Finance is a core part of everyday life. People use money to travel, start businesses, raise families, and retire (among other goals). A common saying captures how sensitive money can be:
“If you want to keep someone happy, don’t mess with their food or money.”
Because financial professionals often handle large amounts of client assets, the industry places a heavy emphasis on responsibility, ethics, and compliance. To work legally and ethically, you need to understand the rules - and who enforces them.
Several regulators share responsibility for enforcing securities rules. Here, we’ll focus on:
As we learned in the secondary market unit, the Securities and Exchange Commission (SEC) is the primary regulator of the securities markets. The SEC is an independent agency of the U.S. government. It was created by the Securities Exchange Act of 1934 and also enforces key rules under the Securities Act of 1933, the Investment Company Act of 1940, and other securities-related legislation.
The SEC has three primary goals:
Protect investors is largely about preventing fraud and unethical conduct. In most contexts, the SEC focuses most heavily on protecting retail investors. Institutional investors typically have substantial legal and financial resources, so they’re less likely to be victimized by bad actors. This is why you’ll often see certain rules apply differently (or not at all) when institutions are involved. Two common examples are Regulation D and Rule 144A.
Maintain fair, orderly, and efficient markets means supporting confidence in the markets by promoting transparency and integrity. This goal applies most directly to the secondary market and to the rules under the Securities Exchange Act of 1934.
Facilitate capital formation means supporting a system where issuers can raise money by selling securities. Registration can be difficult and costly, so the SEC aims to balance investor protection with practical access to capital. Non-exempt issuers that publicly sell securities typically must register, but many exemptions exist for smaller and private offerings.
The Financial Industry Regulatory Authority (FINRA) is the primary regulator you’ll deal with in day-to-day industry life. FINRA is a private self-regulatory organization (SRO) that has been granted regulatory authority (by the industry and the SEC) over securities professionals - specifically member firms and their registered representatives.
In broad terms, FINRA focuses on firm- and representative-level regulation, while the SEC oversees the securities markets (both primary and secondary). FINRA enforces its own rules and also enforces the rules of other SROs (for example, the MSRB, discussed below).
FINRA also writes and administers the SIE. Passing the SIE (along with a FINRA top-off and a 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, the Uniform Application for Securities Industry Registration or Transfer. Firms typically help new employees complete the form.
Form U-4 requires the following information:
Some past events can prevent someone from working in the securities industry. Form U-4 requires disclosure of criminal-related events even if there was no conviction or guilty plea. However, only convictions can trigger a bar from the industry. These disqualifying events are called statutory disqualifications and typically involve criminal activity or serious rule violations.
*A conviction includes no contest (legally referred to as ‘nolo contendere’) and guilty pleas.
The following background details are considered statutory disqualifications:
Firms often ask early in the hiring process about criminal convictions (and sometimes even arrests) because a felony or securities-related misdemeanor may prevent registration. In some cases, a firm can request an exception and attempt to register someone despite a 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 firm files the request with FINRA, FINRA forwards it to the SEC, and the SEC makes the final decision.
FINRA rules also require firms to investigate the good character, business reputation, qualifications, and experience of every representative they plan to register. To support this process, FINRA requires applicants to be fingerprinted at approved security organizations (e.g., Sterling) or at the firm’s office if it has the proper equipment. Once collected, the fingerprints are sent* to the Federal Bureau of Investigation (FBI). The FBI runs a background check and typically sends results to FINRA within a few days. Firms can then review the results and compare them to the information the applicant disclosed. This helps confirm the applicant’s background and identify any outstanding criminal issues.
*While many firms collect fingerprints while the applicant completes the U-4, FINRA rules require fingerprints to be filed within 30 days of U-4 submission.
After the background check process, the employee signs Form U-4. By signing, the applicant confirms the information is accurate and 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 submits it to FINRA’s Central Registration Depository (CRD). The CRD is a large database containing information on member firms and registered representatives. Investors can view certain U-4 information through FINRA’s BrokerCheck (your information may even be there right now).
Form U-4 must be updated whenever information becomes inaccurate or a new disclosable event occurs.
In many statutory disqualification situations, the event leads to revocation of registration and termination of employment.
When a representative’s employment ends, the firm must file Form U-5 with FINRA within 30 days. Terminations aren’t always negative. If a representative voluntarily quits or retires, their registration is typically canceled. Revocation is punitive (a punishment), but cancellation is not. Termination information filed on Form U-5 is publicly available through BrokerCheck.
FINRA maintains regulatory authority over a formerly registered person for two years. For example, if a representative quits and their registration is canceled, FINRA can still take action if a legitimate customer complaint alleging fraud is filed within two years of termination. If FINRA revokes the person’s license, it can effectively “blacklist” them from re-entering the industry for at least ten years.
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 outcomes are also disclosed on this form. Like the U-4 and U-5, U-6 information is available on BrokerCheck.
The Municipal Securities Rulemaking Board (MSRB) is an SRO that governs the municipal bond market. The MSRB writes rules, but it does not have the authority to enforce them. Instead, organizations such as FINRA and the SEC enforce MSRB rules.
Municipal securities and municipal issuers are generally exempt from MSRB rules, but firms and professionals that work with municipal securities are not. You can see this in how disclosures work for new municipal issues.
Municipal issuers are exempt from registering their securities with the SEC, so they don’t create prospectuses when offering securities in the primary market. Instead, they often prepare official statements, which serve a similar purpose by providing key information about the issuer and the offering. Official statements are not legally required, but municipal securities are very difficult to sell without meaningful disclosure.
The MSRB requires firms to deliver official statements to customers purchasing municipal securities in the primary market, but only if the municipality created the official statement. The MSRB cannot require municipalities to create official statements, but it can require firms to deliver them when they exist.
MSRB rules also address political contributions to reduce “pay to play” practices. Historically, firms and financial professionals have sometimes made political donations in exchange for municipal business after an election. For example, a broker-dealer contributes to a mayoral candidate, the candidate wins, and the mayor then hires the broker-dealer to perform financial work for the municipality.
To limit this behavior, the MSRB caps political contributions by firms and municipal finance professionals (MFPs) at $250 per campaign. If more than $250 is contributed to a local campaign, the firm is barred from doing business with that municipality for two years.
This $250 limit does not apply to political campaigns for municipalities outside the firm or MFP’s residence. If any amount is contributed to an out-of-city or out-of-state campaign, the two-year ban is automatically triggered.
An MFP is a specific type of firm employee who works with municipal securities. To be considered an MFP, the employee must be involved in municipal securities research, advising, underwriting, trading, or communications. There is one major 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 state securities administrators. Each state has its own securities “administrator,” meaning an office responsible for enforcing securities laws and regulations - often tied to the Uniform Securities Act. NASAA is often described as the state-level counterpart to the SEC (which is a federal agency).
You won’t need much NASAA detail for the SIE, but it becomes much more important for the Series 63, 65, or 66. NASAA writes each of those exams.
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