LO 5.1.2: Describe federal and securities legislation applicable to financial planners. Flashcards
Why weren’t state regulations enough to protect investors after the Great Crash of 1929
- Individual states tried to protect investors from abuses, but
- could not extend protections beyond their borders
- created different blue sky laws that limited competition from out-of-state firms
- e.g., made many attractive securities unavailable to investors in some states
- This made it extremely difficult for corporations to raise capital nationally.
SEC
- Securities and Exchange Commission (SEC)
* Primary federal regulatory authority.
What was the purpose of the Securities Exchange Act of 1934
Created the SEC, extended regulation from new issues (’33 Act) to existing securities, and forbids market manipulation, deception, misrepresentation of facts, and fraudulent practices. :: SEC extended ‘33 | No fraud.
What was the SEC given power to do
Enforcement powers aimed to regulate securities transactions on both organized exchanges and in over-the-counter (OTC) markets.
What is the SEC’s mission
To protect investors and maintain integrity in the securities markets by interpreting federal securities laws, amending existing rules, proposing new rules, and serving as an enforcement authority against individuals and companies that violate securities laws.
What does the SEC require
- 1). public companies to disclose material information to the public,
- 2). investment adviser records, including e-mail, be maintained for 5 years.
- 3). all broker-dealers, transfer agents, and clearing agencies, SROs, securities exchanges, to register with the SEC.
- 4). issuers of securities to file quarterly financial statements w/the SEC, send annual reports to shareholders, and file 10K reports (more info that the annual reports) w/ the SEC annually.
- 5). trading activities of corporate directors and officers (insiders) subject to the law.
Dis 5 Registers as a 10 Trade
Why does the SEC require public companies to disclose material information to the public
- so no investors have a common source of information, and TF, can decide for themselves if they want to invest in those companies.
What does the SEC oversee
- Key participants in the securities industry, including:
- stock exchanges,
- broker-dealers,
- investment advisers,
- mutual funds,
- and public utility holding companies.
Who was the Great Crash of 1929 and the economic depression that followed blamed on
On bankers and brokers, and on the unregulated environment in which they operated.
How did the U.S. deal with the Great Crash of 1929
- Congressional hearings, which focused on the practices of issuing and trading securities, made public many of the scandalous practices of the day.
- These revelations lead to a number of landmark pieces of securities legislation.
What was the purpose of The Securities Act of 1933
- AKA. truth in securities law, the Paper Act
- Applies to most initial public offerings (IPOs)- requires a registration statement that provides full disclosure of the material facts
- Specifies classifications of securities that are exempt from registration requirements
- All new issues must be accompanied by a prospectus.
The Securities Act of 1933 | What is the registration statement intended to do (new issues)
To inform investors of important information they need to know to make an informed judgment about whether or not to purchase the being issued.
The Securities Act of 1933 | What happens is SEC finds misleading, incomplete, or inaccurate information in the registration statement
It will delay the offering until the registration statement is corrected.
The Securities Act of 1933 | What is a prospectus and what does it include
- A detailed summary of the registration statement; includes the following:
- A list of directors and offices, their stock holdings, stock options, and salaries;
- A description of the company’s properties and business;
- A description of the securities being offered for for sale;
- Financial statements certified by independent accountants;
- The underwriters;
- The purpose and use of the funds to be received from the offering;
- Any other reasonable info investors need before buying the securities;
- A general antifraud provision that prohibits deceit, misrepresentation, and other fraud in the sales of securities.
The Securities Act of 1933 | What if those preparing the registration statement or prospectus provide false info or fail to disclose all material facts
They can be sued.
The Securities Act of 1933 | Does the SEC guarantee the accuracy of registration statements
No. While the information is required to be accurate, the SEC does not guarantee its accuracy.
The Securities Act of 1933 | Do all new issues require registration
- No; some newly issued securities are exempt from registration requirements to foster capital formation by lowering the cost of offering securities.
- Examples:
- new issues of a limited size;
- private offerings to a limited number of institutions or persons;
- intrastate offerings; and
- offerings of local, state, and federal governments.
Glass-Steagall Act of 1933
- Was an emergency response to the collapse of thousands of banks during the Great Depression.
- Prohibited financial institutions from consolidating and offering any combination of traditional commercial banking, investment banking (brokerage firm), and insurance.
How are Securities Act of 1933 and Securities Exchange Act of 1934 related
The ‘34 Act extended the ’33 Act (which applies only to new issues) to create the SEC and extend regulations to existing securities. | Existing issues have to keep info fresh/current | Created SEC | Required issues to be registered w/SEC.
The Securities Exchange Act of 1934 | Who is considered an insider
Anybody who has information that is not public knowledge.
The Securities Exchange Act of 1934 | What is insider trading
An illegal practice when a person has material, nonpublic information and trades on that information.
The Securities Exchange Act of 1934 | What does the Securities Exchange Act of 1934 give the Federal Reserve Board of Governors the responsibility to do
setting margin requirements when buying securities.
