The Regulatory Map

The statutes

The Securities Act of 1933 governs the primary market — the issuance of new securities. Its central mechanism is disclosure: a security offered to the public must be registered with the SEC and accompanied by a prospectus, unless the security or the transaction is exempt. It is often called the 'truth in securities' act or the paper act. Section 5 is the operative prohibition: no offer or sale without a registration statement, subject to the exemptions.

The Securities Exchange Act of 1934 governs the secondary market — trading after issuance — and created the Securities and Exchange Commission itself. It registers exchanges, brokers and dealers, requires ongoing reporting by public companies, addresses proxies and tender offers, and contains the great anti-fraud provisions, most famously Section 10(b) and the SEC's Rule 10b-5 beneath it. It also authorized registered securities associations, which is the statutory hook FINRA hangs from.

The Investment Company Act of 1940 governs pooled investment vehicles — mutual funds, closed-end funds, unit investment trusts — and the Investment Advisers Act of 1940 governs those who advise for compensation. The Trust Indenture Act of 1939 requires an indenture and an independent trustee for most public corporate debt offerings. The Securities Investor Protection Act of 1970 created SIPC.

A useful mnemonic that is also true: 1933 is issuing, 1934 is trading, 1940 is pooling and advising.

The SEC and the self-regulatory organizations

The SEC is a federal agency. It writes rules under the statutes, reviews registration statements, brings civil enforcement actions, and — critically for the structure of the industry — approves the rules of the self-regulatory organizations.

A self-regulatory organization is an industry body with rulemaking and disciplinary authority over its own members, operating under SEC oversight. The design is deliberate: the industry writes detailed conduct rules and polices them, while the government retains approval and appellate power. When you read that FINRA amended a rule, what happened underneath is that FINRA filed the change with the SEC and the SEC approved it.

FINRA — the Financial Industry Regulatory Authority — is the SRO for broker-dealers. It registers and examines firms and associated persons, administers the qualification exams, writes the conduct rules that make up most of this course, operates BrokerCheck and the arbitration forum, and disciplines members. Nearly every firm doing a public securities business in the United States must be a FINRA member.

The MSRB — the Municipal Securities Rulemaking Board — writes the rules for municipal securities dealers and municipal advisors. It is a rule-writer without an examination staff: it makes the rules, and FINRA and the SEC enforce them against dealers. Its rules are lettered by series, and you will meet G-17 (fair dealing), G-19 (suitability), G-30 (prices and commissions) and G-32 (primary offering disclosure) repeatedly.

The exchanges are also SROs. Cboe writes the options rules the content outline cites; NYSE and Nasdaq write rules for their own markets. The Series 7 outline cites specific Cboe and NYSE rules, which is why exchange rules appear in the options and trading modules.

The other regulators

The Federal Reserve Board does not regulate broker-dealer conduct, but it does control the extension of credit for securities purchases through Regulation T, issued under authority the 1934 Act gave it. Every margin calculation in Module 9 begins with a Fed rule, not a FINRA rule — although FINRA Rule 4210 layers maintenance requirements on top of the Fed's initial requirement.

The Department of the Treasury and the IRS matter because taxation is woven through the content outline. Municipal interest exemption, wash sales, cost basis, retirement account rules and the gift and estate unification are all Internal Revenue Code, and the outline cites specific IRC sections.

The states, through their securities administrators, register agents and firms doing business with their residents and enforce their own anti-fraud provisions. NASAA is the association of those administrators; it is not itself a regulator but it writes the model law, the model rules and the uniform exams. State law is often called blue-sky law, after the early-twentieth-century characterization of speculative schemes backed by nothing but 'so many feet of blue sky.'

SIPC and FDIC — the distinction that gets asked

The Securities Investor Protection Corporation was created by the 1970 Act. It is not a government agency and it is not an insurance company in the ordinary sense; it is a non-profit membership corporation funded by assessments on its member broker-dealers.

What SIPC does is narrow and specific: when a member firm fails financially and customer property is missing, SIPC steps in to return securities and cash held at the firm, up to $500,000 per customer, of which no more than $250,000 may be for cash claims. Coverage is measured per separate capacity — an individual account and a joint account are separate; two individual accounts in the same name at the same firm are not.

What SIPC emphatically does not do is protect against loss of market value. If your customer's shares fall by half, that is not a SIPC event. This is the distinction the exam tests, and it is the distinction customers most often misunderstand. It also does not cover commodity futures contracts, fixed annuities, or investment contracts not registered under the Securities Act.

The FDIC is a different scheme entirely: a federal agency insuring deposits at insured banks, currently to $250,000 per depositor per insured bank per ownership category. A certificate of deposit at a bank is FDIC territory. A brokered CD held in a brokerage account passes the FDIC coverage through to the issuing bank, which is why a customer holding several brokered CDs must be told to watch the issuing banks, not just the total.

FINRA Rule 2266 requires members to provide SIPC information to customers annually — a small rule that is easy to remember precisely because it is the only place SIPC touches a representative's routine.