The Securities and Exchange Commission (SEC) is the primary securities regulator in the financial markets. Operating as an independent agency of the US Government, the SEC was technically created by the Securities Exchange Act of 1934 although it also enforces rules and regulations in the Securities Act of 1933, plus other federal securities laws. The SEC has three primary goals:
Protect investors
Maintain fair, orderly, and efficient markets
Facilitate capital formation
Protecting investors should be self-explanatory. In almost every instance we’ve discussed the SEC in this material, their intent is to shield investors from fraud and unethical actions. In general, the SEC is most concerned with protecting smaller, retail investors. Institutions have access to significant legal and financial resources, making it unlikely for institutions to be victims of bad actors.
Maintaining fair, orderly, and efficient markets relates to ensuring confidence in the financial markets. This goal relates mainly to the secondary market and the laws within the Securities Exchange Act of 1934.
Facilitating capital formation involves maintaining and regulating a system that allows issuers to raise capital (money) by selling securities. Although many rules exist that make the process of registering securities difficult and costly, the SEC strikes a balance between necessary regulation and ease of raising capital. Non-exempt issuers selling significant amounts of securities to the public often must go through the formal registration process, but many exemptions exist for smaller issues and securities sold to private audiences.
State administrator
The entity responsible for the interpretation and enforcement of the rules and regulations in the Uniform Securities Act (USA) is the state administrator. They are basically each US state’s version of the SEC.
As we discussed earlier in this unit, the state administrator is an office dedicated to protecting investors and ensuring the integrity of the financial securities system. For example, The Department of Financial Protection and Innovation is California’s state administrator. If you’re curious about the administrator in your state, use these terms on any search engine: ‘State securities administrator of [state]’
The Series 65 exam covers a wide array of rules and regulations specific to the USA, and the state administrator enforces them. These regulations include:
Registration & regulation of persons
Registration & regulation of securities
Enforcement of general securities laws
Enforcement of anti-fraud provisions
Let’s break down each of these a bit further:
Registration & regulation of persons
We’ve already learned about the four “players in the game,” or types of persons the state administrator focuses on:
While it probably felt nitpicky at the time, there was a reason we dissected the legal definition of these entities. If a business or natural person (human being) meets any of those definitions, they’re legally required to register with the state administrator, which effectively puts them under some form of government supervision. After all, the administrator is a branch of each state’s government. We’ll discuss the process of registration and all that comes with it later in this material.
Registration & regulation of securities
Not only are certain persons subject to registration and regulation, but so are securities. In particular, security issuers are usually subject to some rules enforced by the state administrator. In most cases, issuers are required to publicly disclose a significant amount of information about the securities they’re offering to investors. The state administrators strive for a transparent environment that provides investors with the resources necessary to make informed investment decisions.
Enforcement of general securities laws
The USA is an all-encompassing legislation that covers numerous aspects of the securities markets and their participants. There’s a lot to keep track of, and that’s why it takes an office of each state’s government (the state administrator) to interpret the law and enforce applicable rules and regulations.
Enforcement of anti-fraud provisions
While preventing fraudulence in the securities markets is at the heart of nearly every regulation of the USA, it’s important enough for us to discuss this separately. The primary and most important job of each state administrator is to enforce anti-fraud provisions of the USA. If this weren’t the case, confidence in the securities markets would fall, which could lead to fewer investors financially supporting businesses (or even governments) and general economic decline. Would you want to invest your hard-earned money if there was a decent chance of being taken advantage of by financial professionals or other investors?
As you make your way through the rest of this material, keep in mind that every rule, regulation, or law discussed is generally enforced by the state administrator, although their level of involvement depends on the situation.
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