Securities Laws, FINRA Rules, and Prohibited Practices
Three federal statutes form the backbone of the securities regulatory system, and FINRA rules layer sales practice standards on top of them. This chapter covers registration and disclosure for new offerings, the framework governing broker-dealers and the trading markets, the special rules for investment companies, the sales practices that will get a representative barred, the categories and approval requirements for communications with the public, and the anti-money laundering obligations every firm must meet.
The Securities Act of 1933
The 1933 Act is the disclosure statute for the primary market. An issuer selling securities to the public must file a registration statement with the SEC and deliver a prospectus containing the material facts and risks of the offering. Between filing and effectiveness comes the cooling-off period, during which a representative may distribute the preliminary prospectus and collect non-binding indications of interest, but may not accept money or confirm sales. The SEC's review is limited to the adequacy of disclosure; it never approves an offering or vouches for its accuracy, and saying otherwise to a customer is a misrepresentation. Some securities are exempt from registration, including government and municipal issues, but the antifraud provisions still reach them. Because open-end funds are in continuous distribution, every fund purchase is a primary market transaction requiring a current prospectus no later than the confirmation.
The 1934 Act and the Investment Company Act of 1940
The Securities Exchange Act of 1934 created the SEC and regulates the secondary market: exchanges, broker-dealer registration, reporting by public companies, insider trading, and market manipulation. The Investment Company Act of 1940 governs the funds themselves, defining the three classes of investment company and setting structural safeguards. It requires seed capital and a minimum number of shareholders before a public offering, mandates independent representation on the fund's board, requires shareholder approval to change a fundamental investment objective, and controls how advisory contracts are approved. Together the statutes explain why a fund cannot quietly become something the investor never bought.
Prohibited Sales Practices
Most Series 6 enforcement questions describe a representative putting personal compensation ahead of the customer. Breakpoint selling recommends an amount just under a quantity discount. Switching moves a customer between funds with similar objectives to generate new sales charges. Selling dividends urges a purchase before a distribution as if the distribution were free money, when in fact the NAV drops by the same amount and the investor picks up a tax bill. Front-running uses knowledge of a pending customer order for personal gain. Beyond these, a registered person may never guarantee a customer against loss, may never commingle customer funds with personal funds, and may share in a customer's profits and losses only with written approval from the firm and the customer and in proportion to actual capital contributed.
Communications with the Public
FINRA sorts written and electronic communications into three buckets based on audience. A retail communication reaches more than 25 retail investors within any 30 calendar-day period and generally requires principal approval before first use. Correspondence reaches 25 or fewer retail investors in that window and is subject to supervision and review rather than pre-approval. Institutional communications go only to institutional investors such as banks, insurers, and registered investment companies. Investment company retail communications containing performance are generally filed with FINRA within 10 business days of first use, and all communications records are kept for three years from last use. Performance must be presented on a standardized basis, projections are prohibited, and testimonials require disclosure that the experience may not be typical and that any material compensation was paid.
Anti-Money Laundering
Every broker-dealer must maintain a written anti-money laundering program with a designated compliance officer, ongoing training, independent testing, and risk-based customer due diligence. The customer identification program requires the firm to collect and verify a new customer's name, date of birth, street address, and taxpayer identification number before or shortly after opening the account, and to screen the name against the Office of Foreign Assets Control's Specially Designated Nationals list. Cash transactions exceeding $10,000 in a single business day trigger a Currency Transaction Report. Suspicious transactions at or above $5,000 trigger a Suspicious Activity Report filed with FinCEN, and the firm must never tell the customer that a SAR was filed. Structuring transactions to stay under reporting thresholds is itself a federal crime.
Last updated: July 2026