Finance affects everyday decisions - travel, housing, raising a family, and retirement all depend on having (and managing) money. That’s why financial professionals work in a field where trust matters. A common saying captures the idea:
“If you want to keep someone happy, don’t mess with their food or money.”
In many roles, financial professionals handle or influence significant amounts of money. That comes with real responsibility. To operate legally and ethically, you need to understand the rules that govern the industry. You’ll also sometimes need to think like a criminal - understanding the incentives behind prohibited behavior helps you recognize, stop, and report it.
Several regulators enforce financial rules and regulations. You were introduced to them for the SIE exam, and they’ve come up throughout this program. This review focuses on:
As we learned in the primary market chapter, the Securities and Exchange Commission (SEC) is the primary securities regulator in the financial markets. The SEC is an independent agency of the US Government. It was created by the Securities Exchange Act of 1934, and it also enforces rules and regulations under the Securities Act of 1933 and the Investment Company Act of 1940. The SEC has three primary goals:
Protecting investors is the SEC’s core purpose. In most situations where the SEC appears in this material, the goal is to reduce fraud and unethical behavior. The SEC is generally most focused on protecting smaller, retail investors. Institutions typically have substantial legal and financial resources, which makes them less likely to be victimized by bad actors. This is why you’ll sometimes see rules that don’t apply (or apply differently) when institutions are involved - Regulation D is a good example.
Maintaining fair, orderly, and efficient markets is about market confidence. This goal is closely tied to the secondary market and the Securities Exchange Act of 1934, which we covered in the secondary markets chapter.
Facilitating capital formation means supporting a system where issuers can raise capital (money) by selling securities. Many rules make the process of registering securities difficult and costly, so the SEC aims to balance investor protection with the ability to raise funds efficiently. Non-exempt issuers selling significant amounts of securities to the public often must complete formal registration, but many exemptions exist for smaller offerings and securities sold to private audiences.
The Financial Industry Regulatory Authority (FINRA) is the primary regulator you’ll deal with in day-to-day industry life. FINRA is a private organization, but it’s also a self-regulatory organization (SRO) that has been approved by the SEC to exercise regulatory authority.
Although the full structure is more complex, a helpful way to think about it is:
FINRA enforces its own rules and also enforces the rules of other SROs (such as the MSRB).
FINRA also writes and administers exams like the SIE and Series 6. Passing these exams is part of becoming a registered representative who can work with customers of securities firms. In most cases, you must be registered with FINRA to operate legally in the industry.
To register with FINRA, you’ll complete and file Form U-4, the Uniform Application for Securities Industry Registration or Transfer. Your firm will usually guide you through the process. The form can feel personal because it requires detailed background information, including:
Some past events can prevent someone from working in the securities industry. While Form U-4 requires disclosure of criminal-related events (even without a conviction or guilty plea), only convictions or guilty pleas typically create an automatic barrier to registration. These are called statutory disqualifications and usually involve criminal activity or serious rule violations. The following items can lead to a U-4 being denied:
Firms often ask early in the hiring process about criminal convictions (and sometimes arrests) because a felony or securities-related misdemeanor may prevent registration. In some cases, a firm can request an exception and attempt to register someone despite a disqualifying event. For example, a broker-dealer might argue that a felony conviction from eight years ago should not prevent registration. This request is an Eligibility Proceeding. The firm files the request with FINRA, FINRA forwards it to the SEC, and the SEC makes the final decision.
To confirm the information on Form U-4, firms conduct background investigations on new hires. FINRA rules require firms to investigate the good character, business reputation, qualifications, and experience of each representative they plan to register. Fingerprints are also collected and sent to the FBI. This helps confirm identity and check for outstanding criminal issues.
After the background check, the employee signs the U-4. The signature confirms the information is accurate and also accepts an arbitration agreement embedded in the form. As covered earlier, this generally prevents representatives from suing their employer unless allegations of harassment or discrimination exist.
Once signed, the firm submits the U-4 to FINRA’s Central Registration Depository (CRD). The CRD is a database containing information on registered representatives across the industry. Customers can view certain information through FINRA’s BrokerCheck (you may already appear there). The CRD also contains information on FINRA member firms, meaning firms registered with FINRA - broker-dealers are a common example.
Form U-4 must be updated when information changes. Some updates are routine (such as a name or address change). Others involve events that can affect employment or registration status. If an event involving a statutory disqualification occurs after registration, the U-4 must be updated within 10 days of the event. For example, a registered representative convicted of a securities-related misdemeanor would need to update the U-4. In many cases, such events lead to revocation of registration and termination.
When a representative’s employment ends, the firm must file a U-5 with FINRA within 30 days. If FINRA removes registration due to a rule violation, the registration is revoked. Not every departure is negative, though. If a representative quits or retires, the registration is canceled. Revocation is punitive (a punishment); cancellation is not. U-5 information is also available on BrokerCheck.
After a registration is revoked or canceled, FINRA maintains regulatory authority for 2 years. For example, if someone quits and their registration is canceled, and then a legitimate customer complaint alleging fraud is filed afterward, FINRA can still revoke the person’s license. That revocation can prevent the person from re-entering the industry later.
Form U-6 is filed when a representative or firm is subject to disciplinary action or when a reportable event occurs. Reportable events include criminal convictions and financial disclosures (bankruptcy and compromises with creditors). Arbitration dispute outcomes are also reported on this form. Like the U-4 and U-5, U-6 information is available on BrokerCheck.
The Municipal Securities Rulemaking Board (MSRB) is an SRO that writes rules for the municipal securities markets and their participants. Its rules do not apply to municipal issuers. The MSRB writes rules but does not enforce them. The following organizations enforce MSRB rules:
Enforces MSRB rules for securities firms
Enforces MSRB rules for banks
The North American Securities Administrators Association (NASAA) is a group of state securities administrators. Each state has its own administrator - an office responsible for enforcing rules under the Uniform Securities Act. You can think of NASAA as the state-level counterpart to federal securities regulation. You won’t need much NASAA detail for the Series 6, but it becomes central on the Series 63, 65, and 66. NASAA writes and administers each of those exams.
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