b. Regulation - regulation is extensive in the securities industry, both at the federal and state levels.
- The 1933 Act - applies to the required disclosure for the issuance of new securities. Issuers of non-exempt securities must file a registration statement with the SEC. Anyone purchasing a new, non-exempt issue must receive a prospectus.
- Exempt securities include US government securities; municipal bonds; commercial paper and banker's acceptances with maturities of less than 270 days; insurance policies and fixed annuities; national and state bank securities; savings and loan securities and charitable, religious, educational and non-profit association issues.
- Exempt transactions include Regulation A: corporate offerings of less than $5M; Regulation: Private Placements; Rule 147: securities offered and sold exclusively intrastate and Rule 144 (control securities owned by directors, officers or persons owning or controlling 10% or more of an issuer's voting stock/restricted securities: acquired through other than a public offering, e.g. private placement), 144a (the sale of non-registered foreign and domestic securities to qualified institutional buyers e.g. with a minimum of $100M in assets and 145.
- The 1934 Act - the people act, it regulates the secondary market which comprises outstanding securities, trading and the participants in it. The act created the Securities and Exchange Commission (SEC). The act requires registration of all firms and persons trading securities on the exchanges and over the counter, registration of the exchanges and the OTC market, regulation of credit by the Federal Reserve Board (FRB), regulation of trading activities, regulation of insider transactions, proxies and short sales, regulation of client accounts, the customer protection rule, net capital requirements of broker/dealers and issuers' reporting requirements.
- The Public Utility Holding Company Act of 1935
- The Maloney Act of 1938 - amended the 1934 Act to allow the SEC to create self-regulatory organizations (SROs) or designated examining authorities (DEAs) to monitor broker/dealers not affiliated with a stock exchange. It was here that the National Association of Securities Dealers (NASD) was chartered as the SRO of the OTC market.
- The Federal Bankruptcy Act of 1938
- The Trust Indenture Act of 1939 - is applicable to corporate bonds with an issue size of more than $5 million within twelve months and with a maturity exceeding nine months. The purpose of the act is to protect bondholders. The issuer is required to appoint a trustee to ensure that the terms of the trust indenture-the series of promises between the issuer and trustee-are fulfilled for the bondholders' benefit.
- The Investment Company Act of 1940 - defines and regulates investment companies. Such companies must register with the SEC prior to issuing any shares to the public; set forth clearly their investment objectives in the registration statement and prospectus; have a minimum $100,000 net worth, have at least 100 shareholders, comply with pricing, sale and reporting standards.
- The Investment Advisors Act of 1940 - regulates investment advisors, defined as anyone who offers investment advice for compensation as part of their business. Broker/dealers fitting the definition must register under the act, investment advisor representatives must register as well and pass the Series 65 (Series 66 if Series 7 licensed) unless a particular advanced certification exempts them from doing so in the state where they register (e.g. Chartered Financial Analysts and Certified Financial Planners may be exempt from the exam requirements, depending on the state in which they practice).
- The Securities Investor Protection Act of 1970 - the goal of this act is to protect investors from broker/dealer insolvency or failure. The Securities Investor Protection Corporation is independent and government sponsored. Membership is compulsory for broker/dealers registered with the SEC who pay an annual assessment that funds a pool to meet potential claims for customers from a failed broker/dealer.
Coverage requirements - customer accounts are covered to a $500,000 maximum, of which the cash coverage may not exceed $100,000. Note that the coverage amounts are per customer, not per account. The order of events in a liquidation is as follows.
- Securities held in the customer's name are delivered to registered owners.
- Cash and street name securities are distributed pro rata.
- SIPC funds are paid out to meet any remaining claims up to the per customer maximum.
- Customers with claims exceeding the limits become general creditors of the broker/dealer.
- The Securities Acts Amendments of 1975 - these established the Municipal Securities Rulemaking Board (MSRB) which regulates the issuance and trading of all manner of municipal securities.
Sample Questions 1 - 7
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