Series 6

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Securities Industry Regulations - Securities Exchange Act of 1934

The Securities Exchange Act of 1934 governs the rules for agents, broker dealers and securities that trade on the secondary markets. In an attempt to provide a fair and orderly market for investors, the Act also determines the laws that regulate the exchanges and their participating broker-dealers.

Look Out!

Understand the distinction between the 1933 and 1934 Acts.The Securities Act of 1933 primarily deals with the registration of new securities issues.It is concerned with the full disclosure of all information regarding new issues for the benefit of the investing public.The Securities Exchange Act of 1934 concerns the rules that govern the securities exchanges, as well as the rules that govern the registration and regulation of broker-dealers.

Definitions Under the Act
The Act of 1934 defines a broker as any person who transacts securities sales for investors while a dealer buys and sells securities for his or her own account.

Directly from Section 3.a.10 from the Securities Exchange Act of 1934, the definition of a security is:

"...any note, stock, treasury stock, security future, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a 'security'; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited."

An investment contract is defined broadly as any interest that involves an investment of money in a common enterprise with profits to come solely from the efforts of others. This definition was clarified by the Supreme Court in the Howie vs. SEC (1948) case.

Securities and Exchange Commission (SEC)
One of the most significant outcomes of the Securities Exchange Act of 1934 was the creation of the Securities and Exchange Commission, more commonly known as the SEC. The SEC is responsible for enforcing securities laws in the U.S. The five commissioners of the SEC are appointed by the President of the U.S., with the advice of the Senate. Only three of the five members may be affiliated with the same political party. Members serve a five-year term during which they are full-time employees of the SEC. They are not allowed to engage in any securities transactions during their tenure

The SEC is empowered to administer oaths, subpoena witnesses, take evidence and request documentation from any issuer that may have violated federal securities law. The SEC may also suspend trading in a security for up to 10 days. It may also suspend trading on an exchange for up to 90 days with prior notification of and approval by the President of the United States.

National Securities Exchanges
When a new exchange is formed, it must fill out an application and register its constitution, bylaws and articles of incorporation with the SEC. The application will contain the rules of the exchange and any other required information.

When the SEC reviews the exchange application, it will make sure that the rules of the exchange are accompanied by an enforceable system of compliance and that these rules will prevent fraudulent and manipulative actions and promote fair and equitable trading practices.

The exchange cannot grant membership to any broker-dealer that is not registered with the SEC. Moreover, membership must be denied to anyone not associated with a broker-dealer or anyone who has received a statutory disqualification which would prevent him or her from any association with a self-regulatory organization (SRO). If the exchange finds out that an individual or a member has been expelled or suspended by another SRO, it may summarily suspend the member or individual. The exchange should also be in a position to either limit the activities of or suspend any member that is experiencing financial or operational difficulties that would lead to the harm of investors, other members, creditors or the exchange itself.

Rule 17f-2 - Fingerprinting of Security Industry Personnel
The SEC requires those involved in selling securities or handling cash and / or securities to be fingerprinted to help protect the public. Rule 17f-2 states that "every member of a national securities exchange, broker, dealer, registered transfer agent and registered clearing agency shall require that each of its partners, directors, officers and employees be fingerprinted and shall submit, or cause to be submitted, the fingerprints of such persons to the Attorney General of the United States or its designee for identification and appropriate processing". An exemption applies to broker-dealers and their employees who transact only mutual fund shares, variable contracts or unit investment trusts.

Investment Advisors Act of 1940
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