1. Common stock
2. Preferred stock
3. Debt securities
4. Corporate debt
5. Municipal debt
6. US government debt
7. Investment companies
8. Alternative pooled investments
9. Options
10. Taxes
11. The primary market
12. The secondary market
13. Brokerage accounts
14. Retirement & education plans
15. Rules & ethics
15.1 The regulators
15.2 Prohibited activities
15.3 Ethical duties
15.4 Other laws & regulations
16. Wrapping up
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15.1 The regulators
Achievable SIE
15. Rules & ethics

The regulators

Finance is an essential aspect of a person’s life. People need money to travel the world, start businesses, raise a family, and retire (among other things). To quote a popular saying:

“If you want to keep someone happy, don’t mess with their food or money.”

Financial professionals typically have access to significant assets and money, which requires an immense amount of responsibility. To operate legally and ethically in this field, an individual must know industry rules and regulations.

Many regulators play a role in enforcing financial rules and regulations. We’ll specifically focus on these organizations:

  • The SEC
  • The MSRB


As we learned in the secondary market unit, the Securities and Exchange Commission (SEC) is the primary regulator in the securities markets. Operating as an independent agency of the U.S. government, the SEC was technically created by the Securities Exchange Act of 1934. Regardless, the organization also enforces rules and regulations in the Securities Act of 1933, the Investment Company Act of 1940 and other securities-related legislations. 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, the organization intends to shield investors from fraud and unethical actions. Generally speaking, the SEC is most concerned with protecting retail investors. Institutions have access to significant legal and financial resources, making it unlikely for these professional investors to be victims of bad actors. Think about it - how many times do you remember rules not applying to transactions involving institutions? Regulation D and Rule 144A are two prime examples.

Retail investor
An individual personally investing for themselves, family members, or other related parties (a non-professional investor)
Institutional investor
A single entity investing on behalf of others as a business activity (a professional investor)

Examples: investment advisers, investment companies, hedge funds

Maintaining fair, orderly, and efficient markets relates to ensuring confidence in the financial markets. This goal applies primarily 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 attempts to strike a balance between necessary regulation and ease of raising capital. Non-exempt issuers publicly selling securities often must go through the formal registration process, but many exemptions exist for smaller and private offerings.


The Financial Industry Regulatory Authority (FINRA) is the primary regulator you’ll deal with while in the industry. Technically formed as a private organization, FINRA is a self-regulatory organization (SRO) that’s granted regulatory power (by the industry and the SEC) over securities professionals (member firms and representatives).

Member firm
Firms in the securities industry that are registered with FINRA (e.g., broker-dealers)
Designated examining authorities (DEAs)

The exam may make mention of a DEA. They are not referring to the Drug Enforcement Administration, but instead a designated examining authority. This is another term for a self-regulatory organization. So, FINRA is both an SRO and DEA.

Generally speaking, FINRA handles “lower level” priorities related to firms and representatives, while the SEC oversees securities markets (primary and secondary markets). FINRA enforces its own rules and the rules of other SROs (e.g., the MSRB - discussed below). You can also thank FINRA for having to take the SIE, which it writes questions for and administers. Passing this exam (along with a FINRA top-off and NASAA exam) makes you eligible to register as a financial representative and work with customers of securities firms.

To register with FINRA, an individual must complete and file Form U-4, which stands for the Uniform Application for Securities Industry Registration or Transfer. Firms typically “streamline” the process and assist new employees with the form. The following information must be provided on Form U-4:

  • 5-year residential history
  • 10-year employment history
  • Outside business activities
  • Financial disclosures (bankruptcies and compromises with creditors)
  • Any felony history (including charges)
  • Any securities-related misdemeanor history (including charges)
  • Items subject to statutory disqualification
Securities-related misdemeanors

Form U-4 requires the disclosure of any history of securities-related misdemeanors. You may be wondering - what exactly is a securities-related misdemeanor? This is a direct quote from Form U-4:

[A securities-related misdemeanor is one] involving: investments or an investment-related business or any fraud, false statements or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to commit any of these offenses.

Most test questions will refer to these misdemeanors generally as ‘securities-related.’ However, this should provide some insight into the specific types of criminal acts included in this designation.

Certain actions in a person’s past may prevent them from working in the financial industry. While any criminal-related event (even if there wasn’t a conviction or guilty plea) must be reported on Form U-4, only convictions may prevent a career in the securities field. Known as statutory disqualifications, these events typically relate to criminal activities and rule violations.

*A conviction includes no contest (legally referred to as ‘nolo contendere’) and guilty pleas.

The following background details are considered statutory disqualifications:

  • Conviction of any felony in the last ten years
  • Conviction of a securities-related misdemeanor in the last ten years
  • Suspension or revocation of registration from a securities regulator (e.g., SEC) or SRO (e.g., FINRA, MSRB)
  • Proof of false statements made to securities regulators or SROs

One of the first things your firm may have requested from you was disclosure of past criminal convictions (or even arrests). This is the main reason why; if a felony or securities-related misdemeanor exists, it may prevent you from working in the industry. In some circumstances, a firm may apply for an exception and attempt to register a person with a previous disqualifying event. For example, a broker-dealer may feel a felony conviction eight years ago may be forgivable and ask for an exception. This process is known as an Eligibility Proceeding. The request is filed with FINRA, and then forwarded to the SEC, who ultimately determines if an exception is granted.

FINRA rules require firms to investigate the good character, business reputation, qualifications, and experience of every representative they plan on registering. To confirm the firm’s investigations of its new hires, FINRA requires all applicants to be fingerprinted at approved security organizations (e.g., Sterling) or the firm’s own office if they have the appropriate equipment. Once the fingerprints are collected, they are sent* to the Federal Bureau of Investigation (FBI). The FBI performs a background check on the applicant, and the results are sent to FINRA typically within a few days. From there, firms can access the background check and confirm the information provided by their new hires is consistent with the FBI’s findings. This process verifies their background information and ensures the employee isn’t wanted for any outstanding crimes.

*While many firms perform the fingerprinting process while the applicant completes the U-4, FINRA rules require fingerprints to be filed within 30 days of U-4 submission.

Once a background check confirms the provided information, the employee signs Form U-4. In addition to vowing the information on the form is correct, the applicant agrees to a pre-dispute arbitration agreement. This agreement prevents representatives from suing their employer unless allegations of harassment or discrimination exist.

After the U-4 is signed, the firm will submit it to FINRA’s Central Registration Depository (CRD). The CRD is an extensive database containing information on member firms and registered representatives across the industry. Investors can gain access to select U-4 information by utilizing FINRA’s BrokerCheck (your information may even be there right now).

Form U-4 must be updated when any information becomes incorrect or new disclosable events occur. “Harmless” events (e.g., name or address changes) must be filed by amendment with FINRA (via CRD) within 30 days of the change. Situations involving a statutory disqualification (e.g., a representative pleads guilty to a felony) require Form U-4 to be updated within ten days of the event. In many of these scenarios, the event leads to the revocation of the representative’s registration and employment termination.

Registration revocation
Registration status is removed by FINRA due to an unethical or illegal action

When a representative’s employment comes to an end, the firm must file Form U-5 with FINRA within 30 days. Keep in mind terminations aren’t always “bad.” When a representative voluntarily quits or retires, their registration is ‘canceled.’ Revocation of a license is punitive (a punishment), but cancellation is not. Information related to a person’s termination (which is filed with FINRA on Form U-5) is made publicly available on BrokerCheck.

FINRA maintains regulatory power over a formerly registered person for two years. For example, assume a representative quits their job and their registration is canceled. If a legitimate customer complaint alleging fraud is filed within two years of their termination, FINRA can still revoke the person’s license. This action would effectively “blacklist” the individual from re-joining the industry for at least ten years.

Form U-6 is filed if a representative or firm is subject to disciplinary action or a reportable event occurs. Reportable events include criminal convictions and financial disclosures (bankruptcy and compromises with creditors). Additionally, the results of disputes facilitated through arbitration are disclosed on this form. Like the U-4 and U-5, the information supplied on the U-6 is available on BrokerCheck.


The Municipal Securities Rulemaking Board (MSRB) is an SRO that governs the municipal bond market. This SRO is a rule-writing organization with no real power to enforce its own rules. Organizations like FINRA and the SEC enforce MSRB rules on their behalf.

Municipal securities and issuers are generally exempt from MSRB rules, but financial firms and professionals involved with municipal securities are not. An example of this dynamic is demonstrated with official statements. Municipal issuers are exempt from registering their securities with the SEC, and therefore do not create prospectuses when offering securities in the primary market. However, an official statement is similar to a prospectus; virtually all municipalities create them before issuing securities. Although not legally required, municipal securities are almost impossible to sell without disclosures on the issuer and offered security. The official statement provides this information to investors.

The MSRB requires financial firms to deliver official statements to customers purchasing municipal securities in the primary market, but only if created by the municipality. The MSRB does not have the regulatory power to require the creation of official statements. However, firms must deliver them (if created by the issuer) upon the sale of new municipal issues.

MSRB rules also cover political contributions to prevent “pay to play” situations. In the past, firms and financial professionals have donated significant amounts of money to political campaigns in return for the politician sending business their way if they win office. For example, a broker-dealer contributes considerable funds to a candidate for mayor. The candidate wins the election, and the mayor hires the broker-dealer to perform financial duties for the municipality. Essentially, this is a “scratch my back during the campaign, and I’ll scratch yours if I win” situation.

The MSRB limits political contributions made by firms and municipal finance professionals (MFPs) to $250 per campaign. If more than $250 is contributed to a local campaign, the firm is barred from doing business with the municipality for two years. This $250 limitation does not apply to political campaigns for municipalities outside the firm or MFP’s residence. If any money is contributed to an out-of-city or out-of-state campaign, the two-year ban is automatically enforced.

An MFP is a specific type of employee of a firm dealing with municipal securities. The employee must be involved in research, advising, underwriting, trading, or creating communications for municipal securities to be considered an MFP. There’s one big exception - if a representative only engages in retail sales (sales to individual investors), they are not considered an MFP.


The North American Securities Administrators Association (NASAA) represents the group of state securities administrators. Each state has its own “administrator,” which is an office dedicated to enforcing securities-related laws and regulations (typically related to the Uniform Securities Act). NASAA is viewed by many as the “state version” of the SEC (the SEC is a federal agency). You won’t need to know much about NASAA for the SIE, but you’ll learn plenty more if you take the Series 63, 65, or 66. NASAA writes each of those exams.

Key points

Securities and Exchange Commission (SEC)

  • Prominent securities industry regulator
  • Regulates the primary and secondary markets
  • Enforces:
    • Securities Act of 1933
    • Securities Exchange Act of 1934
    • Investment Company Act of 1940
  • Main goals:
    • Protect investors
    • Maintain fair, orderly, and efficient markets
    • Facilitate capital formation

Financial Industry Regulatory Authority (FINRA)

  • Regulates the financial industry and its participants


  • Registration form for persons in finance
  • Filled out and filed when joining a firm
  • Requires extensive background information
  • Must be updated if information changes
  • Arbitration agreement is embedded


  • All applicants must submit fingerprints during the registration process
  • Fingerprints used in FBI background checks
  • Fingerprints must be submitted within 30 days of U-4 submission

Statutory disqualifications

  • Events that may prevent or revoke a registration
  • Most commonly cited:
    • Any felony conviction in the past 10 years
    • Securities-related misdemeanor in the past 10 years
    • Punishment from other regulators

U-4 updates

  • General updates - filed within 30 days
  • Statutory disqualification event - filed within 10 days


  • Removes registration status
  • Filled out and filed when leaving a firm


  • Reports the following:
    • Disciplinary actions
    • Reportable events
    • Arbitration results

Municipal Securities Rulemaking Board (MSRB)

  • Self-regulatory organization governing the municipal markets
  • Writes municipal regulations, does not enforce
  • Enforces MSRB rules (securities firms):
    • SEC
    • FINRA
  • Enforces MSRB rules (banks):
    • The Federal Reserve Board
    • Office of Comptroller of the Currency
    • Federal Deposit Insurance Corporation (FDIC)

Municipal finance professional

  • Firm employee involved in municipal:
    • Research
    • Advising
    • Underwriting
    • Communications
  • Not an MFP if limited to retail sales only

Political contributions by firms and MFPs

  • $250 contribution limit for campaigns
  • 2-year ban is imposed if the limit is surpassed
  • Any amount given to a non-local campaign automatically creates a ban

North American Securities Administrators Association (NASAA)

  • Regulates financial industry at the state-level
  • Enforces provisions of the Uniform Securities Act

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