Overview of the Regulatory Framework
Regulatory framework
The Securities Act of 1933 requires registration and a prospectus for public offerings and contains anti-fraud provisions. The Securities Exchange Act of 1934 created the SEC, regulates exchanges and broker-dealers, and requires periodic reporting. The Trust Indenture Act of 1939 covers bond indentures; the Investment Company Act of 1940 regulates funds; the Investment Advisers Act of 1940 imposes fiduciary duties on advisers. FINRA is a self-regulatory organization for broker-dealers; the MSRB writes rules for municipal securities, while FINRA enforces them for firms. States apply blue-sky laws. SIPC protects customers of failed broker-dealers up to $500,000, including a $250,000 cash sublimit; it does not cover market losses. FDIC deposit insurance covers bank deposits up to $250,000 per depositor, per bank, per ownership category. The Fed and other regulators supervise banking and monetary policy.
Traps: SIPC is not insurance against bad investments; FDIC does not cover securities; the SEC does not arbitrate customer disputes; FINRA is not a government agency; the 1933 Act governs new issues, while the 1934 Act governs ongoing reporting and trading.
Worked example: A customer's failed broker holds $400,000 of securities and $150,000 cash. SIPC coverage is capped at $500,000 total, with cash protected up to $250,000. The customer's $150,000 cash is within the cash cap, so the claim is covered up to the $500,000 overall limit-not the full $550,000.