Regulations and Professional Conduct
The Securities Act of 1933
The Securities Act of 1933 governs the primary market and requires issuers to register new public offerings and provide a prospectus with full and fair disclosure of material facts. During the cooling-off period between filing and effectiveness, firms may distribute a preliminary prospectus (red herring) and gather non-binding indications of interest but may not make sales or accept payment. In a firm commitment underwriting the syndicate buys and resells the entire issue, assuming the risk, whereas a best efforts underwriting is an agency arrangement. Regulation D exempts private placements sold primarily to accredited investors from full registration.
The Securities Exchange Act of 1934
The Securities Exchange Act of 1934 created the SEC and regulates the secondary market, including exchanges, broker-dealers, public company reporting, and proxy solicitation. Its antifraud and anti-manipulation provisions prohibit insider trading on material nonpublic information and market manipulation such as spreading false rumors, wash sales, and painting the tape. The Federal Reserve's margin rules and Regulation Best Interest also stem from this statutory framework, reflecting the Act's broad reach over trading conduct and market integrity.
FINRA Rules and Communications
FINRA rules classify communications with the public as retail communications, correspondence, and institutional communications, each with distinct approval and recordkeeping requirements. Communications must be fair, balanced, and not misleading, presenting material risks alongside benefits, and retail communications generally require principal approval before first use. Firms must maintain a supervisory system with written procedures and qualified principals reasonably designed to achieve compliance, and preserve books and records for specified periods available to regulators.
Anti-Money Laundering
Under the Bank Secrecy Act, firms must file a Currency Transaction Report for cash transactions exceeding $10,000 in a single business day, aggregating related transactions, and structuring to evade this threshold is illegal. Firms file a Suspicious Activity Report when transactions appear to involve illicit funds or lack an apparent lawful purpose, and generally may not tip off the customer. AML programs, customer identification procedures, and ongoing monitoring are required components of a firm's compliance obligations.
Prohibited Practices and Investor Protection
Prohibited practices include guaranteeing customers against loss, churning an account to generate commissions, unauthorized trading, commingling customer and firm assets, and unsuitable recommendations. Representatives must give prior written notice of outside business activities, and private securities transactions (selling away) require notice and firm approval. The Securities Investor Protection Corporation provides limited protection of customer cash and securities if a member broker-dealer fails, though it does not cover ordinary market losses. Effective supervision helps detect and prevent these violations.
Last updated: July 2026