Securities Industry Essentials (SIE) ExamOverview of Regulatory FrameworkMedium
A broker-dealer firm is investigating a potential violation where a registered representative (RR) allegedly used material, non-public information obtained through their employment to trade for personal profit. This action is a severe breach of ethical conduct and securities law. Which major federal law primarily prohibits this type of activity?
- AThe Securities Exchange Act of 1934.
- BThe Securities Act of 1933.
- CThe Investment Advisers Act of 1940.
- DThe Sarbanes-Oxley Act of 2002.
Show answer & explanationAnswer & explanation
Correct answer: A. The Securities Exchange Act of 1934.
The Securities Exchange Act of 1934 is the primary federal law that governs the secondary market and specifically prohibits insider trading. Section 10(b) and Rule 10b-5 of this Act are central to the prohibition of fraud, including the misuse of material non-public information.
Why the other options are wrong
- B. The 1933 Act focuses on new issues and primary market disclosure.
- C. The 1940 Investment Advisers Act regulates investment advisers.
- D. Sarbanes-Oxley primarily addresses corporate governance and accounting scandals.
Insider Trading (1934 Act)
The illegal practice of trading on the stock exchange to one's own advantage, using confidential information about a company that is not yet public. It is primarily prohibited by the Securities Exchange Act of 1934.
- Violates Section 10(b) and Rule 10b-5 of the 1934 Act.
- Applies to anyone with material non-public information.
- Penalties include fines and imprisonment.
Memory trick: The '34 Act stops insider lies.