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SEC Rules and Regulations Investors Should Know


The Securities & Exchange Commission (SEC) regulates much of the U.S. financial industry. This guide goes over the most prominent rules that the SEC enforces. Many of these regulations are focused on information being available to investors. The SEC wants investors to know the facts so they can make informed decisions when deciding whether to sell, hold or buy a company’s securities.

Securities Act of 1933

This law, which mandates the registration of securities, is often referred to as the “truth in securities” law and has two basic objectives. One is to prohibit deceit, misrepresentations and other fraud in securities sales. The other objective is to require that investors receive financial and other significant information about securities offered for public sale.

Securities Exchange Act of 1934

This act created the SEC, and gave the commission broad authority over all aspects of the securities industry, including the power to register, regulate and oversee brokerage firms, transfer agents and clearing agencies. It also gives the SEC authority over United States securities self-regulatory organizations, also known as SROs.

SROs include various securities exchanges as well as other organizations, including the New York Stock Exchange, the Nasdaq Stock Market, the Chicago Board of Options and the Financial Industry Regulatory Authority (FINRA).

This act also gives the SEC the power to require companies with publicly traded securities to periodically report information. It also identifies and prohibits certain conduct in markets and gives the SEC disciplinary powers over regulated entities and individuals associated with them.

Trust Indenture Act of 1939

SmartAsset: SEC Rules and Regulations Investors Should Know

This act applies to debt securities like bonds, debentures and notes offered for public sale. Although such securities can be registered under the Securities Act, they cannot be offered for sale to the public unless there is a formal agreement between the issuer of the bonds and the bondholder, known as the trust indenture. The trust indenture must conform to the standards of the Trust Indenture Act.

Investment Company Act of 1940

This act regulates mutual funds and other companies that engage mainly in investing, reinvesting and trading in securities, and whose securities are available to the investing public. However, this does not permit the SEC to directly supervise investment decisions or activities of these companies or judge the wisdom of their investments.

The regulation is designed to minimize conflicts of interest that may arise by requiring these companies to disclose their financial condition and investment policies to investors when the stock is initially sold and, later, on an ongoing, regular basis. You should also note that the act is focused on having funds disclose information to the investing public about the fund, their investment goals, investment company structure and operations.

Investment Advisers Act of 1940

This act aimed to enhance the government’s ability to monitor the investment advisory business by requiring virtually all investment advisors to register with the SEC. It defined an advisor as “any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.”

The Investment Advisers Act was amended in 1996 and 2010, so now generally only advisors who advise a registered investment company or have at least $100 million of assets under management have to register with the SEC.

Sarbanes-Oxley Act of 2002

Lawmakers enacted this wide-ranging law to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud. For example, it requires corporate officers to sign off on financial statements. It also created the Public Company Accounting Oversight Board, also known as the PCAOB, to oversee the activities of the auditing profession. You can find links to all SEC rulemaking and reports issued under the Sarbanes-Oxley Act here.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

SmartAsset: SEC Rules and Regulations Investors Should Know

This act, which targets the perceived causes of the Great Recession, was signed into law on July 21, 2010, by President Barack Obama. The law was designed to reshape the U.S. regulatory system in a number of areas, including consumer protection, trading restrictions, credit ratings, regulation of financial products, corporate governance and disclosure and transparency.

Regulation Best Interest Rule of 2012

The SEC promulgated the consumer-friendly Regulation Best Interest rule (RBI), requiring brokerage firms and financial advisors to disclose potential conflicts of interest when they give consumers financial advice. A federal appeals court upheld the rule after after seven states, among other parties, legally challenged the measure. Firms had until June 30 of 2020 to come into compliance with RBI. Essentially, it raises the bar on the existing “suitability” standard. That standard meant that investments or products that brokers recommended to their clients had to be generally “suitable” — but not necessarily suitable to their specific clients’ best interests. In other words, a recommended investment did not have to be the best or most cost-effective choice. Now, broker-dealers will be required to act in the best interest of their clients. They will be prohibited from putting their financial interests ahead of the interests of a customer when making recommendations.

You can ask your financial advisor about their practices and if they are complying with the RBI. You should also make sure to ask if your advisor is a fiduciary and get them to put in writing that they act as a fiduciary, that is, someone who has an ethical obligation to act solely in someone else’s best interest.

Bottom Line

Although companies have to submit a lot of information, it can be difficult to interpret. If you review many different SEC documents together, you can get a better idea of the overall pictures. Financial ratios can be used to identify a company’s long- and short-term financial strengths. Look out for red flags in a company’s footnotes. Red flags include sudden one-time or special charges and extremely confusing sections in the 10-K form, an annual financial report, or 10-Q form, a quarterly financial report.

Financial Advisor Tips

  • Consider talking to a financial advisor about your financial plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • The SEC requires registered investor advisor firms (RIA) to disclose information about their operations that can be useful to investors considering professional help. RIAs are required to disclose any and all relevant information pertaining to their business practices or disciplinary actions on their Form ADV. It’s also helpful to use tools like FINRA’s Broker Check to take a closer look at an advisor’s professional background.

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