Practical and Helpful Tips: Regulations

A Primer on Financial Securities Law

Securities are assets and debt that can be acquired by municipalities, companies, and other commercial outfits for the sake of raising capital. Many securities are purchased from an initial public offering, or IPO. Securites are regulated by numerous laws. Legislation is in place to prevent financial firms from taking irresponsible risks. There is no greater example of risk-taking by financial firms and the misuse of securities that than of the 2008 financial crisis in the United States.

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As stated in the Securities Act of 1933, the public must be sold securities that have been properly vetted. The Securities and Exchange Commission was created shortly thereafter. Individuals who fraudulently sell stocks on the New York Stock Exchange, the Chicago Board of Options, and NASDAQ may face legal action from the SEC, as the Commission has disciplinary authority.

The Securities Exchange Act of 1934 not only established the SEC. The Act prohibits insider trading, the practice of buying or selling a security by an individual who has information on that security that is not shared with the public. Congress passed the Investment Company Act of 1940 to continue efforts for financial disclosure within the investment and banking industries. The Act requires that companies, including mutual funds, share their policies regarding the overall financial health of the company each time the company’s stock is sold. This also includes the company’s investment activity.

More recent legislation

The SEC registers people, too. By 1940, Congress was mandating that advisers compensated for their investment advice should also be registered with the SEC.The Act was changed in recent years to only require advisers with more than $100 million in assets to register.

The Sarbanes-Oxley Act of 2010 created a Public Company Accounting Oversight Board to keep tabs on the activities of auditors.

Maybe the most radical change to financial regulations since the 1940s was the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The act would protect consumers, regulate credit ratings, and call for greater transparency, among other stipulations.

The future of financial regulations might be complicated by the latest onslaught of technology. Take Bitcoin. It is hard for Congress to regulate Bitcoin, a form of electronic cash, that has become more popular to use. The cryptocurrency is not easily compatible with our current financial system, according to Chris Brummer, director of Georgetown’s Institute of International Economic Law. Brummer says that it is not possible to identify the origins of one-third of Initial Coin Offerings, making keeping track of fraud impossible.

Regulating cryptocurrencies will pose new challenges for governments of the future.

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