“Ship your grain across the sea; after many days you may receive a return. Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.”
Source:
(1) Rice, S. M. (2024). SIE Exam 2025/2026 for Dummies (Securities Industry Essentials Exam Prep + Practice Tests and Flashcards Online) (4th ed.). John Wiley & Sons, Incorporated. (2) https://www.investor.gov/introduction-investing/investing-basics/role-sec/laws-govern-securities-industry. (3) https://www.sec.gov/. (4) https://www.law.cornell.edu/wex/securities_act_of_1933.
The work created within this post is inspired by the above sources.
Most securities have to registered*** before they are able to be sold to the public through a broker-dealer.
*** There are exemptions to securities registration, which will be discussed in the next article…
A corporation wanting to sell it’s securities, needs to register with both the states & the SEC.
Typically, the registration form a company will file will include essential & accurate material facts like: (1) a description of the company’s properties and business, (2) a description of the security to be offered for sale, (3) information about the management of the company, and (4) financial statements certified by independent accountants.
If a U.S. domestic company files with the SEC, the statement will be accessible on the EDGAR database.
SEC
The SEC stands for the U.S. Securities and Exchange Commission.
The SEC was founded as a response to the Great Depression by Congress & was enabled by the Securities Exchange Act of 1934.
The SEC “protects investors from misconduct, promotes fairness & efficiency in the securities markets, and facilitates capital formation for those looking to hire, innovate, and grow.”
The SEC is the primary enforcer of federal securities law.
Here is a link for the SEC’s Investor Complaint Form for problems relating to: order handling, trade execution, confirmations, the delivery of funds or securities, dividends, fees, commissions, mark-ups, inaccurate/misleading disclosures by financial professionals, margin, suitability, excessive trading, account abuses, opening/transferring/closing an account, or redeeming/transferring mutual funds.
The SEC says that “these complaints can be filed against brokers, brokerage firms, investment advisers, transfer agents, mutual funds, and other market participants”.
“Invest your money in foreign trade, and one of these days you will make a profit. Put your investments in several places-many places even- because you never know what kind of bad luck you are going to have in this world.”
When dealing with securities, there are several important Acts of Congress that should be considered & understood:
(1) The Securities Act of 1933
The Securities Act of 1933 mainly regulates new issues of corporate securities.
The Securities Act of 1933 has a dual purpose: (1) to ensure that issuers that sell securities to the public disclose material information, and (2) “that any securities transactions are not based on fraudulent information or practices.”
The material information needing to be disclosed is that which a reasonable shareholder would need when making up their mind about the investment in question. This information should be complete & accurate.
Since there are a number of exemptions that apply to the mandatory registration process in the sale of securities, the Securities Act of 1933 mainly impacts the primary market.
The primary market is a place of exchange where primary offerings occur. A primary offering “is the issuance of new securities.”
The Securities Act of 1933 has additional names: 1933 Act, Securities Act, Truth in Securities Act, Federal Securities Act, ’33 Act.
(2) The Securities Exchange Act of 1934
The Securities Exchange Act of 1934 enabled Congress to create the Securities & Exchange Commission (SEC).
This act gave the SEC broad powers over all aspects of the securities industry.
Our nation’s self-regulatory organizations (SROs) like: New York Stock Exchange (NYSE), NASDAQ Stock Market, FINRA, and Chicago Board of Options are all SROs that the SEC was empowered to regulate as a result of the Securities Exchange Act of 1934.
This act requires these SROs to “create rules that allow for disciplining members for improper conduct and for establishing measures to ensure market integrity and investor protection.”
The Securities Exchange Act of 1934 gave the SEC the power to require “periodic reporting of information by companies with publicly traded securities.”
Additionally, The Securities Exchange Act of 1934 prohibits insider trading. Insider trading involves trading securities while possessing material nonpublic information that violates a duty to withhold the information or refrain from trading securities.
(3) The Trust Indenture Act of 1939
The Trust Indenture Act of 1939 focuses on debt securities & the formal agreement known as a trust indenture.
Debt securities are “a type of financial asset that is created when one party lends money to another.” Types of debt securities include: corporate bonds, government bonds, debentures, and notes for public sale.
These debt securities are often still registered under the SEC by the Securities Act.
However, if the debt securities are above $50 million dollars, they can not be sold to the public until a trust indenture is formally created between the issuer of bonds and the bondholder.
Additionally, this trust indenture must conform to the standards found within the Trust Indenture Act of 1939.
The trust indenture requires disclosure of the coupon rate, maturity date, collateral backing of the bond and other requirements.
Finally, companies that must adhere to the Trust Indenture Act of 1939 need to hire a trustee, who is responsible for ensuring the rights of bondholders are protected.
There are other important Acts of Congress that should be reviewed when learning about securities.
Some of these are the: Investment Advisers Act of 1940, Sarbanes-Oxley Act of 2002, Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Jumpstart Our Business Startups Act of 2012.
“Cast thy bread upon the waters: for thou shalt find it after many days. Give a portion to seven, and also to eight; for thou knowest not what evil shall be upon the earth.”
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