Finance affects everyday decisions in a very direct way. If you want to travel, you need enough money to do it. If you want to start a family, you need steady cash flow. If you want to retire at a reasonable age, you need to save and invest over time.
Working in finance means working with something people care deeply about. A common saying captures it well:
“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 know the rules that govern the industry. You’ll also sometimes need to understand how prohibited activities work so you can recognize them and report them.
Several regulators help enforce financial rules and regulations. You first encountered them in the SIE, and they’ve come up throughout this program. This review focuses on:
As we learned in the secondary 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 U.S. government. It was created by the Securities Exchange Act of 1934, and it also enforces rules and regulations under the:
The SEC has three primary goals:
Protect investors means reducing fraud and unethical behavior in the securities markets. In this material, the SEC’s investor-protection focus is usually aimed at smaller, retail investors. Large institutions typically have extensive legal and financial resources, so many rules treat institutional transactions differently. Regulation D and Rule 144A are two common examples.
Maintain fair, orderly, and efficient markets is about market integrity and investor confidence. This goal is closely tied to the secondary market and the rules in the Securities Exchange Act of 1934, which we covered in the secondary markets chapter.
Facilitate capital formation means supporting a system where issuers can raise money by selling securities. Many rules make the registration process difficult and costly, but the SEC’s role includes balancing necessary investor protections with a workable path for raising capital. Non-exempt issuers selling securities to the public often must complete formal registration, while many exemptions exist for smaller offerings and private placements.
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 a self-regulatory organization (SRO) that the SEC authorizes to exercise regulatory power.
FINRA’s responsibilities are often described as more “firm and representative” focused. The SEC oversees the broader primary and secondary markets, where securities are issued and traded at massive scale. FINRA primarily regulates member firms and their registered representatives. It enforces:
FINRA also writes and administers qualification exams like the SIE and Series 7. 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 (Uniform Application for Securities Industry Registration or Transfer). Your firm typically helps you complete it, but you’re responsible for the accuracy of what’s reported. The form requires extensive background information, including:
Some past events can prevent someone from working in the securities industry. While any criminal-related event (even without a conviction or guilty plea) must be disclosed on Form U-4, only convictions or guilty pleas may prevent a career in the securities field.
These disqualifying events are called statutory disqualifications. They typically involve criminal activity or serious rule violations. The following items can lead to a U-4 registration application being denied:
Firms often ask early in the hiring process about criminal convictions (and sometimes arrests) because certain events may block registration. In some cases, a firm may request an exception and attempt to register someone with a prior disqualifying event. For example, a broker-dealer might argue that a felony conviction from eight years ago should not prevent registration. This request is called an Eligibility Proceeding. The request is filed with FINRA and forwarded to the SEC, which ultimately decides whether to grant the exception.
To verify the information on Form U-4, firms must conduct background investigations on new hires. FINRA rules require firms to investigate the good character, business reputation, qualifications, and experience of each person 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. By signing, the person attests that the information is accurate and agrees to the 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 some of this 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 (like a name or address change). Other updates involve events that can affect 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 within that timeframe. In many cases, such events lead to revocation of registration and termination.
When a representative’s employment ends, the firm must file Form U-5 with FINRA within 30 days. If FINRA removes registration due to a rule violation, the registration is revoked. Not every termination is negative, though. If a representative voluntarily quits or retires, the registration is canceled. Revocation is punitive (a punishment); cancellation is not. U-5 information is also available through BrokerCheck.
Even after registration is revoked or canceled, FINRA maintains regulatory authority for two 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 re-entry into 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 results are also disclosed on this form. Like the U-4 and U-5, U-6 information is available on BrokerCheck.
The Trade Reporting and Compliance Engine (TRACE) is FINRA’s system for collecting and disseminating transaction data in the U.S. bond markets to improve transparency and oversight. All broker-dealers must report eligible trades to TRACE shortly after execution. For corporate bonds, TRACE publicly reports full trade details - including date and time, CUSIP, price, yield, capped volume for large trades, and buy/sell indicator - within 15 minutes of the trade. For government securities such as U.S. Treasuries, Agency debt, and Agency mortgage-backed securities, TRACE collects the same trade-level data within 15 minutes but provides it in full only to regulators; the public receives only aggregated or delayed information. By contrast, in the equity markets, trades reported to the FINRA Trade Reporting Facility (TRF) must be submitted within 10 seconds of execution.
We learned about the role of the Municipal Securities Rulemaking Board (MSRB) back in the municipal debt chapter. As a reminder, the MSRB is an SRO that writes rules for the municipal securities markets and its participants. However:
These 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 state securities rules), including provisions of the Uniform Securities Act. You can think of NASAA as the state-level counterpart to the SEC.
You won’t need much NASAA detail for the Series 7, but NASAA becomes central if you take the Series 63, 65, or 66. Those exams are written and administered by NASAA.
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