Rules of SEC and FINRA

  1. Introduction
  2. Securities Markets
  3. Brokers and Dealers
  4. Economic Factors
  5. Stocks and Shareholder's Rights
  6. Options
  7. Investment Products
  8. Alternative Investments
  9. Risk of Investing
  10. Trading Types and Accounts
  11. Rules of SEC and FINRA
  12. Prohibited Activities

Securities Acts

Rules and Regulations of Securities

Importance of the SEC and FINRA

The rules of the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) are of utmost importance in regulating the securities industry and protecting investors. These rules establish standards of conduct, disclosure requirements, and operational guidelines that firms and individuals in the securities industry must adhere to. By enforcing these rules, the FINRA and SEC help maintain fair and transparent markets, prevent fraudulent activities, and promote investor confidence. The rules cover various aspects such as registration and licensing, sales practices, advertising and marketing, customer protection, recordkeeping, and market integrity. Compliance with these rules ensures that investors are provided with accurate and complete information, receive suitable investment recommendations, and are protected from unethical or illegal practices. The rules also promote market efficiency, integrity, and stability, which are vital for the overall health of the securities industry and the economy as a whole.

Securities Act of 1933

Issuers of Securities

The FINRA and SEC have specific rules and regulations pertaining to issuers of securities. These rules aim to ensure that issuers provide accurate and complete information to investors, maintain fair and transparent markets, and protect the interests of investors. Some of the important rules include:

Issuers of Securities
  1. Prohibitions: Both FINRA and SEC have regulations that prohibit issuers from engaging in fraudulent, manipulative, or deceptive practices when offering or selling securities. These rules aim to prevent misleading statements, omissions, or misrepresentations by issuers.
  2. Free Writing Prospectus (FWP): Rule 2210 of FINRA requires issuers to file with FINRA any free writing prospectus used in connection with a public offering. This rule helps ensure that the information provided to investors through these documents is accurate and not misleading.
Rule 2210
  1. Private Placements: Regulation D of the SEC provides exemptions from the registration requirements for certain private placement offerings. Rule 506 under Regulation D sets forth specific conditions and limitations for private placements, including restrictions on the number and qualifications of investors, disclosure requirements, and restrictions on general solicitation and advertising.
Private Placements

Securities Exchange Act of 1934

The Securities Exchange Act of 1934 is a landmark piece of legislation in the United States that regulates the securities markets and provides investor protection. It was enacted in response to the stock market crash of 1929 and established the Securities and Exchange Commission (SEC) as the primary regulatory authority overseeing securities transactions, exchanges, and securities professionals.

Securities Exchange Act of 1934

These rules collectively aim to promote fair and transparent practices in the issuance of securities, protect investors from fraudulent activities, and maintain the integrity of the securities markets. Compliance with these rules is essential for issuers to operate within the regulatory framework and build investor trust.

Broker/Dealer Rules

SEC/FINRA Rules for Brokers and Dealers

The rules created by the SEC and FINRA for brokers and dealers serve to ensure fair and transparent practices in the securities industry and protect investors. These rules establish standards of conduct, disclosure requirements, and regulatory oversight to maintain integrity and promote investor confidence in the markets. By setting guidelines and enforcing compliance, these rules aim to prevent fraud, manipulative practices, and conflicts of interest, fostering a level playing field and maintaining the trust and integrity of the securities industry.

Registration as Broker/Dealer

Permitted Activites

Permitted activities of brokers and dealers include facilitating securities transactions on behalf of clients, executing orders, providing investment advice, conducting research and analysis, acting as market makers, underwriting securities offerings, and participating in the distribution and sale of securities. They are authorized to engage in activities that are within the scope of their licenses and registrations, as long as they comply with applicable regulations, disclose any conflicts of interest, and act in the best interests of their clients. However, it is important to note that specific activities and the extent of permitted activities may vary based on regulatory requirements and the type of registration held by the broker or dealers.

Statutory Disqualifications of Brokers and Dealers

Statutory disqualifications of brokers and dealers refer to specific circumstances or actions that can result in the revocation, suspension, or restriction of their registration or license. These disqualifications are outlined in various securities laws and regulations. Common statutory disqualifications include convictions for certain felonies or securities-related offenses, disciplinary actions by regulatory authorities, injunctions or restraining orders related to securities laws, and findings of involvement in fraudulent or manipulative activities. Statutory disqualifications are intended to protect investors and maintain the integrity of the securities industry by preventing individuals with questionable backgrounds or misconduct from engaging in securities-related activities.

U.S.A. Patriot Act

United States Patriot Act Rules and Provisions

The USA PATRIOT Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act) is a significant piece of legislation enacted in response to the September 11, 2001 terrorist attacks in the United States. The act introduced various measures to enhance national security and combat money laundering, terrorism financing, and other illicit activities. In relation to the financial industry, the USA PATRIOT Act imposed important obligations on financial institutions, including those regulated by FINRA and the SEC. It requires firms to establish and maintain robust customer identification programs (CIP) to verify the identity of customers, conduct due diligence on foreign correspondent accounts, and report suspicious activities to the appropriate authorities. These provisions aim to prevent the use of the financial system for illicit purposes and promote the detection and prevention of terrorist financing and money laundering activities. Compliance with the USA PATRIOT Act is a crucial aspect of regulatory oversight for both FINRA and the SEC, ensuring that financial institutions fulfill their obligations in safeguarding the integrity of the financial system and protecting national security.

Patriot Act

U.S.A. Patriot Act

United States Patriot Act Rules and Provisions

The USA PATRIOT Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act) is a significant piece of legislation enacted in response to the September 11, 2001 terrorist attacks in the United States. The act introduced various measures to enhance national security and combat money laundering, terrorism financing, and other illicit activities. In relation to the financial industry, the USA PATRIOT Act imposed important obligations on financial institutions, including those regulated by FINRA and the SEC. It requires firms to establish and maintain robust customer identification programs (CIP) to verify the identity of customers, conduct due diligence on foreign correspondent accounts, and report suspicious activities to the appropriate authorities. These provisions aim to prevent the use of the financial system for illicit purposes and promote the detection and prevention of terrorist financing and money laundering activities. Compliance with the USA PATRIOT Act is a crucial aspect of regulatory oversight for both FINRA and the SEC, ensuring that financial institutions fulfill their obligations in safeguarding the integrity of the financial system and protecting national security.

Patriot Act

Telemarketing Rules

Telemarketing Rules

Telemarketing rules exist for FINRA and the SEC to protect investors and ensure fair practices in the financial industry. Telemarketing can be a common method used by brokers and dealers to solicit investments or promote financial products and services. The rules aim to regulate these activities to prevent fraudulent or misleading practices and safeguard the interests of investors. The regulations address issues such as prohibited calls to certain individuals, abandoned calls, prerecorded calls, and the identification of telemarketers. By establishing these rules, FINRA and the SEC seek to maintain transparency, integrity, and investor confidence in the financial markets while promoting ethical conduct in telemarketing activities.

Telemarketing Sales rule

FINRA Rules

FINRA Rules and Regulations

FINRA, the Financial Industry Regulatory Authority, has rules in place to regulate and oversee the activities of its member firms and associated individuals in the securities industry. These rules serve several important purposes. First, they aim to protect investors by establishing standards for fair and ethical conduct, ensuring that investors receive suitable investment recommendations and that their interests are safeguarded. Second, the rules promote market integrity and transparency, fostering confidence in the financial markets and preventing fraudulent or manipulative practices. Third, the rules provide a framework for maintaining a level playing field among industry participants, ensuring fair competition and promoting a healthy and efficient marketplace. By enforcing these rules, FINRA plays a crucial role in upholding investor protection, market integrity, and the overall stability of the securities industry.

Retention of Jurisdiction Failure to Comply with Arbitration Award NASD Rule 1070 FINRA Rule 4530 FINRA Rule 8312 FINRA Rule 2320 FINRA Rule 3250 FINRA Rule 4510 FINRA Rule 4512 Forward Pricing (Rule 22C-1(A))

SEC Regulation Best Interest

SEC Regulation Best Interest (BI)

SEC Regulation Best Interest (Reg BI) is a regulatory framework implemented by the U.S. Securities and Exchange Commission (SEC) to enhance investor protection in the context of recommendations made by broker-dealers. Reg BI establishes a "best interest" standard of conduct that requires broker-dealers to act in the best interest of their retail customers when making investment recommendations. This means that broker-dealers must prioritize their customers' interests above their own and must consider key factors such as the customer's investment objectives, risk tolerance, and financial situation when making recommendations. Reg BI also mandates the disclosure of material facts related to the recommendation and the mitigation of conflicts of interest that could compromise the customer's best interest. The aim of Reg BI is to improve the transparency, accountability, and quality of advice provided to retail investors, promoting fair and suitable investment recommendations while preserving investor choice.

The following are the four obligations outlined in SEC regulations related to acting in the best interests of clients:

  1. Duty of Care: Financial professionals must exercise reasonable care, skill, and diligence when providing investment advice or recommendations. This includes conducting a thorough analysis of the client's financial situation, investment objectives, risk tolerance, and any other relevant factors to ensure that the advice provided is suitable and in the client's best interest.
  2. Duty to Seek Best Execution: Financial professionals are required to seek the best execution of client transactions. This means making reasonable efforts to obtain the most favorable terms reasonably available under the circumstances when executing client orders, taking into consideration factors such as price, speed, and likelihood of execution.
  3. Duty to Seek Best Execution: Financial professionals are required to seek the best execution of client transactions. This means making reasonable efforts to obtain the most favorable terms reasonably available under the circumstances when executing client orders, taking into consideration factors such as price, speed, and likelihood of execution.
  4. Duty to Provide Full and Fair Disclosure: Financial professionals must provide clients with clear, accurate, and complete information about the terms, costs, and risks associated with their investment recommendations. This includes disclosing any material facts that could reasonably be expected to influence the client's investment decision-making process.

These obligations are designed to promote transparency, client protection, and the highest standards of ethical conduct in the financial industry. It's important for financial professionals to understand and adhere to these obligations to ensure they act in the best interests of their clients.

Form CRS

Form CRS (Customer Relationship Summary) is a document mandated by the U.S. Securities and Exchange Commission (SEC) under Regulation Best Interest. It requires broker-dealers and investment advisers to provide a concise and standardized summary of key information about their services, fees, conflicts of interest, and disciplinary history to retail investors. Form CRS aims to enhance transparency and help investors make informed decisions about the services and relationships they have with financial professionals. The document must be written in plain language and provide easy-to-understand information that allows investors to compare different firms and understand the nature of the services offered. By providing investors with clear and concise disclosures, Form CRS aims to promote investor understanding, facilitate informed decision-making, and foster stronger investor protection.

Suitability

What is Suitability

Suitability refers to the requirement that financial professionals, such as brokers and investment advisers, recommend investments that are appropriate and suitable for their clients. It means that the investment recommendation should align with the client's financial objectives, risk tolerance, investment experience, and other relevant factors. Suitability ensures that the investment advice or recommendation provided by the professional is suitable for the individual investor's unique circumstances and needs. Financial professionals are obligated to gather sufficient information about their clients to assess suitability properly and make suitable investment recommendations. This requirement helps protect investors by ensuring that they receive appropriate investment advice that is in line with their financial goals and risk tolerance, reducing the risk of unsuitable investments that may result in financial harm.

Suitability MSRB Suitability Rule

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