SIE

Section 1 accounts for about 16% of the exam (12 scored questions). It covers the regulators and self-regulatory organizations that oversee the industry, the participants who make markets work, how primary and secondary markets are organized, the economic forces that move prices, how securities are offered, and the federal laws that frame it all. Expect questions that ask which regulator is responsible for something and which law or rule applies to a situation.

The Securities and Exchange Commission (SEC)

The SEC is the primary federal regulator of the securities industry. Congress created it through the Securities Exchange Act of 1934, in response to the 1929 market crash and the Great Depression. It is an independent federal agency whose mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

The Commission has five commissioners appointed by the President and confirmed by the Senate for staggered five- year terms; no more than three may belong to the same political party, and the President designates one as Chair. The SEC regulates exchanges, broker-dealers, investment advisers, investment companies, and transfer agents; reviews registration statements and prospectuses for new offerings; brings civil enforcement actions; and oversees the self- regulatory organizations (SROs), with the authority to review and modify SRO rules. The SEC is a civil enforcement agency; criminal cases are referred to the Department of Justice.

The Financial Industry Regulatory Authority (FINRA)

FINRA is the largest SRO in the securities industry. It operates under SEC oversight and regulates broker-dealers and their associated persons. It was formed by consolidating the National Association of Securities Dealers (NASD) with the member regulation functions of the New York Stock Exchange. FINRA writes and enforces rules for member firms and registered representatives, examines firms for compliance, conducts market surveillance to detect manipulation and insider trading, runs the largest securities arbitration and mediation forum, and administers qualification exams, including the SIE.

FINRA maintains the Central Registration Depository (CRD), the database of registration, employment history, and disclosure information for firms and registered persons. Much of that information is available to the public through BrokerCheck. FINRA exams may be routine cycle examinations or cause examinations triggered by specific concerns.

The Federal Reserve Board

The Federal Reserve System is the U.S. central bank, created by the Federal Reserve Act of 1913. It conducts monetary policy, supervises and regulates banks, maintains financial stability, and provides services to depository institutions and the federal government. The Board of Governors has seven members appointed by the President and confirmed by the Senate for 14-year terms; the Chair and Vice Chair serve four-year terms in those roles. The Federal Open Market Committee (FOMC), which sets monetary policy, consists of the seven governors plus five Reserve Bank presidents.

For the securities industry, the Fed's most important direct role is setting initial margin under Regulation T, which controls how much credit broker-dealers may extend to customers who buy securities. The current Reg T requirement is 50% for most equity securities.

SIPC, the MSRB, and Other Regulators

The Securities Investor Protection Corporation (SIPC) is a nonprofit membership corporation created by the Securities Investor Protection Act of 1970. It is not a government agency. When a member broker-dealer fails and customer assets are missing, SIPC may ask a federal court to appoint a trustee to liquidate the firm and return customer property, using its reserve fund to make up shortfalls up to the coverage limits. SIPC does not protect against market losses or bad investment decisions, and it does not cover commodity futures, currency, or investment contracts (such as limited partnerships and fixed annuities) that are not registered with the SEC. Most SEC-registered broker-dealers must be SIPC members; firms whose business is limited to products such as mutual funds or variable annuities may be exempt.

The Municipal Securities Rulemaking Board (MSRB) is an SRO created by the Securities Acts Amendments of 1975. It writes rules for broker-dealers, banks, and municipal advisors in the municipal securities market, covering fair dealing, suitability, pricing, qualifications, advertising, and recordkeeping. The MSRB has no examination or enforcement authority: the SEC, FINRA, and bank regulators enforce its rules. The MSRB operates EMMA (Electronic Municipal Market Access), the free official source for municipal disclosures and trade data.

Entity	Type	KeyResponsibilities
SEC	Federalagency	Enforces federal securities laws; registers offerings exchanges broker- , ,
		dealers andadvisers;overseesSROs ,
FINRA	SRO	Regulates member broker-dealers and associated persons; exams CRD and ,
		BrokerCheck arbitration qualificationexams , ,
MSRB	SRO	Writesmunicipalsecuritiesrules;operatesEMMA;noenforcementauthority
FederalReserve	Centralbank	Monetarypolicy;banksupervision;setsinitialmarginunderRegulationT
SIPC	Nonprofit	Protects customers when a member broker-dealer fails
	membership
	corporation
CFTC	Federalagency	Regulatescommodityfuturesandoptions;securityfuturesareregulated
		jointlywiththeSEC
Stateregulators(NASAA)	Stateagencies	Enforce blue-sky laws; register firms agents offerings and smaller advisers , , ,
		intheirstates
Treasury OCC andFDIC , ,	Federalagencies	Treasuryissuesgovernmentsecurities;OCCchartersandsupervises
		nationalbanks;FDICinsuresbankdeposits
FinCEN	Treasurybureau	ReceivesSuspiciousActivityReportsandCurrencyTransactionReports

State securities regulators administer blue-sky laws, which may impose registration and disclosure requirements beyond federal law; the North American Securities Administrators Association (NASAA) coordinates among them. The FDIC insures deposits up to $250,000 per depositor, per insured bank, for each ownership category, but not securities, mutual funds, or annuities, even when they are sold through a bank.

Market Participants

Participant	Role
Broker	Actsasagent executingtradesforcustomersandchargingacommission ,
Dealer	Actsasprincipal tradingforitsownaccountandchargingamarkupormarkdown;mostfirmsare ,
	both (broker-dealers) but act in only one capacity in any single trade
Associatedpersons	Registeredrepresentatives principalswhosupervisethem andothersinthefirm'ssecuritiesor , ,
	investmentbankingbusiness;registeredthroughCRD
Investmentadvisers	Give securities advice for compensation and owe clients a fiduciary duty; generally SEC -registered at
	$100 million or more in assets under management state-registered below that ,
Issuers	Corporations governments andinvestmentcompaniesthatcreateandsellsecuritiestoraisecapital , ,
Underwriters	Investmentbanksthathelpissuersbringnewsecuritiestomarket asprincipal(firmcommitment)or ,
	agent(bestefforts)
Institutionalandretail	Institutions(pensionfunds insurers funds endowments)receivelessprotectionbecauseoftheir , , ,
investors	sophistication;retailinvestorsreceivethemost
Transferagents	Keepownershiprecords issueandcancelcertificates anddistributedividendsandproxymaterials , ,
Custodians	Holdcustomerassetsforsafekeeping segregatedfromtheirown ,
Clearingcorporations	Standbetweenbuyerandsellertoguaranteesettlement;DTCCanditssubsidiariesclearandsettle
	mostUS securitiestrades . .

Broker = agent = commission. Dealer = principal = markup or markdown. A firm cannot charge both a commission and a markup on the same trade.