Laws, Regulations & Guidelines Flashcards

What does the SEC regulate?

Answer: Securities markets

The Securities and Exchange Commission (SEC) is a U.S. government agency responsible for protecting investors, maintaining fair and orderly functioning of securities markets, and facilitating capital formation. It regulates various entities within the securities industry, including stock exchanges, brokerage firms, mutual funds, and investment advisers, to ensure transparency and prevent fraud.

What is insider trading?

Answer: Trading on non-public info

Insider trading refers to the illegal practice of buying or selling a public company's stock while in possession of material, non-public information about that stock. This information, if made public, would likely affect the stock's price. Such trading is illegal because it gives an unfair advantage to the insider over other investors, undermining the fairness and integrity of the securities markets.

What law governs investment advisers?

Answer: Investment Advisers Act of 1940

The Investment Advisers Act of 1940 is a federal law that regulates investment advisers. It establishes a fiduciary standard for advisers, requiring them to act in the best interest of their clients. The Act mandates registration with the SEC for larger advisers and sets forth requirements regarding disclosure, record-keeping, and advertising practices.

What is a fiduciary duty?

Answer: Best interest of client

A fiduciary duty is a legal and ethical obligation to act solely in the best interest of another party. For investment advisers, this means prioritizing the client's financial well-being above their own or their firm's interests. This duty requires advisers to provide unbiased advice, disclose conflicts of interest, and recommend suitable investments.

Who enforces anti-money laundering laws?

Answer: FINCEN and SEC

The Financial Crimes Enforcement Network (FINCEN) is a bureau of the U.S. Department of the Treasury that collects and analyzes information about financial transactions to combat money laundering and terrorist financing. The SEC also plays a crucial role in enforcing anti-money laundering (AML) laws within the securities industry, requiring firms to establish robust AML programs to detect and report suspicious activities.

What is Regulation Best Interest?

Answer: Act in client’s best interest

Regulation Best Interest (Reg BI) is a rule adopted by the SEC that requires broker-dealers to act in the best interest of their retail customers when making recommendations of any securities transaction or investment strategy. This standard is higher than the previous suitability standard and aims to enhance investor protection by mitigating conflicts of interest. It mandates disclosure of material facts relating to conflicts of interest and the care, skill, and diligence in making recommendations.

What is required in Form ADV?

Answer: Adviser business details

Form ADV is the uniform registration form required by the SEC for investment advisers. It provides detailed information about an adviser's business, including their services, fees, disciplinary history, and conflicts of interest. This form is a crucial disclosure document that helps prospective and current clients understand the adviser's operations and make informed decisions about engaging their services.

When must conflicts of interest be disclosed?

Answer: Before or during advice

Investment Adviser Representatives (IARs) have a fiduciary duty to act in their clients' best interests. This duty requires them to disclose any potential conflicts of interest *before* or *during* the provision of advice, ensuring clients can make informed decisions. This transparency is crucial for maintaining trust and complying with regulatory standards.

What does FINRA do?

Answer: Regulate brokers

FINRA (Financial Industry Regulatory Authority) is a self-regulatory organization (SRO) that oversees broker-dealers in the United States. Its primary role is to protect investors by ensuring that the securities industry operates fairly and honestly. FINRA achieves this by writing and enforcing rules governing the activities of registered broker-dealers and their associated persons.