In the U.S., bank deposits are protected through a guarantee extended by the FDIC. Mutual funds and other traded securities, however, have no guarantee that protects an investor's capital. Instead, a series of government regulations monitors the movement of the securities market and the companies and individuals who create and sell mutual funds, stocks, bonds and other investment products. Congress enacts these regulations to help advise and guide investors through the securities trading process.
The Truth in Securities Act
The Truth in Securities Act is also referred to as The Securities Exchange Act of 1933. Rebuilding the public's trust in the stock market was important for Congress to tackle after the stock market crash in 1929. The regulation aimed to place the investor's needs and concerns above a brokerage company's or agent's desire for profit. The law required all companies in the business of selling securities to the public to inform the customer of the risks of purchasing and to truthfully speak about the company and its investment products.
Securities Exchange Act 1934
In 1934, Congress passed a second securities act that created the Securities and Exchange Commission. This Act gives the SEC the authority to regulate and oversee the stock market, brokerage companies, agents and organizations that self regulate within the investment industry. The New York Stock Exchange, the Financial Industry Regulatory Authority and the Chicago Board of Options are examples of self-regulatory organizations. The law also gives the SEC the power to impose and monitor periodic reporting requirements on investment companies and to use disciplinary action when needed. Insider trading is illegal under this regulation.
Investment Company Act 1940
The Investment Company Act of 1940 rules the organization and actions of companies, including mutual fund companies, that trade and invest in securities or offer their company's securities to the public for purchase. The Act emphasizes disclosure about the company and fund operations, the fund objectives and the structure of the company managing the fund. This includes disclosure of investment policies and a company's financial condition. The Act also attempts to reduce conflicts of interest, but doesn't regulate or supervise actual investment choices made by the mutual fund companies or make comments about the actual value of investments.
Regulating Investment Advisers
The Investment Adviser Act of 1940 was designed to regulate securities investment advisers, which would include mutual funds, stocks and other securities products. Advisers don't actually sell mutual funds to client, but simply advise clients which products to purchase. The law required all advisers to register with the SEC and to conform to any regulations designed to protect the investor. Amendments to this act occurred in 1996 and again in 2010. As a result of these amendments, only advisers managing assets of $100 million or more or advisers working with registered investment businesses are now required to register with the SEC.
State Mutual Fund Laws
Mutual funds must meet all regulations and requirements put forth by the state in which brokerages, agents or advisers operate. In addition, mutual funds must also follow all state laws in every state where it sells or attempts to sell shares. For example, New Mexico's Regulation and Licensing Department operates a Securities Division that regulates the operation of investment advisers, broker-dealers and their agents working in New Mexico. The Division is authorized to revoke, suspend or deny licenses to organizations or persons found in violation of federal or New Mexico securities laws.
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