Capital markets are integral components of a thriving economy. Like an onion, the world of utilizing capital markets and securities for financial gain has many layers. There are primary markets that handle the sale of newly issued securities, and secondary markets that are responsible for trading already issued securities. Institutional and retail business investors are the entities that provide the sale of securities whereas individuals and government investors are the purchasers. Both institutions and individuals alike can flourish from the benefits of buying, selling, and trading capital investments. However, before becoming involved in capital market investments, it is important to understand the number of laws and regulations that define fair play.
1. Federal vs. State Regulations
Capital markets function at a global level, which includes equity markets and debt markets. Equity markets are just as they sound, responsible for the trading of equities such as corporate stocks, which invest in a company’s assets. Debt markets are responsible for the trading of debts, such as government bonds. Each type of trade, although the trading entities exist at a global level, is regulated at both the state and federal level within the United States. Furthermore, there are a number of agencies that have been put into place at both the federal and state levels to ensure that regulations are followed.
Both state and federal level regulations have criteria regarding the registration of businesses, the amounts of stocks and bonds that can be traded, and the determination of who can participate in trading. Arguably, the most important federal firm in governing capital markets is the Securities Exchange Commission (SEC). The SEC is responsible for maintaining fair and efficient markets by enforcing federal security law. In short, the SEC is in charge of regulating equity securities at the federal level. Another important federal firm is The Federal Reserve Board (FRB). The FRB controls the trade and sale of the U.S. Treasury securities and federal agency securities—in other words, the sale and trade of debt securities.
At the state level, there are State Securities Regulators. These firms are in place to govern federal SEC laws at a state level as well as each state’s individual laws regarding capital market regulations. One of the main roles of State Securities Regulators is providing registrations to businesses and other investment firms that are not required to register at a federal level according to the SEC. In addition to enforcing registrations, states also have laws that determine fees associated with capital market investments, the frequency of sales and trades, and who can participate in them.
Regardless of the volume or frequency that you and your firm intend on participating in capital market investments, it is important to familiarize yourself with laws and regulatory agencies at both the federal and state levels.
2. Required Registration & Documentation
Every broker or dealer that participates in capital market investment and trade is most likely required to register their business or self at the state level, federal level, or both. Brokers are those who are active in the industry on behalf of others, and dealers are those who are active in the industry for personal gain. Rules regarding who is required to register are very broad and create confusion for new individuals entering the industry. It is important to understand that there are very few circumstances where individuals and/or firms are not required to register with the SEC. If one is even remotely involved in the capital market investment industry, it is wise to inquire about and finalize official registration to avoid conflict or lawful reprimand.
In regards to state vs. federal regulations, there are many laws that identify where registration is required, including where investment takes place and the total of investments. Generally speaking, if an individual or entity is participating in trades or investments across multiple states or at a global level, they will be required to register with the SEC at a federal level and with each state that they are working in. However, if an individual or entity is only participating in trades or investments within a specific state, it is likely that they are not required to register federally with the SEC, but with the individual state they are working in.
In addition to required registration of an individual or business, it is required that documentation of sales and trades be made available for public knowledge. The aforementioned documentation includes online monthly statements and quarterly reports of all sales and trades. Requiring documentation of sales and trades helps to guarantee that no unlawful occurrences are taking place and increases the integrity of the industry. Furthermore, in order to protect those who are participating in the industry, those who are initiating trading and selling are required to document the fees issued to investors.
3. Rules for Banking and Financial Institutions
Banks and other financial institutions are not exempt from state or federal laws and regulations. Large and small institutions often participate in capital market investments and are also required to abide by the same, or other, specifically written laws regarding the role that they play in the industry. Most often, it is determined that banks are participating in investments as a broker, and therefore are required to register at a state and federal level. Other laws that involve banks and financial institutions are inside trading laws, which prohibit anyone with inside knowledge to participate in trades involving the said institution and staff compliance guides.
Navigating the laws and regulations of the capital market investment world can be confusing due to the many layers that exist. However, investing time and resources into complying with them will assist in ensuring success for those who participate.