Series 99

By Jeff Van Blarcom AAA

Chapter 6: Conduct Rules - A. Introduction: Securities Industries Rules and Regulations

Federal and state securities laws, as well as industry regulations, have been enacted to ensure that all industry participants adhere to a high standard of just and equitable trade practices. In this chapter, we will review the rules and regulations, as well as the registration requirements for firms, agents, and securities.

The Securities Exchange Act of 1934

The Securities Exchange Act of 1934 was the second major piece of legislation that resulted from the market crash of 1929. The securities Exchange Act regulates the secondary market that consists of investor-to-investor transactions. All transactions between two investors that are executed on any of the exchanges or in the over the counter market are secondary market transactions.  In a secondary market transaction, the selling security holder receives the money, not the issuing corporation. The Securities Exchange Act of 1934 also regulates all individuals and firms that conduct business in the securities industry.  The Securities Exchange Act of 1934:

  • Created the SEC
  • Requires registration of broker dealers and agents
  • Regulates the exchanges and FINRA
  • Requires net capital for broker dealers
  • Regulates short sales
  • Regulates insider transactions
  • Requires public companies to solicit proxies
  • Requires segregation of customer and firm assets
  • Authorized the Federal Reserve Board to regulate the extension of credit for securities purchases under Regulation T
  • Regulates the handling of client accounts
  • Regulates interstate securities transactions

The Securities Exchange Commission / SEC

One of the biggest components of The Securities Exchange Act of 1934 was the creation of the SEC. The SEC is the ultimate securities industry authority and is a direct government body. Five commissioners are appointed to five-year terms by the president, and each must be approved by the senate. No more than three members may be from any one political party. During their term as a commissioner individuals may only act as a commissioner and may not engage in any outside employment. The SEC is not a self-regulatory organization (SRO) or a designated examining authority (DEA). A self-regulatory organization is one that regulates its own members such as the NYSE or FINRA. A designated examining authority is one that inspects a broker dealer’s books and records, and can also be the NYSE or FINRA. All broker dealers, exchanges, agents and securities must register with the SEC. All exchanges are required to file a registration statement with the SEC that includes the articles of incorporation, bylaws and constitution. All new rules and regulations adopted by the exchanges must be disclosed to the SEC as soon as they are enacted. Issuers of securities with more than 500 shareholders and with assets exceeding $10,000,000, or issuers whose securities are traded on an exchange or NASDAQ must register with the SEC, file quarterly (10Q) and annual (10K) reports, and must follow certain rules relating to the  solicitation of proxies from stockholders. The issuer must file the proxy with the SEC and the proxy must be in the required form and must be accompanied by certain information. A broker dealer that conducts business with the public must register with the SEC and maintain a certain level of financial solvency known as net capital.  All broker dealers are required to forward a financial statement to all customers of the firm.  Additionally, all employees of the broker dealer, who are involved in securities sales, have access to cash and securities, or who supervise employees, must be fingerprinted. 

Extension of Credit

The Securities Act of 1934 gave the authority to the Federal Reserve Board (FRB) to regulate the extension of credit by broker dealers for the purchase of securities by their customers. The following is a list of the regulations of the different lenders and the regulation that gave the FRB the authority to govern their activities:

  • Regulation T broker dealers
  • Regulation U banks
  • Regulation G All other financial institutions

TAKE NOTE!

Exempt securities issued by The US Government and municipal governments are exempt from most of the conditions of The Securities Exchange Act of 1934, including Regulation T, anti-manipulation rules, proxy requirements and insider reporting.  

B. NASD and Codes
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