Welcome to the world of laws and regulations. If you’ve already prepared for the SIE, Series 6, or Series 7 exams, you’ve likely seen many of the major securities laws before.
You’ll want to be familiar with these key securities laws:
The Uniform Securities Act (often called the USA) is model legislation that states can adopt to regulate the securities industry. Because it’s a shared framework, it helps create more consistent state rules. Without it, each state could write entirely different securities laws, and a firm operating in multiple states would have to navigate a separate set of requirements in each one.
Most of this unit is based on the USA. There have been multiple versions of the act, but two are most commonly used by states:
The two versions are very similar. Any differences are generally not important for the exam. If you’d like to read the original text, use the links above. If not, you’ll still be covered here - we’ve summarized the testable parts.
The USA is also associated with the term blue sky laws.
**State securities laws were originally referred to as “blue sky laws.” It was said that certain advisors and brokers would go so far as “sell the blue sky” as they were attempting to take 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 sounds like a single person, the administrator is an office or agency responsible for enforcing the USA.
In practice, states often use their own agency names rather than the exam’s legal term. For example, California refers to its state administrator as the Department of Financial Protection and Innovation.
All of the securities acts after the USA are federal securities laws. Depending on the question, it may be important 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.
You’ll see the details later, starting in the federal securities registration chapter.
The Securities Exchange Act of 1934 governs secondary market securities transactions and market participants at the federal level.
Most 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 were covered in the chapters linked above.
The Investment Advisers Act of 1940 regulates federal-covered advisers.
We’ll cover 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 using this information.
By definition, insider trading involves trading on material, non-public information:
Insiders of publicly traded companies often have access to large amounts of material non-public information. For example, executives at a biotechnology company may 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.
That’s exactly what the SEC is trying to prevent. Insiders may possess and discuss inside information, but they can’t trade on it. Once a trade occurs, both:
may face serious 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.
The SEC treats insider trading seriously regardless of the size of the profit made or the loss avoided. In civil court, perpetrators can be sued for up to three times the profit achieved or loss avoided. These are called treble damages. 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 can also apply. An individual may 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 to the SEC’s Fair Fund, which holds and distributes money to victims of financial fraud.