Estimated study time: 40 minutes
Content:
The U.S. securities industry is governed by a series of landmark federal statutes, each enacted in response to market abuses or financial crises. Understanding when each law was passed and what it covers is tested on the SIE exam.
The Securities Act of 1933 — often called the "Paper Act" or "Truth in Securities Act" — governs the primary market (new issuances of securities to the public). It requires that issuers register new securities with the SEC (by filing a registration statement and prospectus) before offering them for sale. The purpose is to ensure investors receive full and fair disclosure about securities being sold to them. The registration process includes a quiet period (cooling-off period) during which only limited communications are allowed. Exempt securities (U.S. government securities, municipal bonds, bank securities) and exempt transactions (Regulation D private placements, Regulation A+ small offerings, Regulation Crowdfunding) are not required to register under the 1933 Act.
The Securities Exchange Act of 1934 — often called the "People Act" or "Exchange Act" — governs the secondary market (trading of already-issued securities). It created the SEC, established rules for exchanges and broker-dealers, required ongoing reporting by public companies (10-K annual, 10-Q quarterly, 8-K current event reports), and prohibited market manipulation and insider trading. All broker-dealers must register with the SEC under the 1934 Act.
The Investment Company Act of 1940 governs investment companies — primarily mutual funds (open-end investment companies), closed-end funds, and ETFs. It requires registration with the SEC and mandates disclosure through a prospectus. Under this Act, funds must redeem shares within seven days of a shareholder request (the "seven-day rule").
The Investment Advisers Act of 1940 governs investment advisers who manage client assets for compensation. It requires registration with the SEC (for larger advisers) or state regulators (for smaller advisers) and establishes the fiduciary standard for advisers.
FINRA Rule 2010 (Standards of Commercial Honor) is the foundational conduct rule, requiring members to "observe high standards of commercial honor and just and equitable principles of trade" — essentially the catch-all ethical standard for the industry.
Key Terms:
Quiz Questions:
Q1. XYZ Corporation is conducting an initial public offering (IPO). Under which federal law must it register the new securities with the SEC before selling them to the public?
A) Securities Exchange Act of 1934 B) Investment Company Act of 1940 C) Securities Act of 1933 D) Investment Advisers Act of 1940
Answer: C — The Securities Act of 1933 governs the primary market — the initial offering and sale of new securities to the public. It requires the issuer to file a registration statement and provide a prospectus to investors. The 1934 Act governs ongoing secondary market trading.
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Q2. Under the Investment Company Act of 1940, within how many days must an open-end mutual fund redeem shareholder shares upon request?
A) 1 business day B) 3 business days C) 5 business days D) 7 calendar days
Answer: D — The Investment Company Act of 1940 requires open-end investment companies (mutual funds) to redeem shares within seven calendar days of a shareholder's redemption request. This is known as the "seven-day rule" and ensures investor liquidity.
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