Securities Industry Essentials (SIE) ExamOverview of Regulatory FrameworkMedium
An investor owns shares in a publicly traded company and believes the company's management has engaged in fraudulent accounting practices. Which federal law would primarily protect this investor and allow for potential legal recourse against the company for misrepresentation in financial statements?
- AThe Securities Exchange Act of 1934.
- BThe Securities Act of 1933.
- CThe Investment Advisers Act of 1940.
- DThe Investment Company Act of 1940.
Show answer & explanationAnswer & explanation
Correct answer: A. The Securities Exchange Act of 1934.
The Securities Exchange Act of 1934 governs the trading of existing securities in the secondary market and includes provisions against fraud and misrepresentation in public company financial statements. It also established the SEC.
Why the other options are wrong
- B. The Securities Act of 1933 focuses on the initial primary issuance of new securities.
- C. The Investment Advisers Act of 1940 regulates investment advisers.
- D. The Investment Company Act of 1940 regulates investment companies like mutual funds.
Securities Exchange Act of 1934 Investor Protection
The Securities Exchange Act of 1934 governs the secondary market, requiring ongoing disclosures from public companies and prohibiting fraudulent activities like misrepresentation in financial statements to protect investors.
- Regulates secondary market.
- Requires periodic reporting from public companies.
- Prohibits fraud and manipulation.
- Empowers SEC to enforce these rules.
Memory trick: The '33 Act is new, the '34 Act is old; the '40 Acts are funds and advice told.