Welcome to the world of laws and regulations. If you’ve already prepared for the SIE, Series 6, or Series 7 exams, you likely have some familiarity with the major securities laws. This unit builds on that foundation.
You’ll want to be comfortable with the following securities laws:
The Uniform Securities Act (often called the USA) is a model law that states can adopt. In other words, it provides a framework that states can use to regulate the securities industry.
Using a shared framework makes compliance more practical for firms and professionals who operate in multiple states. Without the USA, each state could create very different rules, and a firm doing business across state lines would have to track and comply with a separate set of requirements in every state.
Most of this course is based on the USA. There have been multiple versions of the act, but states primarily rely on two:
The two versions are broadly similar, and the differences are generally not important for the exam. If you’d like to read the original text, use the links above. Otherwise, this program focuses on the key testable points.
**State securities laws were originally referred to as “blue sky laws.” The idea was that some advisors and brokers would go so far as to “sell the blue sky” by taking advantage of unknowing investors.
State laws and regulations created under the USA tend to be similar from state to state. They cover a wide range of issues, including:
These laws and regulations are enforced by the state administrator. You can think of the administrator as the state-level counterpart to the SEC.
Even though the term administrator sounds like a single person, it refers to an office (a group of people) responsible for enforcement. In practice, states often use different names for this office. For example, California’s state administrator is the Department of Financial Protection and Innovation.
All of the securities acts below (after the USA) are federal securities laws. Depending on the question, you may need to identify whether a law is state or federal.
The Securities Act of 1933 governs primary market sales of securities at the federal level. When an issuer offers securities interstate (in more than one state), the offering is subject to this act. The details are covered later in this material.
The Securities Exchange Act of 1934 governs secondary market securities transactions and market participants at the federal level. Many of the exam-relevant rules here relate to market manipulation and prohibited actions, which are covered later in this unit.
The Investment Company Act of 1940 regulates investment companies, including:
Relevant rules and regulations from this act are covered in the chapters linked above.
The Investment Advisers Act of 1940 regulates federal-covered advisers. You’ll learn more about the basics of investment advisers and the relevant rules and regulations later in this unit.
The Insider Trading Act of 1988 addresses the use of inside information, primarily by making it illegal to trade based on it.
By definition, insider trading involves trading on material, non-public information:
Insiders of publicly traded companies may have access to large amounts of material non-public information. For example, executives at a biotechnology company might know about a new medical product before it’s announced publicly. If the product is groundbreaking, those executives could buy shares before the announcement. Once the product is announced, demand for the stock could rise, increasing the stock price and creating profits for the insiders.
This is a serious issue if the SEC discovers it. Insiders may possess and discuss inside information, but they can’t trade on it. Once a trade occurs, both:
may face significant consequences.
If a customer tells you they have inside information and asks you to place a trade, you can’t do it. You may be held liable and could be sued by the SEC.
Regardless of the size of the profit made or the loss avoided, the SEC treats insider trading as a major violation. In civil court, perpetrators can be sued for up to three times the profit achieved or loss avoided. These are called treble damages. In addition, any investor who traded in the security at the time of the insider trade (a contemporaneous trader) can sue those responsible for insider trading for up to this amount.
Criminal charges and fines may also apply. An individual found guilty can be fined up to $5 million and sentenced to up to 20 years in jail. If the misconduct is widespread across a financial firm, the firm can be fined up to $25 million. Collected fines are typically distributed through the SEC’s Fair Fund, which holds and distributes money to victims of financial fraud.