The Securities and Exchange Commission (SEC) is the primary securities regulator in the financial markets. It operates as an independent agency of the US Government. The SEC was created by the Securities Exchange Act of 1934, and it also enforces rules and regulations under the Securities Act of 1933 and other federal securities laws.
The SEC has three primary goals:
Protecting investors means shielding investors from fraud and unethical behavior. In general, the SEC focuses most on protecting smaller, retail investors. Institutions typically have substantial legal and financial resources, which makes it less likely they’ll be victimized by bad actors.
Maintaining fair, orderly, and efficient markets is about preserving confidence in the financial markets. This goal applies mainly to the secondary market and the laws within the Securities Exchange Act of 1934.
Facilitating capital formation means maintaining and regulating a system that allows issuers to raise capital (money) by selling securities. Although many rules make the process of registering securities difficult and costly, the SEC aims to balance necessary regulation with the ability of issuers to raise funds. Non-exempt issuers selling significant amounts of securities to the public often must complete the formal registration process, but many exemptions exist for smaller offerings and securities sold to private audiences.
The entity responsible for interpreting and enforcing the rules and regulations in the Uniform Securities Act (USA) is the state administrator. You can think of the state administrator as each US state’s version of the SEC.
As discussed earlier in this unit, the state administrator is an office dedicated to protecting investors and supporting the integrity of the securities system. For example, The Department of Financial Protection and Innovation is California’s state administrator. If you want to find the administrator in your state, search: “State securities administrator of [state]”.
The Series 66 exam covers many rules and regulations specific to the USA, and the state administrator enforces them. These regulations include:
Let’s break down each of these a bit further:
Registration & regulation of persons
You’ve already learned about the four “players in the game,” or types of persons the state administrator focuses on:
Those legal definitions matter because they determine who must register. If a business or natural person (human being) meets any of those definitions, they’re legally required to register with the state administrator. Registration places them under government supervision (since the administrator is part of each state’s government). The registration process and its requirements are covered later in this material.
Registration & regulation of securities
Registration and regulation don’t apply only to people and firms - they can also apply to securities. In particular, issuers are often subject to rules enforced by the state administrator. In many cases, issuers must publicly disclose significant information about the securities they’re offering. The goal is a transparent environment where investors have the information they need to make informed investment decisions.
Enforcement of general securities laws
The USA is broad legislation that covers many aspects of the securities markets and their participants. Because there’s so much to interpret and apply, each state relies on an office (the state administrator) to enforce the rules and regulations that apply.
Enforcement of anti-fraud provisions
Preventing fraud in the securities markets is central to nearly every part of the USA, but it’s important enough to highlight separately. A primary job of each state administrator is enforcing the USA’s anti-fraud provisions. Without strong anti-fraud enforcement, confidence in the securities markets could decline, which could reduce investment in businesses (and even governments) and contribute to broader economic decline. If there were a meaningful chance of being taken advantage of by financial professionals or other investors, many people would be less willing to invest.
As you work through the rest of this material, keep in mind that most rules, regulations, and laws discussed are generally enforced by the state administrator, although the administrator’s level of involvement depends on the situation.
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