Chapter 2 – Regulation of the Securities Industry
Q1. Following the 1929 Stock market crash, Congress passed a series of Acts to regulate
the securities industries. Name four of these Acts and brie!y describe their purpose.
A. The four Acts are:
i. Securities Act of 1933 – mandated all securities to be properly
ii. Securities Act of 1934 – created the Securities and Exchange Commission
iii. Investment Company Act of 1940 –regulated investment companies such
iv. Glass Steagall Act: separated deposit taking and loan making “commercial
Q2. A goal of many parts of U.S. regulatory legislation has been to eliminate/minimize
con!icts of interest between issuers, investment banks, and investors. Provide
examples of con!icts of interest in the U.S. investment banking industry and the
corresponding regulations that a7empted to resolve those issues.
A. Sell-side research vs. banking division: global research se7lement; spinning:
global research se7lement; insider trading: ’34 Act; independence of outside
Q3. Disclosure of information to investors is another recurring theme in U.S. regulation
of the securities industry. Provide examples of disclosure required by U.S.
regulations.
A. Securities Act of 1933: investors must receive financial and other signiticant
information about a company o>ering securities for public sale; ’34 Act: periodic
reporting of information by companies with publicly traded securities; ICA 1940:
Q4. What is the role of states in the U.S. in regulating investment banks?
A. Only anti-fraud ma7ers.
Q5. What type of U.S. securities o>erings do not need to be registered with the SEC?
A. Private o>erings to limited number of persons or institutions; o>erings of limited
Q6. What is a “Red Herring”?
A. A “Red Herring” is a preliminary registration statement that has been =led with
the SEC and which carries a front-page statement (wri7en with red ink) which
cautions prospective investors that the SEC has not approved the registration and
Q7. Before an SEC registration statement is declared e>ective, companies (or their
underwriters) that sell stock or are deemed to be promoting the sale of stock have a
securities law problem. What is this problem called and what are its consequences?
A. Gun jumping. The company must withdraw the issuance until the SEC is satistied
Q8. What are the “Risk Factors” in a prospectus? Why are they important to the issuer
and to the investor?
A. Risk Factors are disclosures about potential problems the company may
encounter, including possible losses, unpredictable revenue, capacity constraints,
i. Issuer: The issuer must list every reasonable risk in order to meet full
disclosure requirements of securities laws and to therefore have a
ii. Investors: Investors should read these disclosures to ensure that they
Q9. What is the signiticance of the Gramm-Leach-Bliley Act of 1999 in relation to the
securities industry?
A. The Gramm-Leach-Bliley Act, in essence, repealed the Glass Steagall Act of 1933
and allowed the creation of financial holding companies that could participate in
Q10. What are some securities regulations in place in the U.K., Japan and China that
mirror U.S. regulations?
A. Japan and China: Originally separated the functions of commercial and
investment banks (these changes happened within a much shorter time frame
for China). Later, like the U.S., those restrictions were eliminated. Also, various
Q11. What are some major di>erences between the regulatory frameworks of the four
countries covered in this chapter?
A. One main di>erence is the U.S. has somewhat fragmented and decentralized
Q12. Compare the regulatory bodies of the four countries covered in this chapter.
A. The Financial Supervisory Agency in Japan, the Financial Services Authority in
U.K., and the China Securities Regulatory Commission are the sole financial
Q13. What does the Dodd-Frank Act of 2010 mainly focus on?
A. This Act mainly focused on protecting consumers, ending “too big to fail”
bailouts, improving coordination between various regulatory agencies,