Chapter 11 - securities industry rules and regulations Flashcards
Securities exchange act of 1934
- Regulate the secondary market that consists of investor-to-investor transactions
- Created the Securities and Exchange Commission (SEC)
- Requires the registration of broker-dealers and agents
- Regulate the exchanges and FINRA
- Requires net capital for broker-dealers
- Regulates short sales
- Regulates insider transactions
- Requires public companies to solicit proxies
- Require segregation of customer and firm assets
- Authorize the federal reserve board to regulate the extension of credit for securities purchases under Regulation T
- Regulates the handling of client accounts
- Regulates interstate securities transactions
Securities and Exchange Commission (SEC)
The SEC is the ultimate securities industry authority and is a direct government body.
Five commissioners are appointed to five-year terms by the president, and each must be approved by the Senate.
No more than three members may be from any one political party.
SEC registrations requirements
All broker dealers, exchanges, agents, insecurities must register with the SEC. All new rules and regulations adopted by an exchange must be disclosed to the SEC as soon as they are enacted.
Issuers of securities with more than 500 shareholders and with assets exceeding $10 million or issuers with securities are traded on an exchange or NASDAQ must register and file quarterly (10-Q) and annually (10-K) reports.
The SEC may impose trading suspensions and non-exempt securities or on an exchange or NASDAQ if certain emergency conditions exist.
The SEC may suspend the trading in a security for up to 10 business days, including any extension of the order.
The SEC may suspend the trading on an exchange or in a market as a whole for up to 90 days. In the case of a market-wide suspension, the SEC must notify the president and he or she must not disapprove of the suspension.
Set guidelines on how an issuer or an affiliate may re-purchase its own shares.
- May not buy on the opening print or within 30 minutes of the close of the market.
- May only enter orders through one broker-dealer or market maker on a given trading day.
- Must file Form 13e-3 with SEC when going private.
A tender offer is made by a person or firm who is seeking to purchase all or part of the outstanding securities of an issue or at a specific price.
If the issue or, another company, or person makes a tender offer for securities, the offeror must file form TO with the SEC.
And investor may not sell short into a tender which is known as short tendering.
During a Dutch Auction the issuer will announce a range of prices at which it is willing to re-purchase it on securities.
Form 13D / 13G / 13H
Requires that individuals or entities who acquire 5% or more of an issuer’s equity securities must file form 13D.
Investment companies who require 5% or more of an issue or will file a notice of their ownership on form 13G.
A large trader must file form 13H within 45 days of the end of each calendar year.
Maloney Act of 1938
An amendment to the Securities Exchange Act of 1934 created the National Association of Securities Dealers (NASD) which is now part of FINRA.
NASD became the SRO for the OTC market.
NASD organized into 4 major bylaws:
- The rules of fair practice - Insurance just an equitable trade practices among members in their dealings with the public.
- The uniform practice code - sets guidelines for how FINRA members transact business with other members.
- The code of procedure - regulates how FINRA investigates complaints and violations.
- The code of arbitration - provides a form to resolve disputes.
Becoming a member of FINRA
- Meat net capital requirements (solvency).
- Have at least two principles to supervise the firm
- Have an acceptable business plan detailing its propose business activities.
- Attend a pre-membership interview.
Registration of agents/associated persons
All sponsoring firms are required to ascertain the applicant’s:
- Business character
- Educational background
- Professional background
Once a member has certified the above information regarding the applicant, it may formally submit the individuals application for becoming an associated person, known as a U4.
FINRA Rule 2210
Streamlines member communication rules into three categories
- Retail communication - distribution or communication made to more than 25 retail investors in a 30-day period.
- Institutional communication - any written communication distributed or made available exclusively to institutional investors and marked “for institutional use only.”
- Correspondence - electronic and written communications between the member and up to 25 retail investors and a 30-day period.
Note: blind recruiting ads are the only form of advertising that does not require the member’s name to appear in the ad.
Securities Investor Protection Corporation Act of 1970
Created the Securities Investor Protection Corporation (SIPC), a government-sponsored corporation that provides protection to customers in the event of a broker-dealer’s failure.
Covers customer losses that result from a broker dealer failure, not for market losses.
Covers customers for up to $500,000 per separate customer, of which up to $250,000 may be in cash.
Securities Acts Amendments of 1975
Gave the authority to the Municipal Securities Rulemaking Board (MSRB) to regulate the issuance and trading of municipal bonds. The MSRB has no enforcement division, its rules are enforced by other regulators.
The Insider Trading and Securities Fraud Enforcement Act of 1988
Set forth guidelines and controls for the use and dissemination of non-public material information.
Trading on inside information has always been a violation of the securities exchange act of 1934, and the insider trading act prescribes penalties for violators, which include:
- A fine of the greater of 300% of the amount of the gain or 300% of the amount of the loss avoided or $1 million for the person who acts on the information.
- A fine up to $1 million for the person who divulge is the information.