Who’s Minding the Store - Regulating the Securities Industry Securities and Investments

Regulating the Securities Industry “truth in securities” law Requires disclosure of information regarding securities 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

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

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 (a group of individuals who provide financing for entrepreneurs) Jumpstart Our Business Startups Act of 2012 (JOBS) Copyright ©Texas Education Agency, All rights reserved. 4

Regulations (continued) Administered exams for securities professionals Associated with National Association of Securities Dealers Automated Quotations (NASDAQ) NASD In 2007 NASD merged with the NYSE (New York Stock Exchange) to create FINRA Financial Industry Regulatory Authority FINRA Copyright ©Texas Education Agency, All rights reserved. 5

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” Copyright ©Texas Education Agency, All rights reserved. 6

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. – Scammers may also target people nearing or at retirement who can use extra income. Copyright ©Texas Education Agency, All rights reserved. 7

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. Copyright ©Texas Education Agency, All rights reserved. 8

Unethical Corporate Behavior and Fraud Well-known companies: – Enron Hid losses and debt 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. Copyright ©Texas Education Agency, All rights reserved. 9

QUESTIONS Question #1: Who benefits from a Ponzi scheme? Answer#1 The original investors, which usually are very few. Their income is funded by all of the later investors who think they are actually investing in a security. Question #2: What type of fraud targets groups of people with a common interest? Answer#2: Affinity fraud Question #3: When was the Securities and Exchange Commission created? Answer#3: 1934 Question #4: Which act was created after a rash of accounting and investment fraud cases? Answer#4: The Sarbanes‐Oxley Act of