1

Who’s Minding the Store-Regulating the Securities Industry

Securities and Investments

2

Regulating the Securities Industry

• “truth in securities” law• Requires disclosure of information regarding

securities that are for sale

Securities Act of 1933

• Congress created Securities and Exchange Commission

• Provides disciplinary action for individuals and businesses selling securities

Securities Exchange Act

of 1934

• Discloses information about mutual funds• Regulates investment company structure

Investment Company Act

of 1940

3

Regulations (continued)

• Requires individuals who sell securities to register with the SEC

Investment Advisers

Act of 1940

• Created the “Public Company Accounting Oversight Board”

• Mandates corporate responsibility and ethics in accounting

Sarbanes-Oxley Act of 2002

4

Regulations (continued)

• Improves regulatory oversight and disclosure involving investing and other consumer activities

Dodd-Frank Wall Street Reform and Consumer

Protection Act of 2010

• Makes it easier for small businesses to raise capital

• Eases security regulations regarding crowdfunding, which is basically a group of individuals who provide financing for entrepreneurs

Jumpstart Our Business

Startups Act of 2012 (JOBS)

5

Regulations (continued)

• Administered exams for securities professionals

• Associated with NASDAQ, National Association of Securities Dealers Automated Quotations

NASD

• In 2007 NASD merged with the NYSE (New York Stock Exchange) to create FINRA

• Financial Industry Regulatory Authority

FINRA

6

State Regulations• Texas State Securities Board

– Texas Securities Act• Provides that securities in Texas are registered• Those who sell securities must also be registered

– Also provides investor education

• All states have securities regulations called “Blue Sky” laws

7

Types of Fraud• Affinity fraud

– Fraud that targets a group of people such as immigrants or people of the same religious affiliation.

– The scammer tries to empathize with the particular group.

• Baby Boomer (Elderly) fraud– These scammers target people of a certain age group who

may be facing financial challenges due to caring for elderly parents.

– They may also target those people nearing or at retirement who can use extra income.

8

Types of Fraud (continued)• Ponzi Scheme-also known as “Pyramid” scheme

– A plan that pays early investors with the contributions of later investors with no real investment actually existing. The only individuals making money are the initial few at the expense of the later investors.

9

Unethical Corporate Behavior and Fraud

• Well-known companies:– Enron

• Basically losses and debt were hidden from the public which made the company appear more profitable than it was, with the help of accounting firm Arthur Andersen. Executives made millions from selling off stock causing the demise of company pensions.

– WorldCom• Company executives and accountants overstated assets among

other criminal corporate activity, which quickly led to bankruptcy and losses for investors.

– Tyco• Executives reportedly made loans from the company and never

repaid in addition to profiting from fraudulent securities sales.

10

Formal Assessments• Regulator Acronym Assignment #1 - Students are to select any two of the many

regulatory agencies they have learned about in this lesson. Then they will place the initials of that organization on a posterboard or on the computer on a word processing document if a lab is available, and for each letter they will create a phrase beginning with that letter that describes an aspect of the agency and what it does.

• Recognizing Fraud Assignment #2 – In pairs, students are to select a brochure relating to frauds and scams located on the North Carolina Secretary of State website. They will create a presentation to present to the class using either presentation management software, an online presentation program, or visuals such as posters and handouts explaining the topic and suggested ways to avoid the unethical or illegal behavior.

• Letter to the President Assignment #3 – Instruct students to pretend that they are one of the employees of one of the companies that have been discussed regarding fraud and unethical behavior. You have been hurt by the company’s actions so now you are typing a letter, using proper personal-business letter format, that 1) states your purpose for writing the letter, 2) explains in detail all of the ways the company has hurt you and how you feel about its actions, and 3) a request for some sort of resolution that the company can make to the people who were hurt.