored by FINRA members, and distribute new issues underwritten by FINRA members.
Securities professionals associated with a member firm who will engage in securities transactions must register with the FINRA as a registered representative or principal. Applicants participate in a thorough investigation to ensure that they have not violated any federal or state law or any exchange or FINRA rule that would prohibit them from entering the securities business. They are then required to pass a qualification exam to demonstrate their knowledge of the securities industry.
Registered Representatives
Registered Representatives are individuals associated with a member firm, including assistant officers other than principals, who are engaged in:
The investment banking or securities business for the member firm including the functions of supervision, and
The training of persons associated with a member for any of these functions.
