Securities Exchange Commission (SEC)
Created by the Securities Exchange Act of 1934
Federal regulator of the securities industry
Financial Industry Regulatory Authority (FINRA)
Self-regulatory organization (SRO) that oversees the over-the-counter (OTC) market and members of the NYSE.
Federal Reserve Board (FRB)
Regulates credit extended in the securities industry
Regulation T: the extension of credit by broker/dealers to customers
Regulation U: the extension of credit by banks to customers (BDs)
Securities Act of 1933
The Paper or Primary Act
New securities must register with SEC
Full disclosure (prospectus) for investors.
Exceptions: government and municipal securities,
private placements, and some money market
securities
Securities Exchange Act of 1934
The People and Places Act
Requires registration of nonexempt securities,
exchanges, B/Ds, representatives, and principals
Representative: passes Series 6 or 7
Principal:
- passes Series 24 or 26;
- manages firm's activities
- supervises and/or trains repr
Markets: Exchanges
Provide a place to trade listed securities
Prices established by auction
Markets: OTC Market
No central trading location; market makers
maintain inventories of unlisted securities
Market makers post bid and ask prices on Nasdaq
Prices established by negotiation
Third Market
Listed securities sold over-the-counter
Fourth Market
Direct dealing between institutional investors
Uses electronic communications networks (ECNs)
No retail customers or B/Ds.
Trade confirmation
Lists date of trade and settlement, identity of security, price, quantity, and amount of commission
Must be sent to customer by settlement day
Settlement of trades
Regular way: trade date + 3 business days (T+3)
Cash trades: same-day settlement
Payment for trades
Regulation T of Federal Reserve: settlement date
+ 2 business days (S+2)
Income Tax
Paid annually; includes interest, dividends, and
other income
Capital Gains Tax
Short-term: taxed as ordinary income
Long-term: if asset is held for more than one year,
gain is taxed at a lower rate
Gains may be offset by losses
$3,000 income per year may be offset by excess
loss, with unused loss carried forward
Repurchase of securi
Cost Basis of Shares Transferred
If by inheritance, cost base is fair market value at death; if by gift, cost base is donor's old cost base
Retirement Plans
Qualified (contributions pretax) and nonqualified
(contributions after tax).
Earnings of both grow tax-deferred.
Non-qualified Retirement Plans
Individual annuity, deferred compensation plans, and Section 457 plans.
Traditional IRA
May contribute 100% of earned income up to an indexed maximum
Penalties: excess contribution, 6%; withdrawal before age 59�, 10%; insufficient distribution,
50%
Rollovers: one per year, and 60 days to complete
or tax and penalty (if under age 59�)
Transfe
Roth IRA
No pretax contributions; tax-free withdrawals after 5 years and age 59�
Coverdell Education Savings Account (CESA)
$2,000 per child per year; contributions must stop at age 18
Section 529 plans
Set up by states to provide savings for higher education
College savings plans: an investment account;
gift tax rules apply
Prepaid tuition plans: only in state of residence;
provides inflation protection
Qualified (Tax Advantaged) Plans
Plans must be run under independent, fiduciary
trust agreement
Regulated under the Employee Retirement Income Security Act of 1974 (ERISA)
Withdrawals must begin by age 70� (unless still
working)
TSA�for employees (not clients) of nonprofits
Keogh�for sel
Corporate Qualified Plans: Pension
Defined benefit, defined contribution, and profit-sharing
401(k) plans
Investment Advisers Act of 1940
Investment adviser that gives advice for a fee must
register with state or SEC
Investment adviser representatives always register with the state.
Exclusions:
Banks and B/Ds
Lawyers, accountants, teachers, engineers (LATE).
Securities Investor Protection Act of 1970
Created the Securities Investor Protection
Corporation (SIPC)
Protects investors if their B/D fails; applies to
separate customers
Insures up to $500,000 in securities and cash, of
which $250,000 may be cash
Insider Trading and Securities Fraud Enforcement Act of 1988
Prohibits use of insider information to profit or
avoid loss in securities trades
Tipper, tippee, B/D, and representative may be
held liable
Penalties: $1 million fine or 300% of profit made
or loss avoided (civil); 20 years in prison (criminal)
Regulation S-P
-Enacted by SEC to protect the privacy of customer information
- Firms must disclose privacy policies to customers when account is opened and yearly thereafter
- Opt-out method must be simple for customers who do not want information shared.