Securities - Regulation Of The Securities Business

Only dealers or brokers who are registered with the SEC pursuant to the 1934 act may engage in business (other than individuals who deal only in exempted securities or handle only intrastate business). Firms act in three principal capacities: broker, dealer, and investment adviser. A broker is an agent who handles the public's orders to buy and sell securities for a commission. A dealer is a person in the securities business who buys and sells securities for her or his own account, and an investment adviser is paid to advise others on investing in, purchasing, or selling securities. Investment advisers are regulated under the Investment Advisers Act of 1940 (15 U.S.C.A. § 80b et seq.). This law provides for registration similar to that in the 1934 act for brokers and dealers, but its coverage is generally not as comprehensive. Certain fee arrangements are prohibited, and adverse personal interests in a transaction must be disclosed. Moreover, the SEC may define and prohibit certain fraudulent and deceptive practices.

The SEC has the power to revoke or suspend registration or impose a censure if the brokerdealer has violated federal securities laws or committed other specified misdeeds. Similar provisions apply to municipal securities dealers and investment advisers.

Problems may arise in a number of ways. For example, a broker-dealer may recommend or trade in securities without adequate information about the issuer. "Churning" is another problem. Churning occurs when a broker-dealer creates a market in a security by making repeated purchase from and resale to individual retail customers at steadily increasing prices. This conduct violates securities antifraud provisions if the broker-dealer does not fully disclose to customers the nature of the market. Churning also occurs when a broker causes a customer's account to experience an excessive number of transactions solely to generate repeated commissions. Fraudulent "scalping" occurs when an investment adviser publicly recommends the purchase of securities without disclosing that the adviser purchases such securities before making the recommendation and then sells them at a profit when the price rises after word of the recommendation spreads.

In 1990 Congress enacted the Penny Stock Reform Act (15 U.S.C.A. § 78q-2), which gives the SEC authority to regulate the widespread incidence of high-pressure sales tactics in the peddling of low-priced speculative stocks to unsophisticated investors. Dealers in penny stocks must provide customers with disclosure documents discussing the risk of such investments, the customer's rights in the event of fraud or abuse, and compensation received by the broker-dealer and the salesperson handling the transaction.