Lesson Objective: To analyze the key US securities laws and the roles of the primary regulatory bodies, including the SEC, FINRA, and the CFTC.

In-Depth Notes:

1. The US Regulatory Framework – Historical Context and Key Legislation:
The US securities regulatory framework is built upon a series of federal laws enacted in the aftermath of the 1929 stock market crash and the Great Depression . These laws are designed to ensure fair and transparent markets, protect investors from fraud, and facilitate capital formation.

  • The Securities Act of 1933: Often referred to as the “Truth in Securities” Act, this is the foundational law for primary markets. It requires that all securities offered for public sale be registered with the SEC and that issuers provide full and fair disclosure of all material information through a prospectus .

  • The Securities Exchange Act of 1934: This act established the SEC and granted it broad authority to regulate the secondary markets. It governs the trading of securities on exchanges and OTC markets, regulates broker-dealers, and imposes stringent reporting requirements on public companies. Key provisions include Section 10(b) and Rule 10b-5, which are the primary anti-fraud provisions, and Regulation NMS, which promotes fair competition and best execution .

  • The Investment Advisers Act of 1940: This act regulates investment advisers, requiring them to register with the SEC and establishing fiduciary duties (the duty of loyalty and the duty of care) that advisers owe to their clients .

  • The Investment Company Act of 1940: This act regulates mutual funds and other investment companies, imposing requirements on their structure, governance, and operations.

  • The Sarbanes-Oxley Act of 2002 (SOX): Enacted in response to major corporate accounting scandals (Enron, WorldCom), SOX dramatically increased the accountability of corporate executives, requiring CEOs and CFOs to certify financial statements and strengthening the independence of audit committees .

  • The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010: This sweeping legislation was enacted in response to the 2008 financial crisis. It introduced significant changes to financial regulation, including the Volcker Rule (prohibiting proprietary trading by banks), increased regulation of OTC derivatives, and the creation of the Consumer Financial Protection Bureau (CFPB) .

2. Key Regulatory Bodies:

  • The Securities and Exchange Commission (SEC): The SEC is the primary federal regulator for the US securities markets, responsible for enforcing the securities laws, protecting investors, and maintaining fair and efficient markets. The SEC oversees public companies, mutual funds, broker-dealers, and investment advisers .

  • The Financial Industry Regulatory Authority (FINRA): FINRA is a self-regulatory organization (SRO) authorized by Congress to oversee all broker-dealers and their registered representatives in the US . FINRA conducts examinations, enforces compliance with its rules, and administers licensing exams (e.g., Series exams).

  • The Commodity Futures Trading Commission (CFTC): The CFTC regulates the US derivatives markets (futures, options, and swaps), ensuring their integrity and protecting market participants from fraud and manipulation .

  • Other Bodies: The Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) also play roles in financial regulation, particularly for banks and other depository institutions.

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